Indian NBFCs need to evolve in line with contemporary market trends

19 November 2018 4 min. read
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Despite an expanding market across India for non-banking financial companies (NBFCs), the number of NBFCs in the country has declined sharply over the last few years, primarily due to dominance of the market from a few large players rendering a number of smaller companies “financially inviable.”

India’s formal lending sector is expanding in tandem with its rapidly growing economy, as consumers become more confident and businesses become more ambitious. In addition, government schemes such as ‘Make in India’ are boosting the country’s manufacturing sector, encouraging borrowing on a large scale from heavy industries in particular.

Given this increasing tendency to borrow, India’s ratio of credit to GDP – both household and otherwise – is among the six highest in the world, alongside Switzerland, China, the US, Italy and Germany. According to a new report from Big Four accounting and advisory firm PwC, an increasing portion of this credit market is constituted by NBFCs.

Credit to GDP ratios

While banking credit grew by 8% between 2016 and 2017 to reach nearly Rs. 70 billion, NBFC credit grew by 13% over the same period to reach a value of nearly Rs. 15,000. Overall the share of NBFC in the total value of the credit market increased from 13% in 2015 to 16% by 2017.

Nevertheless, despite the conducive conditions for growth in the NBFC segment, PwC identifies a number of challenges that stand in the way of steady growth for the sector. The biggest challenge, as per the report, remains the growing strength of incumbent large NBFCs, which prevents a number of smaller players from surviving in the sector.

The Reserve Bank of India has had to close down a number of small NBFCs in recent years as they have proved “financially inviable.” As a result, the number of NBFCs has been in steady decline since 2013, while the number of annual cancellations has strongly and consistently exceeded the number of new registrations.

Number of NBFCs in India

On the other hand, the incumbents in the market themselves are increasingly coming under threat from an increasing number of Fintech companies. These firms offer highly simplified digital processes that reduce the time and cost required for borrowing, while simultaneously increasing the quality of products.

Other technological advances such as cloud computing and Big Data analytics are also changing the composition of the NBFC sector, as smaller players with expertise in these fields can leverage these enhancements to deliver more personalized and mobile solutions in real time.

Lastly, the NBFC sector is facing pressure from and increasingly stringent regulatory framework, brought about by an increasing pool of non-performing assets (NPAs) and loan defaults across India. A number of credit regulation bodies have come under fire in recent times as the issue of NPAs has had substantial repercussions.

The future of NBFCs

In light of these challenges, PwC predicts the emergence of a new breed of NBFC, one that matches the increased expectations from all directions in the current market scenario. At the heart of this new body, as per the report, must lie a comprehensive strategy that identifies target customers and optimal distribution channels.

The report states, “the enterprise strategy must play on the NBFC lender’s strengths and focus on right market opportunities that will enable differentiation and are likely to generate success.” To this end, NBFC’s must carefully tailor both product propositions and their geographical distributions.

Other key components of the modern NBFC include round-the-clock service, a more comprehensive approach to customer service, the integration of technological implements, data-driven decision making processes and a number of others.