NBFC

How do NBFCs create Opportunities for Retail Investors?

NBFCs create opportunities for retail investors through several channels and mechanisms. These services offer a wide range of financial services to meet the diverse needs of retail investors. These include investment options such as fixed deposits, mutual funds, bond insurance products, etc., to help investors mitigate risks and achieve their financial goals.

Also, NBFCs offer investors exposure to various investment opportunities, such as lending to specific industries, such as microfinance, housing finance, or infrastructure development, allowing investors to participate in the sector’s growth.

NBFCs also adopt innovative financial technologies and digital platforms to enhance accessibility and convenience for retail investors by applying through online portals and mobile apps, which make it easy for the investors to research, invest, and monitor real-time investments; the financial institutions have partnerships with banks, asset management or fintech companies to offer investment to retail investors.

Who are the Retail Investors?

Retail investors are individuals or small groups of investors who buy and sell securities for their personal investment portfolio rather than on behalf of an organization or institution by investing a small amount of money compared to institutional investors such as mutual funds and insurance companies.

Retail Investors participate in the financial market through various channels, such as brokerage accounts, online trading platforms and investment funds. They can invest in stocks, bonds, mutual funds, exchange-traded funds, options and other financial instruments to build wealth, save or achieve specific economic objectives.

Role of NBFC in Retail Investors

NBFC Registration allows Non-Banking Financial Companies to play an important role in facilitating financial services and opportunities for retail investors. Below is the role of the NBFC in retail investors:

1. Diverse Investment Options

NBFCs offer a range of investment products to retail investors’ needs, including fixed deposits, mutual funds, bonds, debentures, and insurance products.

2. Customized Offerings

Various NBFCs specialize in market sectors or segments, catering to the specific needs of retail investors, such as focusing on housing finance, microfinance, or loans for small and medium enterprises.

3. Accessibility

NBFCs often leverage technology to enhance the accessibility and convenience of retail investors through online platforms and apps.

4. Financial Inclusion

NBFCs promote financial inclusion by extending financial services to underserved areas of the population. And contribute to expanding the investor base and fostering inclusive economic growth.

5. Risk Management

NBFCs often employ risk management strategies to safeguard the interests of retail investors. They conduct thorough due diligence on potential borrowers, assess creditworthiness, and take other measures to minimize the chances of defaults or losses.

Channels through which Retail Investors Participate in the Financial Market

Retail investors participate in the financial market through various channels, and each channel offers different opportunities to the retail investors from the NBFCs. Below is a detailed look at these channels:

1. Brokerage Account

The brokerage account provides retail investors with access to the financial market. Through these accounts, retail investors can buy and sell securities such as stocks, bonds, mutual funds, etc.

2. Online Trading

With advanced technology, online trading platforms have become increasingly popular among retail investors. These platforms allow investors to trade securities electronically from the comfort of their homes or offices.

3. Investment Funds

Retail investors can participate in financial markets through investment funds such as mutual funds and ETFs. Mutual funds pool the money from various investors to invest in a diversified portfolio, and ETFs, which trade on stock exchanges, represent diversified portfolios of assets such as stocks, bonds, or commodities to make investing easy.

4. Direct Stock Exchange Plans

Some companies offer direct stock purchase plans that allow retail investors to buy shares of their stock directly from the company with minimum investment requirements, making the stock accessible to a broader range of investors.

Retail Investments in India

The rise of retail investors and their remarkable growth in the number of retail investors forecast an impressive growth trajectory, with an anticipated surge to 300 million investors within the next few years.

Retail investment in the Indian equity markets experienced significant growth through direct and indirect channels. The global entities faced a severe downturn in 2022 due to events such as the Russian-Ukraine war and the tightening of the policies by the Federal Reserve, and Indian equities managed to maintain stability.  

Retail investors displayed increased risk-taking behaviour in the market during the pandemic, as an important consequence of the pandemic in the market was the arrival of the retail investors because the emergence of discount brokerages, technological advancements, and increased smartphone usage contributed to the surge in retail investments. This trend has already been growing since the global financial crisis.

During the bull run from 2003 to 2008, which marked the longest period of growth, the Nifty 50 benchmark index surged to a peak. What sets this recent bull run apart is the notable involvement of retail and domestic institutional investors because their increased participation has mitigated the impact of Foreign Institutional Investors’ outflows to reduce the market dependency on external flows for growth and stability.

Since March 2020, demat accounts have increased from approximately four crores to around 14 crores in 2024, with ten crore new investors entering India’s wealth creation journey. Retail investors now account for average monthly inflows exceeding $2 billion, with SIPs inflows witnessing an increase.

Growth under Asset Under Management (AUM) of NBFCs Sector

The individual investors accounted for 60% of the industry’s AUM; this surge in the retail investor participants finds its roots in various contributing to a favourable environment through the steady expansion of the Indian economy, which has provided a solid foundation to attract foreign investors and protecting them from the global risks.

Also, government initiatives such as Make in India have fostered confidence in long-term investment. The regulatory framework, spearheaded by SEBI, has played an important role in nurturing a transparent and robust environment for industry growth. SEBI’s proactive measures include mandatory provisions for investors’ education, incentives for mutual funds and the introduction of low-cost direct plans, which have attracted higher inflows and instilled trust among retail investors.

Systematic Investment Plans offer investors a disciplined approach to navigate market flexibility and ease of management and ensure fairness and transparency. The industry growth over the years fueled by the SIP accounts underscores investors’ confidence in India’s robust economic fundamentals, so the retail investors are poised to continue growing the Indian economy through investing, reflecting a shift towards creating long-term wealth.

NBFC’s Strategy to Target Retail Investors

NBFCs are considered to issue non-convertible retail debentures or bonds to target retail investors and reduce their reliability on bank loans. NBFCs are exploring retail issuance of debentures to their funding sources to broaden their investor base. As per the BSE data, some NBFCs will be appointed into the bond market to raise funds.

NBFCs are exploring new avenues both domestically and internationally to raise funds. Additionally, the RBI expressed concerns about the increasing interconnectedness between banks and NBFCs to maintain loan growth. NBFCs also provide strategies for issuing bonds to retail investors to reduce funding costs and diversify their investor base, which has increased retail demand for bonds in the fixed-income market and surged investment in debt securities.

Measures by RBI towards the Bank and Consumer Credits to NBFCs

Due to the high growth in consumer credits and NBFCs’ dependency on bank borrowings has become a major concern, so the regulatory authority has decided to issue measures to overcome this situation by increasing the risk weight from 100% to 125% in the consumer credit exposure of NBFCs which is categorized as retail loans, but excludes housing, educational, vehicle loans, loans against gold and microfinance loans. Also, the bank credits to NBFCs are risk-weighted 125% as per the ratings assigned by ECAI. This amendment restricted the banking sectors to provide exposure and issued sectoral limits to the NBFCs.

Requirements for NBFCs to Provide Opportunities to Retail Investors

NBFC plays a significant role in providing financial services to various economy sections. When providing opportunities to retail investors, NBFC registration makes the NBFCs capable of providing opportunities to retail investors, some of which are stated below:

1. Retail Investor’s Products

NBFCs can develop and offer retail investment products such as fixed deposits, recurring deposits and bonds to meet the needs of the retail investors.

2. Mutual Funds

Several NBFCs operate Mutual Fund subsidiaries or offer mutual fund schemes by contributing to asset management companies. Retail investors invest in Mutual funds to gain exposure to assets, equities, debt, etc.

3. Microfinance

Some NBFCs specialize in microfinance, providing small loans to low-income individuals and small businesses. Retail investors indirectly participate in microfinance by investing in NBFCs.

4. Peer-to-Peer Lending Platform

NBFCs can establish or partner with peer-to-peer lending platforms to connect with retail investors and lend money to borrowers to earn interest.

5. Insurance Products

NBFCs can often offer insurance products such as life insurance, health insurance, and general insurance, and retail investors can purchase insurance policies from them to protect themselves.

6. Online Investment Platform

Many NBFCs operating online investment platforms allow retail investors to invest in various financial products.

How do the Retail Investors overtake the Mutual Funds?

The mutual funds have witnessed an impressive surge in assets under management, twice the amount of the last four years, reaching around Rs 53.40 lac crore by March 2024, with a rise to 35% of assets under management. However, the remarkable rise in retail investment stands out as the reason for the growth trajectory.  

The asset under the management of the open-ended equity funds grew 55%, Rs 2.49 Lac crore in 2024, March and the net inflows of small-cap funds of Rs 94 crore were witnessed in the equity category in March 2024. Also, SIPs contribution rise 35% and up to Rs 19,271 crore in March 2024. However, the strong SIP number supports domestic investors in maintaining high trust in mutual funds for increasing wealth.

Additionally, the shift in power from mutual funds to retail investors is attributed to various factors that have reshaped the landscape of investing in recent years, such as increasing technological advancements, the rise of the online trading platform, the emergence of social media and online communities etc., which made the retail investors an easy way to enable the trade stocks, options and other securities to manage their own investment s also rather than relying on mutual funds.

Corporate Bonds: A lifeline for NBFCs

In the evolving landscape of India’s financial sector, non-banking financial companies (NBFCs) are increasingly turning to alternative sources to fulfil capital requirements. NBFCs aim to tap into the potential of corporate bonds as a means of raising capital, with subscription opportunities opening up for mutual funds, insurance companies, and retail investors.

Corporate bond issuance in India is projected to more than double, reaching Rs 100 trillion, which indicates the corporate bond market participation. Then, the SEBI proposed reducing the face value of privately listed bonds from Rs 1 lac to Rs 10000, which will be expected to open the gate for retail investors to engage with corporate bonds to reshape their participation in the debt market.  

As the RBI increased the risk weight on loans to consumers, NBFCs made bank borrowings more expensive, so they moved to the corporate bonds market to raise funds for investors.

Strategies of NBFCs to Win the Next Generation of Retail Investors

Retail investors displayed increased risk-taking behaviour in the market during the pandemic, as an important consequence of the pandemic in the market was the arrival of the retail investors because the emergence of discount brokerages, technological advancements, and increased smartphone usage contributed to the surge in retail investments. This trend has already been growing since the global financial crisis.  

The key approach involves embracing digital transformation to enhance investors’ accessibility and convenience. The NBFC’s financial education and engagement initiatives also empower the next generation of retail investors to make informed investment decisions.

Also, social responsibility and sustainability are becoming important factors for retail investors to align their offerings with environmental, social, and governance to attract investors. However, the NBFCs with strong regulations attract future retail investors.

Conclusion

NBFCs serve as crucial intermediaries to offer a wide array of investment opportunities to retail investors to foster inclusion in the financial sector and empower individuals to participate in the growth of the economy where the retail investors play an important role by reshaping their investment framework and emphasizing the needs for NBFCs to adapt and innovate to meet the evolving demand of the investors.

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