NBFC

Strategic Investments & Trends in Generating NBFCs (Non Banking Financial Companies)

NBFCs (Non-Banking Financial Companies) play an important role in promoting and advancing equitable opportunities for growth in the country, by catering to the diverse range of financial needs for banking excluded customers.

Further, NBFCs often take an upfront role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) suiting their business requirements along with catering to the Micro Finance requirements for the individuals.

As discussed above, they do supplement the role of the banking sector in meeting the increasing financial needs of the corporate sector to accelerate while delivering credit facilities to the unorganized sector. However, the NBFCs are bound by the Indian banking industry rules and regulations.

Before delving deep into the multifarious roles that the NBFCs do a performance in the current scenario, it is very much required to understand the key objective behind the working of these prestigious institutions. Well if we talk about, it is not the profitability that drives them, but the sole rationale of making financial services accessible to one and all.

Investments generating synergies in NBFCs

In the recent times, the same has been observed that the nationalised Banks were coming up to accelerate the growth opportunities for the NBFCs to rise with the viable support from Government of India through Policies, Budgets favouring the NBFCs.

The credit crisis which to some extent affected NBFCs and housing finance companies (HFCs) the most as bank lending, which was also their primary source of capital, dried up at a higher rate in recent time.

It thereafter became quite difficult for non-bank lenders to raise funds from alternative sources, and started creating a domino effect that resulted in a further liquidity crunch including some of them being Dewan Housing Finance Corp. Ltd. (DHFL), and Reliance Home and Commercial Finance, Infrastructure Leasing and Financial Services (IL&FS).

But these, on the other hand, opened as a hunt sector in terms of the Investment seeking to eradicate the existing scenarios by the Private Equity Players/ Firms.

Sources for the deployment of Funds by the NBFCs:

While having an in-depth study over the ongoing trend for the deployment of funds by NBFCs, it has been majorly for the following:

1. The prime focus of the Investment is to reduce the Liquidity crunch, which in return, strengthens the base of NBFC to conquer in a short span.

2. Since most of the NBFCs are working in line with Fintech^[1] Companies accordingly in today’s era it a need of an hour for being tech-savvy and therefore the Tech-Savvy NBFCs are more likely to attract the PE investments.

Leveraging technology heavily helps to keep costs and Non-Performing Assets (NPAs) low.

3.  Also, a major chunk of the funds do get deployed In the Customer Service mechanism, operational excellence setup and Credit collection to sum up.

The right mix of product selection important for NBFCs (Outlook 2020)

It is to be taken care of and is of prime importance for the NBFCs to consider for their outlook 2020:

How to Identity and simultaneously capture Synergies across Business lines?

How to ensure a sharp focus on product economies?

How to tap the sectors amid Covid 19?

How to ensure tight risk Management assessment techniques?

How to be more Tech-savvy while being sector-specific?

Synopsis of Some Recent Deals of NBFCs

Avanti Finance and Nandan Nilekani raise $30-40 mn:

Avanti Finance,  Being a microloan-focused NBFC supported and promoted by Ratan Tata and Nandan Nilekani, raised $30-40 million (up to about Rs 285 crore) in fresh equity from impact investors and domestic financial institutions to existing fuel growth.

Also, the Tata Group patriarch and IT maverick invested Rs 50 crore each, two years ago into the Bengaluru- based company as a similar investment.

New equity capital is raised through diluting the promoters’ stake. It was an impact-focused entity with onboarding impact investors.

Retail non-banking financial company based out in Jaipur which specializes in secured retail, used and new vehicles and MSME financing. It is the NBFC which has significantly expanded its branch network pan India and has augmented its second-line of the team and borrowing relationships.

It looks forward to reaping the benefits/advantages in terms of expansion post the fresh fund infusion through Investors.

With a continued focus in term of secured retail lending, presence in high growth markets, robust IT system and collecting mechanism, Kogta is all set to thrive in the Indian financial services sector in its favour.

This is the second round of investment by Morgan Stanley Private Equity for Kogta Financial.

Government Effects to generate Synergies in the Indian Economy

While opening the avenues for investment other than usual bank lending to support NBFCs and also while considering the Market experts views on same Government of India come out with a tough job of striking a balance between meeting fiscal deficit targets and shaking up economic growth in a long run. By Aiming to boost the liquidity for the NBFC sector and enable it to provide extra support to other ancillary sectors that can drive growth altogether.

Herein are the lighting reforms announced for NBFC Sector in Budget 2020:

• Reduction of Limits for NBFCs under SARFAESI Act: The budget focused on reducing the asset size of NBFCs from INR 500 Cr to 100 Cr in order to make the same eligible for debt recovery under the SARFAESI Act. This will help to keep watch on the rise of Non Performing Assets ratio of the NBFCs.

• Credit Guarantee for the NBFC:  Finance Minister’s 2019 budget had formulated and focused upon mainly partial credit guarantee scheme to tide over the liquidity crisis while for 2020-21 budget further supports guaranteeing securities on stressed assets of NBFCs. Now we could see that NBFCs’ stressed assets will now be backed by bonds issued by Government and replica effect while making banks less risk-averse towards lending to NBFCs. The impact is an improvement in the current liquidity crunch with NBFCs.

• Amendment in Existing Schemes: In order to boost Agri finance, the focus was also on expanding the horizons of the NABARD refinance scheme to cover NBFCs and other cooperatives that are active in the agriculture sector. Accordingly, the agriculture credit availability at Rs 15 lakh crore for FY 2021 has been led out.

• Amendment in Factor Regulation Act: Another move that is expected to encourage the micro, small and medium sector in order to make amendments in the  Existing Factor Regulation Act 2011, which would enable NBFCs to extend invoice financing to MSMEs through TReDS portal.

This move will greatly reduce one of the top pain points of MSMEs – timely access to credit and working capital requirements meet.

Takeaway

Considering the ongoing scenario and future ahead the NBFCs are set to get a push not only from the Government’s perspective but also from the Investors, i.e. Private Equity Investors/ firms catering to the banking necessities of the under-banked segment through financial inclusion and contributing a major chunk towards economy’s growth in all.