NBFCs are key players when it comes to the objective of financial inclusion that India aims to achieve. It caters to unbanked and underbanked sections of Indian society. Additionally, they provide the credit demand of MSMEs too. Through direct and indirect involvement, they transform sectors like transportation, employment generation, wealth creation, bank credit in rural and even urban segments of the economy.
The need for emergency services like financial assistance and guidance is offered at fast disposal by NBFCs. They play the crucial role of channelizing the scarce financial resources to capital formation. In doing all this and more, they easily supplement the part of the banking sector.
The distinguishing factor that marks NBFCs as different from banks is that they issue business-related loans advances, stock, bonds, acquisition shares, debentures, securities or local authority, or other securities of marketable nature like hire-purchase and insurance business, etc.
Although NBFCs are financial institutions that differ from traditional banks, they are bound by the Indian banking industry rules and regulations.
Here’s How NBFCs will Impact Financing Trends
Despite the widespread economic slump in India’s financial markets, the NBFC sector seems to have followed a trajectory of growth. They follow the use of high-end tech solutions to reduce the costs involved in successful loan application assessment and even loan disbursal.
These factors bring down the cost involved in offering loans to customers. It also makes NBFCs more profitable than traditional banks.
NBFCs are a significant contributor to the economy through lending they provide to infrastructure projects. That is why they are valuable to a nation that is still in its developing phase. Developing countries require large amounts of funds. They eventually earn profits but over a longer time-frame and thus fall under the category of riskier projects.
Over the past few years, NBFCs have contributed significantly more to infrastructure lending than traditional Indian banks.
NBFCs involved in retail lending are all set to witness robust growth. Strong urban demand and increased credit penetration are prime factors that contribute towards the growth in the consumer finance segment. The push from the urban sectors is driven by higher disposable incomes and the effectiveness of government schemes like the 7th Pay Commission.
However, the growth from the rural area is likely to be muted.
Inadequate agricultural income growth and the depleted monsoons have strained agricultural credit growth.
These causes also have to lead to deterioration in the overall asset quality.
Loans to Individuals with No Credit History
In the past, some NBFCs focussed on providing consumer durable, affordable housing and microfinance solutions to Indians. Some others prioritized the support of B2B clients with business loans, cash advance, invoice discounting, etc. With the advent of digitization, the NBFC ecosystem has evolved further.
New NBFCs do not even shy away from disbursing loans to small borrowers with no collateral to seasonal workers. They are also targeting new categories such as blue-collar workers and even unemployed individuals who need funds.
Overall Economic Development
NBFCs act as an effective medium for mobilization of resources. They convert savings into investments. Businesses benefit from the provision of a long term or specialized credit that NBFCs can issue. They are a significant contributor to the development of financial markets and even attract foreign grants.
We have seen how the collapse of IF & FS took a toll on investor confidence and brought detrimental consequences to the flow of credit to NBFCs. Further, even mutual funds cut their investments in NBFCs. The acute lack of credit had a cascading effect on sectors like manufacturing and real estate.
However, it is predicted that large NBFC players will perform better than the smaller ones with exposure to industries such as real estate and auto manufacturing. Even the RBI has eased the lending norms allowing banks to park 20% of their top-end capital with a single NBFC. This is likely to enable better access to credit.
Again RBI has mandated a Liquidity Coverage Ratio (LCR) of 50% to be maintained by non-deposit NBFCs with assets under management of more than INR 10,000 crore and all deposit-taking NBFCs too. This implies that there will be a reduced cost of borrowing for NBFCs, rising from a better ability to manage risk.
NBFCs are working towards spreading their risks and leveraging the synergies by partnering with other niche lenders to offer customized loans to borrowers. They are also focusing on lending against consumer durables like cell phones and payday loans. NBFCs are also showing interest in dispensing collateral-free education loans using alternative credit scoring and data analytics to de-risk their profile.
Come 2020, NBFCs with excellent asset quality and minimal NPAs will thrive. The synopsis above shows how the future promises a reduced cost of borrowing for consumers across the spectrum.
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