NBFC

Decoding the Growth of NBFCs in India

Non-Banking Financial Companies have taken major strides in terms of their scale and diversity of operations. Now they play a crucial role in the promotion of inclusive growth by providing access to financial services to the less-banked customers. NBFCs in India have surpassed banks in the mortgage industry in terms of success by leveraging technology in credit disbursement. Through the use of technology, NBFCs have expanded into underserved segments. But do you know what has made them grow over the years? Let’s find out in this article.

NBFCs in India: Overview

NBFC is an institution engaged in the business of loans and advances, in the acquisition of shares, stocks, debentures, bonds, securities issued by government or local authority or other marketable securities. It also has a principal business of receiving deposits under a scheme or arrangement through arrangements or in any other manner.

Recently the RBI^[1] announced the scale based framework for NBFCs which will be applicable from October 22, 2022. It replaces a vastly scattered governance regime. The new calibrated Scale Based Framework entails capital requirements, governance standards, prudential regulation, etc. As per this framework, NBFCs are classified based on their asset size, undertaken business, inter-connectedness with the system and perceived risk. Earlier NBFCs were categorised based on their asset size and activities.

Factors helping NBFCs grow

Over the years, the NBFC sector has grown tremendously, with a few of the large NBFCs becoming comparable in size to certain private sector banks. So what is driving them? Let’s take a look at prominent factors responsible for the growth of NBFCs in India.

• Serving the under-served

One of the key focus areas of NBFCs has been on unorganized & under-served segments of the economy. This has led companies to create a niche for themselves through frequent interactions with their customers. They have ensured last mile delivery and enhanced customer experience.

• Delivering customized product offerings

NBFCs have mainly focused on a limited line to serve the target customer segment. NBFCs have customised product offerings with a view to address unique characteristics of customers and focused upon meeting the right needs. NBFCs are adopting non-standard pricing models for product lines in accordance to the customer profile and inherent risk of lending.

• Leveraging the use of technology

With the use of technology, NBFCs are customizing credit assessment models and optimizing business processes. It has helped them in improving customer experience immensely. Cutting edge technologies like data analytics and AI have been deployed by NBFCs and many other NBFCs continue to do so as it enables them to build robust relationships with their target customer segments.

• Wider connectivity

NBFCs have managed to spread its wings widely by catering to Tier-2, Tier-3 and Tier-4 markets, disbursing loans across various customer touch points, building a connected channel experience, extending an omnichannel seamless experience with 24*7 sales and service. NBFCs have developed and designed new and improved ways of engaging with customers.

• Co-lending arrangements

A majority of the NBFCs have been collaborating with multiple alternative lenders having digital platforms and commercial banks. This has led to a significant addition in their targeted customer base.

• Risk Management

Considering NBFCs focus on lending to sub-prime customer base and regulatory disadvantage as compared to commercial bank lenders, NBFCs are focussed on enhancing governance through a robust and agile risk management model.

The way forward

Partnership of NBFCs with payments banks, bill payment providers and such other financial institutions will help NBFCs in offering the complete proposition which includes deposits, lending, investments etc. The wide reach of NBFCs and their good understanding of the market can help them to attain a position that places them as a better alternative to traditional banks.

Moreover, to stay relevant in the prevailing digital environment, NBFCs can consider leveraging vast digital customer data to be able to serve customers better. Going forward, NBFCs should find ways of serving their millennial customers through digital means.

Conclusion

NBFCs in India have no comparison in reach and flexibility in tapping resources. In difficult times, NBFCs can survive due to its aggressive character and customised offerings. Especially during the pandemic, NBFCs showed resilience despite a crisis situation and they are expected to witness continued momentum in growth this year also. Some NBFCs have emerged as financial institutions in a short span of time and now they are converting themselves into a financial supermarket making themselves as a one-stop financial shop. As the Indian economy upticks, credit requirements will also require and in that case, NBFCs and Banks can act as the key facilitator who can together drive the Indian economy further. The role of NBFCs in the Indian economy can never be neglected hence RBI should continue to come up with policies that allow them to flourish even more along with care for its investors.

Read our Article:RBI extends timelines for NBFCs to comply with strict bad loan norms