The Rise of NBFCs

Context:

NBFCs (Non-Banking Financial Companies) are emerging as key drivers in India’s financial landscape, increasingly stepping out of the shadow of traditional banks. The Reserve Bank of India (RBI) has acknowledged their growing importance, with Deputy Governor M. Rajeshwar Rao highlighting their potential role in achieving the vision of a $5 trillion economy.

Advantages of NBFCs Over Traditional Banks

• Agility and Adaptability
  • Unlike large banks with legacy systems, NBFCs can swiftly adjust to changing market conditions.
  • They can run pilots, pivot strategies, and respond to real-time customer feedback.
• Institution Building from Scratch
  • Focus on governance, risk culture, and people management from day one.
  • Opportunity to avoid the pitfalls of legacy systems.

The New Generation of Shadow Bank Entrepreneurs

• Notable Leaders:
  • Gunit Chadha (APAC Financial Services)
  • Jaspal Singh Bindra (Centrum Group)
  • Shachindra Nath (UGRO Capital)
  • Gaurav Gupta (Tyger Capital)
  • Aseem Dhru (SBFC Finance)
  • Bhupinder Singh (InCred)
  • Vimal Bhandari (Arka Fincap)
• Capital Backing:
  • Nearly ₹6,000 crore in equity was invested at the outset despite challenging times marked by IL&FS and DHFL collapses.
  • Multiples PE and Bain Capital among key investors supporting this evolution.

Current Performance of NBFCs

• Financial Health (as of September 2024):
  • Capital adequacy: 26.1%
  • Net interest margins: 5.1%
  • Return on assets: 2.9%
  • Gross NPAs: 3.4%
• Investor Confidence:
  • Equity capital growth YoY:
    • 26.5% for non-government NBFCs
    • 17.9% for upper-layer NBFCs

Role in Credit Expansion

• Serving Underserved Markets:
  • Focus on small business credit, gold loans, tractor financing, used vehicle financing, and microloans.
  • Act as efficient credit conduits, taking wholesale loans and reaching last-mile customers in smaller towns.
• NBFC vs. Bank Model:
  • Banks: Scale-driven institutions with trillion-rupee balance sheets.
  • NBFCs: Efficiency-focused entities with targeted, smaller portfolios.

Challenges Faced by NBFCs

• Regulatory Changes:
  • Tighter norms, especially regarding expected credit loss frameworks.
  • Restrictions on bank loans to NBFCs.
• Pandemic Aftermath:
  • Four years of navigating pandemic-related disruptions and liquidity challenges.

Future Outlook

• Critical Role in Financial Inclusion:
  • India needs hundreds of financial institutions to bridge credit gaps for small businesses and rural markets.
  • NBFCs will continue to pioneer new financial products and expand access to credit.
• Market Perception Shift:
  • Once considered high-risk shadows of banks, NBFCs are now recognized as vital players in India’s credit ecosystem.