A comprehensive review of Non Banking Financial Companies(NBFCs)

Understanding NBFCs:

According to the Reserve Bank of India, an NBFC is a financial entity registered under the Companies Act, 1956, that can deal with business of loans and advances, shares, stocks, bonds, debentures, securities, leasing, hire-purchase, insurance, or chit business.(Source: Reserve Bank of India)

Evolution of NBFCs

• NBFCs started their operations in India in the 1960s. Today, they have turned substantial contributors in the national economic growth by supplementing the effort of banks and other financial institutions.
• “NBFCs (unlike banks) have operational viability at lower volumes due to relatively fewer regulatory requirements, which makes it possible for NBFCs to focus on niche products or market segments, and have a greater understanding of their focus segments. This, in turn, leads to better/customised products, lower delinquency rates, greater customer satisfaction and overall Financial Inclusion,” Ashok Bajaj, Managing Director and Chief Financial Officer, Insta Capital.
• In a country like ours , where 70 per cent of the population resides in rural areas, NBFCscertainly have a greater role to play to consolidate the Indian financial system.
• Its inevitable role in nation building through financial inclusion and assisting banks in providing credit facilities to the unbanked segments of the society, especially to the micro, small and medium enterprises (MSMEs), has boosted up the level of entrepreneurship and innovation.
• NBFC are the last mile connectivity in the overall financial intermediation chain. Banks do not have adequate branches and their ability to reach out is restricted. Hence, NBFCs are very important in the financial chain.
• India is a land of financial diversity that garners most of its Gross Development Product (GDP) from Micro, Small and Medium Enterprises (MSMEs). It is a matter of irony that most of these enterprises are starved of capital to a large extent. While banks have not been able to fulfil the requirements of these underserved segments, NBFCs have been able to create greater Financial Inclusion by lending on the basis of business potential and cash flow rather than credit history or collateral cover.

Rising Significance of NBFCs

During past two-three years share and significance of NBFCs have increased in the financing sector on account of followings:

1. Rising NPAs of banks is affecting their capacity to meet the lending demands, especially in the rural areas.
2. Wide range of product line, better affordability, effecting reach, strong risk management capabilities and relevant understanding of the customer segments by NBFcs.
3. Improving macroeconomic conditions, greater credit penetration, inflated consumptions and increasing digital trends will also enable the NBFC’s credit growth.
4. Bringing down approval of loan applications to as little as a few hours or even minutes.
5. Collaboration with players like Payments Banks, bill payment providers and other financial institutions, such as insurance and asset management companies.

In terms of financial assets, NBFCs have recorded a compound annual growth rate (CAGR) of 19 per cent over the past few years, comprising 13 per cent of the total credit and expected to reach nearly 18 per cent by 2018–19.

The Way Forward for NBFCs

1. Collaboration with players like Payments Banks, bill payment providers and other financial institutions, such as insurance and asset management companies, will assist NBFCs a complete preposition, starting, from deposits to lending, investments and transactions.
2. The government and regulatory bodies have taken positive measures to increase this number (and subsequently financial access) by allowing, in principal, licenses to as many as 21 players to establish specialty banks over the next 18 months. This will also enable the NBFCs to escalate their sustenance further.
3. Indian consumers are increasingly getting inclined towards digital way of living. According to PWC, India is currently the second biggest smartphone market, with a user base of 220 million, and is expected to cross 300 million users by 2017.
4. For staying relevant in this rapidly changing environment, NBFCs need to coin a strategy to enhance their product portfolio (positioning and pricing), processes (internal and customer facing) and end-to-end customer experience.
5. NBFCs need to leverage the vast digital and social customer data available for offering a better customer service to the customers.For accelerating its growth, NBFCs need to work in sync with Digital India programme, a flagship programme initiated by the Government of India to digitally empower society. To sustain in this dynamic environment, NBFCs will have to find ways to serve the millennial customers through digital means.
6. Implementation of the Goods and Service Tax (GST) is likely to have a transitional impact on small businesses and self-employed borrowers, the key target segments of NBFCs.

By: Priyank Kishore