NBFC sector in India has undergone a significant transformation over the past few years and has come to be recognised as systemically important components of the financial system and it is growing quite consistently year-on-year. NBFCs are playing a critical role for the development of core infrastructure, transport, employment generation, wealth creation, economic development, to finance economically weaker sections and considerable contribution to the state exchequer.
India’s NBFC sector continues to remain at the forefront in driving new credit disbursals for the country’s underserved retail and MSME market. Despite recording robust growth, the NBFC market share has been dominated by large players, while many small players have struggled to scale up operations profitably.
Moreover, recently, the sector has taken a beating in the stock market with defaults and liquidity challenges, specifically related to one large NBFC. Although the problem seems isolated, it has concerned regulators due to the risk of contagion effect and the overall governance in the sector.
Given the sector is fairly large now to impact the overall economy, this certainly entails some potential implications, including new compliance measures by the regulator, lending slowdown and potential consolidation by larger players.
The NBFC lending model is also under pressure as a result of increased internal and external forces such as:
- Stiff competition from incumbents and the entry of Fintech players.
- Dynamic regulations that are increasing the cost to comply and are restricting the ability to freely impose pricing.
- Technology advances that are enabling customisation, real-time and social mobility.
- Levels of customer expectation are rising, the need for 24×7 pervasive experience.
- Economic volatility, shrinking credit performance and pricing pressure as a result of eroding margins.
Such disruptive forces necessitate another look at what are the building blocks of a robust, scalable and profitable NBFC business model that will sustain through similar stress cycles. Despite concerns surrounding the sector, we believe such NBFC’s with robust business models, strong liquidity mechanism, governance and risk management standards are well positioned to take advantage of the market opportunity.
Hence it is even more critical for incumbent and new-to-market NBFCs to define and implement a balanced strategy that meets table-stakes across essential, core capabilities and differentiates across high value-adding capabilities. NBFCs or shadow banks as now being called are a definitive part of the financial landscape and will continue to thrive and grow in future notwithstanding a few hiccups now and then.
The future of NBFCs:
- A path to consistent growth and evolution for the better will include prescriptive action points such as:
- They should formulate a segmentation strategy, defining target customer segments, product proposition, distribution channels and geographical locations for operations.
- They must offer customers customised, seamless 24×7 sales and service interaction, with well-entrenched engagement programs to attract and retain customers, while maximising lifetime value.
- NBFCs must leverage technology-based tools to transform underwriting and decision making, thereby, helping drive competitive advantage and robust risk management.
- Overdue collections must adopt a customer-focused, data-driven, relationship-based approach to maximise recovery and minimise write-offs.
- Lenders must maintain focus on building tight information security controls to ensure insulation from rising threats.
- Alliances with Fintech companies will allow the lenders to add unique capabilities to boost their value proposition and compete stronger in a crowded market.
- Efficient risk detection, management and mitigation mechanisms will help NBFCs survive regulatory dynamics, market uncertainties and ensure lenders are well capitalised to operate.
The NBFC sector is in a healthy space and it is going to be continued to be very relevant to the economy and that’s why we see so much attention from the government and various regulators etc. There is a large credit gap in India specifically in the SME and at the bottom of the pyramid and that’s where NBFCs will have a role to play. Having said so, NBFCs need to upgrade their business model, keeping the basics intact, because with the changes happening today, in the next two years will be a whole lot of consolidation. Banks and larger NBFCs will/have to acquire a bunch of smaller NBFCs to scale up the growth and the lending business if at all they remain the same.
NBFCs have played a critical role as a key contributor to the economy by providing a fillip to infrastructure, employment generation, wealth creation and access to financial services for the rural and weaker sections of society. The health and success of the NBFC sector have far-reaching implications on the inclusive development of the economy, financial inclusion of diverse population segments, capital formation and eventually the growth in GDP.