Most NBFCs leverage alternative and tech-driven credit appraisal methodologies to gauge creditworthiness, which lets them target those left traditionally underserved by banks.
Non-Banking Financial Companies (NBFCs) have played a critical role in stimulating the growth of the Indian economy and have made a significant contribution towards supporting the government’s agenda of extending financial inclusion. In fact, they have emerged as key financiers to businesses, especially the high-potential, credit-hungry MSME sector.
RBI data shows that, in FY17, NBFCs and housing finance companies cumulatively extended Rs 2.59 lakh crore in credit to commercial enterprises, meeting 18 percent of their total credit needs. This marked a year-on-year increase of 28 percent in NBFC lending from FY16 – a sharp contrast to the banking system, which has been grappling with a mountain of bad loans for quite some time now.
Owing to the challenges they face in sourcing credit from traditional banking institutions, domestic businesses, as well as, individuals are increasingly turning to NBFCs to meet their funding needs.
This shift in borrower sentiment has unlocked a tremendous opportunity for NBFCs to capitalise on. In the last two years, NBFCs have registered multi-fold growth to double their market share in SME and wholesale loan categories, in addition to making significant inroads into other consumer loan categories.
What are the factors driving the growing popularity of NBFCs as credit sources in India?
A big reason for the success that NBFCs have registered in India of late has been their unique value proposition. Most NBFCs, whether online or offline, leverage alternative and tech-driven credit appraisal methodologies to gauge the creditworthiness of prospective borrowers.
This differentiated approach allows them to meet loan requirements of individuals and businesses left traditionally underserved by banks. With the introduction of e-KYC and digital loan agreements making borrowing a hassle-free experience, NBFC lenders are already offering the right financial product to consumers and small businesses. The use of technology to optimise business processes also keeps cost overheads to a minimum, enabling credit to be availed at highly competitive interest rates.
Moreover, NBFCs often have deep regional reach, which they leverage to build robust relationships with their target customer bases. Many new-age NBFCs have started investing in analytics and AI capabilities to connect to their customers in a hyper-personalised manner to serve their credit needs better.
The role of PE investors
There is another factor that has helped NBFCs expand their lending activities faster than banks: availability of capital.
Private equity (PE) investment into the NBFC sector in the past few years has changed the way these firms progress and grow. PE firms provide not only financial muscle to NBFCs for growth, but also enable the creation of world-class financial organisations with a focus on industry developments around the world.
Strategic initiatives such as expanding market presence, branding, and marketing as well as upgrading technological capabilities to deliver better loan products and customer experience are fast-tracked with adequate availability of growth capital. The capital so available also helps in strengthening NBFC balance sheets to weather credit quality and other shocks.
The value-add of PE firms does not stop at just financial support. Corporate governance requirements of PE firms future-proofs investee NBFCs from regulatory risks, fraud, and other losses. PE firms’ history and experience can also provide early visibility to sector headwinds, affording an opportunity to NBFCs to course-correct in a timely manner.
PE firms also provide access to a wide business network, facilitating strategic partnerships, and other business opportunities. Collaboration opportunities unlocked through common investors allow NBFCs - whether online, offline, or hybrid – to work towards mutual goals of enabling seamless access to credit. This approach of co-opetition, or collaborative competition, helps the broader NBFC sector to strengthen its standing in the Indian financial sector, allowing it to truly stand tall when the banking sector is stumbling.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)