The role of NBFCs in supporting India’s economy beyond financing

Non-Banking Financial Companies (NBFCs) have evolved to become a vital source of credit for the Micro, Small, and Medium Enterprises (MSME) sector in India, which contributes to over 30% of the GDP and employs more than 110 million people. 

While MSMEs play a crucial role in the economic and social development of the nation, they face numerous challenges, including limited access to formal credit, complex regulatory compliances, and a shortage of skilled manpower. 

In this article, we will delve into how NBFCs—despite lacking a banking license—have a significant impact on various economic sectors in India and contribute beyond financing.

Versatile portfolio 

Unlike traditional banks, NBFCs have the flexibility to invest in various financial instruments, including money market instruments, stocks, and shares, allowing them to generate higher returns on investments.

Diversified services 

NBFCs offer a wide range of financial services, from wealth management to creating customised investment portfolios. This diversification enables them to cater to specific needs and generate diverse income streams.

Operational efficiency 

With less bureaucracy and compliance overhead, NBFCs can streamline their services, resulting in faster processes and cost-effective loan offerings. This efficiency benefits not only the companies they serve but also the overall economy.

Unexplored territories 

Rural India has a growing appetite for financial services, and NBFCs are actively filling this gap left by traditional banks. This expansion into underserved regions provides an opportunity for growth while promoting financial inclusion.

Beyond supporting the MSME sector, NBFCs have played a pivotal role in the development of several key economic sectors:

Infrastructure development 

NBFCs provide long-term funding for large-scale infrastructural projects, contributing significantly to the progress of the country's infrastructure. With the government's emphasis on infrastructure development, NBFCs are well-positioned to support this sector's credit expansion.

Consumer goods 

NBFCs have also been instrumental in driving the consumption of consumer goods by offering easy financing options, leading to increased demand for various products and stimulating economic growth.

Transportation 

In the transportation sector, NBFCs have provided financing solutions for both passenger and commercial vehicles. Their involvement in this sector has contributed to the growth of the automotive industry.

Technology adoption 

NBFCs have been at the forefront of adopting technology to streamline their operations and offer more accessible services, which not only enhances the customer experience but also supports India’s digital transformation—crucial in the 21st century.

Employment generation 

As NBFCs continue to grow, they create numerous employment opportunities in various functions such as sales, operations, risk management, and IT, which contribute to reducing unemployment and boosting the economy.

Opportunities for NBFCs

Ongoing challenges faced by public sector banks, including bad debt and deterioration in lending in rural areas, have created opportunities for NBFCs to expand their presence. 

Key factors contributing to the success of NBFCs over traditional banks include a broader product range, lower operational costs, wider and more effective outreach, robust risk management capabilities, and a deeper understanding of customer segments. 

NBFCs have thrived in segments like passenger and commercial vehicle finance, personal loans, and housing finance, making the most of improving macroeconomic conditions and digital disruption.

The impact of COVID-19 and resilience

The COVID-19 pandemic posed unprecedented challenges to the financial sector, and NBFCs were no exception. However, these entities demonstrated resilience and adaptability during the crisis. Despite the turbulent times, NBFCs maintained their focus on growth.

According to an ASSOCHAM report, NBFCs have raised significant equity capital, amounting to nearly Rs 70,000 crore over the past 3.5 years, which has significantly improved their financial gearing. The subdued business landscape in recent years has also contributed to better gearing. Further, NBFCs have strengthened their provisioning levels to account for uncertainties associated with the pandemic, resulting in much stronger balance sheets today.

Policy support for infrastructure development

The Indian government has consistently reinforced the importance of the infrastructure sector in driving economic growth and development. Initiatives like the National Infrastructure Pipeline (NIP) introduced in 2019 have further propelled the infrastructure sector's progress. 

Additionally, the PM Gati Shakti National Master Plan and the National Logistics Policy, announced in February 2022 and September 2022, respectively, will play pivotal roles in enhancing infrastructure development in the country. 

NBFCs are poised to leverage their strengths, such as strong customer relationships, adaptability, local knowledge, innovation, and responsiveness, to participate in the growth of these initiatives.

Conclusion

NBFCs have emerged as a crucial player in the Indian financial landscape, supporting not only the MSME sector but also various key economic sectors. Their flexibility, diversified services, operational efficiency, and ability to explore uncharted territories have allowed them to adapt and thrive even during challenging times like the COVID-19 pandemic. 

The sector's resilience, strong balance sheets, and policy support for infrastructure development make NBFCs a significant driving force behind India's economic growth and overall development. As they continue to evolve and innovate, NBFCs are poised to play an increasingly influential role in shaping India's aspirations and future.