Improved Capital Provisions Will Help In NBFC Growth

Rating agency Crisil said that Non-banking financial companies (NBFC) are likely to make a comeback on the hopes of 11-12 per cent growth in their total assets under management (AUM) by the end of the current financial year. The sector saw a slowdown between FY20 and FY22 with their AUM growing at a modest 2-4 per cent.

Expansion in their AUM will be mainly led by the vehicle finance segment, which is expected to grow in the range of 11-13 per cent in FY23. The segment contributes 45-50 per cent to the total AUM of NBFCs.

Within vehicle finance, used vehicle loans will drive the growth, the report said. “Strong demand from the infrastructure sector as well as demand for fleet replacement and focus on last-mile connectivity will buoy commercial vehicle sales while pent-up demand and new launches will drive car and utility vehicle sales,” the agency said.

Speaking with Opportunity India, Geeta Goswami, Co-Founder and Director of Usha Financial emphasizes that improved capital provisions are going to be the main key which will make the balance sheet stronger and hence shall result in improving the growth.

Goswami said, “The last couple of years were a little harsh on NBFCs due to the Coronavirus, we have seen that many NBFCs saw a steep downfall and were not able to recuperate their money from the market and saw a major slump in their growth. We strongly believe that improved capital provisions are going to be the main key which will make the balance sheet stronger and hence shall result in improving the growth.”

She said that NBFCs will have to make their underwriting strong, they must choose their products wisely as per their strength and experience. “With a little out-of-box thinking and ways of keeping the money safe along with good returns, NBFCs can surely see growth,” she added.

If I need to sum up I would say that 3 factors are most important and i.e. capital provisioning, innovative high-yield products, and risk analysis are going to play key factors. The government is also looking forward to improving the lending system and is supporting NBFCs as we are serving mostly in the priority and unserved sectors and this surely trigger better economic condition for these segments. We need to focus on data acquisition and management, introduce customized products, expand of customer base, and better customer service offerings. Lately, we have seen that NBFCs have recovered their NPAs with the help of restructuring, rescheduling, and revival of bad loans. The worst seems to be over and NBFCs are now seeing the light at the end of the tunnel, she said.

Speaking about the major factor for the slowdown in the industry she explained, in the year 2020 we saw pandemic developing roots in India. The lockdown suddenly dried the inflows and the repayment to the borrower became somewhat difficult. Additionally, some big players started to default or delayed the repayments. The lenders started to lose their confidence as the bigger players of the market started to drown. As a result this started to impact the cost of borrowing as the stability of NBFCs was in question.

“Failures of any large and deeply interconnected NBFC also lead to the disruption of the operations for the small and mid-sized NBFCs through domino effect by limiting their ability to raise funds,” Goswami added.

She also mentioned the prevailing competition in the market and said, “There is enormous competition in the market. The financial system is maturing from a bank-dominated space to a hybrid system wherein non-bank intermediaries are gaining prominence, usually; customers opt for an NBFC for its different loan products and easy process. The provision of services by NBFCs regarding the loan is seamless, with the approval of an application within just 24 hours. While NBFCs are now dominating in unsecured loans, banks have major dominance in secured or collateral-based loans. However, now we see some major NBFCs that are giving banks major competition.”

According to the Crisil, NBFC loan growth is also expected to come from other segments like personal loans, consumer durable loans, loans to SMEs, property and gold loans. Consumer loans are seen supported by rising retail spend across consumer durables, travel, and other personal consumption activities, while business loans will benefit from macroeconomic tailwinds. Loan Against Property (LAP) and gold loan segments are also expected to touch 10-12 per cent growth supported by demand from small businesses and individuals.