NBFCs have become an integral part of the Indian lending landscape over the years. Since their inception in the 1960s, they have helped to provide a range of financial services to consumers and businesses across the country.
As of March 2019, the total number of registered NBFCs in the country stood at 9,659. Despite the IL&FS default which precipitated a lending crisis in the country, the overall market share of NBFCs stands at a healthy 20%, as per current estimates.
In the post-liberalisation era, some NBFCs focussed on providing consumer durable, affordable housing and microfinance solutions while others took the lead in supporting B2B clients with business loans, merchant cash advance, invoice discounting, etc.
Over the years, the NBFC ecosystem has evolved further with the arrival of digital lenders who lend to a wide swathe of individuals – from small borrowers with no collateral to seasonal workers.
Although successive interest rate cuts have not helped revive growth, NBFCs have increased their exposure to MSMEs by 12% year on year. After the government designated MSMEs a priority sector, NBFCs have been outperforming public sector banks in terms of tapping the credit needs of small businesses.
Here’s What the Future of NBFCs Looks Like in 2020
Liquidity Crisis
The collapse of IF & FS sapped investor confidence in NBFCs which had been performing exceptionally well until then. As banks went into damage control mode, the flow of credit to NBFCs halved to INR 1.9 lakh in September 2019.
Mutual funds followed suit and cut investments in NBFCs by 30%. The lack of credit had a cascading effect on the manufacturing and real estate sectors which found it difficult to sustain their inventories. Buyer sentiment was also hit as demand in the auto sector bottomed and manufacturers began cutting production hours to stay afloat.
However despite speculations to the contrary, manufacturing and service growth has picked up in the first quarter of 2020, bringing the hope of an economic rebound by mid-year. Large NBFCs are expected to perform better than their smaller counterparts with exposure to sectors such as real estate and auto manufacturing.
The fears of a general recession are unfounded in any case because the economy has posted a 5% growth rate and not two-quarters of negative growth which signifies recession.
The RBI has eased lending norms allowing banks to park 20% of their top-end capital with a single NBFC. This will help them get better access to credit. NBFCs have also been offered to refinance support on loans to priority sector customers.
Risk Management Initiatives
The RBI has also 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. The eventual objective is to increase it to 100% by 2024. NBFCs with net assets between INR 5,000 and 10,000 crores are also to comply with this requirement.
This move by the RBI is expected to reduce the cost of borrowing for NBFCs due to better able to manage risk. There has already been an uptick in fund inflows by about 30% on account of this drive. The government’s assurance that no NBFC will be allowed to collapse has come as welcome relief for investors and promoters alike.
These measures have given NBFCs a stable foundation to mobilise funds. The risk of NPAs has been mitigated and is now better than those on the commercial lending side.
Identifying New Target Groups
Thanks to their improved credit ratings, NBFCs are looking at external sources for funding until the normalisation of credit in the Indian market. They are also targeting new niches such as blue-collar workers and even unemployed individuals in need of funds.
NBFCs are specifically targeting individuals with little or no established credit – a category that is virtually starved of credit and represents a sizable chunk of the market. The relative lack of competition in the low-income segment has heightened hopes of a captive market for NBFCs.
To spread risks and leverage synergies, many small NBFCs are partnering with other niche lenders to offer customised loans. The low ticket market is not without risks however, many lenders have been looking to test their assumptions by partnering with FinTechs that cater exclusively to this segment.
Consumer Durables
Consumer durables and payday loans are two promising segments in which NBFCs have been looking at.
The risk: increased unemployment and dropping income.
Experts say that loans for buying mobile phones are likely to gain traction in select regions of the country.
This niche also provides ample opportunity for upselling and cross-selling higher value products such as personal loans.
Education Loans
Education loans are another segment with a lot of potential for NBFCs. Parents of students aspiring to study abroad are showing renewed interest in collateral-free loans being offered by education loan companies.
Public sector banks that dominate the education loan segment are backing off due to the growing risk of NPAs which stood at 9% of the overall market as of mid-2018. NBFCs are banking on alternative credit scoring and data analytics to de-risk their lending strategies for this sector.
FinTechs are seen as having better prospects in the sector because of better customer profiling and flexible repayment tenors which give consideration to real-life situations faced by students such as intermittent unemployment for up to 1 year following graduation.
Affordable Housing
With the government backing affordable housing programs for the low and middle-income sections of society, NBFCs see a lot of potentials in the real estate sector in 2020 and beyond. While demand has slowed down and inventories continue to pile up, NBFCs expect the market to pick up on the back of interest rate cuts and tax incentives on housing loans.
Micro Finance
The microfinance sector is witnessing the entry of many new lenders lately from P2P lenders, small finance banks to NBFCs and NBFC Micro Finance Institutions (MFIs). Although the market is governed by complex regulations, the average ticket size is very attractive for lenders.
Thanks to innovative risk scoring techniques such as profiling GST returns, POS transaction volumes and social media activity, NBFCs aim to offer competitively priced, collateral-free loans to this segment.
Conclusion
While the road to recovery is likely to be slow, NBFCs with good asset quality and low NPA exposure will consolidate their market share in 2020. The first green shoots are already visible in the form of higher inflows from mutual funds and banks after policy intervention by the RBI. NBFCs have also been borrowing from the international market to tide over temporary liquidity shortfalls. These measures will reduce the cost of borrowing for consumers across the spectrum and help NBFCs regain lost ground.
Finezza is a leading lending lifecycle and credit evaluation platform that helps banks and NBFCs streamline and optimise their performance. Contact us today at contactus@finezza.in to learn more about our customised solutions.
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