NBFCs should be able to carve new lucrative niches to lend in a chronically under-banked market like India.
Indian non-banking finance companies (NBFCs) are at the cross-roads, with increasing competition from ‘regular’ banks and tightening of regulations putting a question mark on the sustainability of their growth in recent times. However, in the ongoing shake-up, these entities and also the regulator – the Reserve Bank of India (RBI) – should not lose sight of the sector’s raison d’être: The NBFCs play a unique role in providing last-mile financial services to under-served segments of the economy not readily reached by banks.
Following the 2008 economic crisis, policymakers have generally sought to clamp down on all entities seen to expose the financial markets to systemic risks. In the case of NBFCs, they have imposed higher capital requirements, besides stricter provisioning and disclosure norms, in an effort to regulate them as tightly as banks. RBI has also discouraged banks from increased exposure to the sector by imposing tighter rules on lending to NBFCs. . This has prompted the industry to complain that the regulator seems hell-bent on pushing all NBFCs to either become banks or simply go out of business. The perception is that they now have to adhere to all the regulations applicable to banks without getting any of the latter’s benefits. Some NBFCs are attempting to beat banks at their own game. The ones backed by large conglomerates, such as L&T Finance Holdings and Tata Capital, today provide retail home, auto and consumer loans, apart from working capital, term loan, project equipment finance, and fee-based support to corporates. This diversified ‘universal banking’ model is seen as putting them ahead in the race for banking licences, whenever the RBI considers handing them out. But it cannot be the way forward for all the 12,000-odd players in the NBFC industry.
One must remember that NBFCs like HDFC, Sundaram Finance, Shriram Transport and Manappuram have thrived all these years largely because of their acumen in spotting and delivering niche credit services to borrowers ignored or neglected by commercial banks. They built a profitable business from extending home loans to the middle class, truck financing, SME loans and gold loans on the basis of knowing their borrowers thoroughly and assessing their risk profile more efficiently than banks could. But with these segments today over-run by competition from banks, the NBFCs should carve out new lucrative niches to lend – not difficult in a chronically under-banked market like India. The RBI, too, needs to play a more facilitative role here. The time is ripe, perhaps, to implement the Usha Thorat Committee’s report of August 2011, which suggested that RBI shouldn’t actively regulate smaller NBFCs that don’t raise public funds. The recommendations of allowing NBFC branches to function as banking correspondents and permitting them to use the SARFAESI Act’s provisions for loan recoveries are also worth considering.