Introduction
The Indian economy is poised for rapid growth in various sectors, such as information technology, automobiles, pharmaceuticals, and more. Alongside this growth, the importance of financial services cannot be overstated. While banks are commonly associated with financial services, there is a significant market for Non-Banking Financial Companies (NBFCs) in India. This article explores the role of NBFCs across sectors, current industry trends, their impact on the Indian economy, future outlook, and the influence of government policies.
Why People prefer NBFCs over Banks?
NBFCs are more flexible than banks when it comes to loan approvals and other processes. Even if a customer has a low credit score, NBFCs are willing to lend money to such borrowers. In contrast, banks may not provide loans to individuals with lower credit scores due to their strict credit evaluation norms. If a customer needs urgent funds, NBFCs process loan applications quickly and disburse funds faster compared to banks. Their streamlined procedures, wide network, rural presence, niche services, and flexibility attract customers towards NBFCs.
In today’s market, many prominent companies have their own financial services arms. These NBFCs provide loans to customers to facilitate the purchase of products and services while also supporting their parent businesses. For instance, Mahindra & Mahindra has M&M Finance, and L&T has L&T Finance. Additionally, there are retail NBFCs like Manappuram Finance and Muthoot Finance, as well as government-backed NBFCs such as Power Finance Corporation (PFC) and Indian Railway Finance Corporation (IRFC).
NBFC Diversified Portfolio:
NBFCs typically focus on lending within a specific sector. However, as market dynamics shift, they expand their portfolios to align with demand.
For example, when RECL separated from PFC, its primary focus was rural electrification projects. However, after a few years, it expanded to corporate lending for infrastructure projects such as metro and real estate developments. Similarly, Bajaj Finance, which initially offered loans to retail consumers, has now diversified into gold loans, education loans, and more.
L&T Finance, which was initially focused on funding L&T Construction, has now shifted its primary business to retail loans, aiming for an annual profit growth of 25% CAGR. This shift illustrates how market forces drive NBFCs to explore other sectors with higher margin potential.
Gold Auction Indicator:
During the COVID-19 lockdown, people faced significant hardships due to job losses, reduced salaries, lack of transportation, and other factors. At that time, the economy was in a slump, and businesses were shutting down across the country. The stock market indices of all nations reflected this economic downturn.
One such indicator was observed in the gold loan sector. A leading gold loan lender had to auction off gold worth ₹1,500 crore during the June quarter—more than three times the amount from the previous quarter (₹404 crore). To put this into perspective, the lender had only auctioned ₹8 crore worth of gold in the first three quarters of FY21. (Source: Business Standard)
Government Policies:
Government policies play a crucial role in shaping the NBFC landscape. Currently, NBFCs face challenges related to cash crunches and rising interest rates. However, the overall growth of the Indian economy supports their business. To further strengthen the sector, it would be beneficial if the Reserve Bank of India (RBI) provided guarantees or supporting norms for NBFCs to obtain funds from banks. Such guarantees would give banks more confidence in lending to NBFCs at lower interest rates.
Additionally, credit rating agencies like CRISIL, ICRA, and CARE play a vital role in attracting investors to NBFCs. Higher ratings encourage investors to invest in NBFC bonds at lower interest rates, further supporting the sector’s growth and stability.
Current Trends in NBFCs:
With technological advancements, new financial apps are emerging, contributing to the economy. Apps like Dhani, Lazypay, Simpl, and Flexpay Extra offer innovative financial services. For example, Buy Now Pay Later (BNPL) apps like Lazypay allow customers to make online purchases without immediate payment, often with added benefits such as cashback. These user-friendly apps increase liquidity, enabling people to spend more, which, in turn, stimulates GDP growth.
Conclusion:
Non-Banking Financial Companies (NBFCs) have emerged as key players in the Indian economy, significantly contributing to GDP growth. With quicker loan approvals, simplified disbursements, and diversified portfolios, NBFCs are giving tough competition to banks in the retail consumer market. They cater to various sectors, ranging from retail to infrastructure projects. Moreover, technological advancements and user-friendly apps have further propelled the growth of NBFCs and their impact on the Indian economy. With supportive government policies and initiatives, NBFCs are poised for a promising future in India’s financial services landscape.
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