DSIJ.in JULY 10 - 23 , 2017 I DALAL STREET INVESTMENT JOURNAL (^51)
growth logged by the banking sector at
the aggregate level.
The sector has grown at a compounded
annual growth of almost 18 per cent over
the last few years and is expected to
maintain similar growth momentum in
the coming years.
❝ A non-banking finance company
(NBFC) is a company engaged in
the business of loans and advances,
acquisition of shares/stocks/
bonds/debentures/securities
issued by the government or local
authority❞
- Reserve Bank of India's definition of
NBFC.
Multiple factors are playing in favour of
the NBFC sector, including their focus
on the retail segment. The retail-heavy
portfolio of NBFCs has helped the
players to maintain steady growth.
Several NBFCs are also seen expanding
beyond their traditional lending business
to offer working capital loans for
corporate entities.
A plethora of strategies is being adopted
by the tech-savvy NBFC players,
however, the ones that have catered to
niche segments have benefited
immensely.
KEY ADVANTAGES :
NBFCs’ understanding of their
customer’s profile and their credit needs
is one of the key advantages enjoyed by
the NBFC players. The ability to innovate
and customise products as per the client’s
needs allows NBFCs to deliver credit to
MSMEs, which have hitherto been
rejected by the traditional banking sector.When compared with the banks, NBFCs
do not enjoy a level playing field,
especially on the liability side. Once this
issue is addressed, it will help NBFCs to
realise their full potential. However, with
deepening bond markets in India,
NBFCs do have an opportunity to bring
down their cost of borrowing funds.The ongoing stress in the banking sector,
especially the public sector banks,
presents an opportunity for the NBFC
players to improve their market share by
lending more to the unattended
customer base.Owing to the NPA problems faced by
the banking sector, certain PSU banks
such as Dena Bank have been placed
under prompt corrective action (PCA)
under which there are limitation on
providing new loans. One can expect
NBFCs to encash such situations
profitably.Ability to tap the unbanked customer
base has proven to be the key reason
behind the growth story of NBFCs.
Majority of credit seekers in India do not
have income proofs or IT returns owing
to temporary employment or self-employment and this is one of the
primary reasons for the tepid credit
penetration in India.This is exactly where the NBFCs have an
edge. Adoption of digitisation and
acceptance of digital data and social
media data comes into play when data set
in traditional manner is not available.The digital disruption will facilitate new
ways for NBFCs to tap markets, even as
acceptance of alternative data from social
media is expected to be on the rise.Better product lines, lower operational
costs, wider reach, effective risk
management capabilities leading to lower
bad debts have all led to better
performance by NBFC players when
compared to banks. Even in personal
loans and housing finance segments,
which have been the bastion of private
sector banks, NBFCs have improved
their penetration.The ever-increasing credit demand in
India will drive growth for the sector.
With improving macroeconomic
indicators, the credit penetration will
only improve from hereon.The NBFC sector continued
to raise funds mainly
through debentures,
borrowings from banks and
commercial papers. In a
welcome move the Reserve
Bank has eased the norms
for external commercial
borrowings (ECBs) for
NBFCs that lend to the
infrastructure sector. In
addition, the Reserve Bank
also allowed NBFCs to raise
funds through rupee
denominated bonds
overseas.
- RBI Publication
Source:PWC
NBFC Classification