NBFCs – transforming from peripheral lenders to financial heavyweights

For a long time, the story of India's financial sector was narrated through the banking sector developments. Their mobilisation of savings, credit delivery, business financing, support to digital payments etc. occupied the centre of formal finance. The Non-Banking Financial Companies (NBFCs) usually appeared as second class institutions; operating in the fringe areas of formal finance.

Now, the trend is reversing. The NBFCs are no more the rookie boys; and are steadily rising to the mainstream – and even competing with banks in terms of size, business depth and technology adoption.

Developments over the last few years show that their profits are rising, systemic importance are scaling up and they are challenging commercial banks as the champions of formal finance.

The RBI's upper layer NBFCs are very important for households, industries and business corporates. The Power finance Corporation, REC, Bajaj Finance, Tata Capital, Muthoot Finance, Sriram Finance – all are as familiar as several mid-tier commercial banks.

Specialisation as the real strength

One core strength of the NBFCs is their specialisation in niche sector lending. For example, the Bajaj Finance, which is the fourth largest NBFC in the country and included in the Upper Layer category of the RBI's scale-based classification, is specialised in consumer finance.

Its business scale, measured in terms of asset size is nearly Rs 3.5 lakh crore which is just higher than that of Federal Bank and the IDFC first bank.

The largest NBFC in the country – Power Finance Corporation has an asset size of nearly Rs 9 lakh crore which is higher than that of Bank of India – the tenth largest bank in India.

Serving the unserved and the under served who are rejected by banks

An important factor that driven the growth of the NBFC sector is the inability of banks to serve the small finance needs like that of consumer finance. Indeed, the banks are facing inability to accurately assess the creditworthiness of customers.

In a country with millions of individuals aspiring to get loans for the purchase of consumer durables, banks can not have a presence given their structural impediments.

Their procedure, cost for underwriting (assessing the soundness of the borrower) the consumer loans etc. allows the NBFCs to have a free play.

The NBFCs are the masters of embedded finance. Here, customers who buy a product in the durable goods shop gets a loan to back up his purchase. He need to travel to the next mile commercial bank to get funding for his purchase of TV or mobile phones. Instead, an agent of the NBFC will be there at call in the shop for extending the loan.

NBFCs like Bajaj finance uses advanced data analytics and credit monitoring methods to assess the potentials of individual customers. They are able to finance millions of purchases in a country with the worlds largest consumer base.

The extraordinary expansion of gold loans

In the case of gold loans, a market where the loans are supported by high liquid asset of gold, the banks are facing tremendous competition from two specialised NBFCs – the Kerala based Muthoot and Manappuram. In future, they may be backed up by Tata Capital and other players.

Though the commercial banks still retained the ground in the gold loan market, the product was popularised by NBFCs. The banks just needed to extend it to the customers with the advantage of being the mighty financial power houses who have a history of trust.

The NBFC sectors' growth and diversification are commendable given that they don't have liquid funds like the CASA (deposit by banks) that the commercial banks possesses.

In the context of the steady rise of the NBFCs, the RBI is extending tougher regulation for them. Under the Scale based regulation, the big NBFCs have to fulfil higher financial disciplines. All these are cementing the commanding importance of the NBFC sector in India's financial landscape.