With the public sector banks battling the mounting non-performing assets (NPAs) and losing their risk appetite, the non-banking finance companies (NBFCs) have a big growth opportunity knocking at their door, a joint ASSOCHAM-PwC paper stated “With the ongoing stress in the public sector banks due to mounting bad debt, their appetite to lend (especially in rural areas) is only going to deteriorate, thus providing NBFCs with the opportunity to increase their presence,” the paper noted. The stressed assets of the banks, mostly in the public sector, are estimated to have touched Rs 10 lakh crore at the end of the fourth quarter of the just concluded fiscal 2015-16. In the backdrop of a large exposure of the banks in the sectors suffering the most such as steel, infrastructure, power, their risk aversion is understandable. However, the ASSOCHAM-PwC paper said having scripted a great success story, their contribution to the economy has grown in leaps and bounds from 8.4 per cent in 2006 to above 14 per cent in March 2015.
In terms of financial assets, NBFCs have recorded a healthy growth—a compound annual growth rate (CAGR) of 19 per cent over the past few years—comprising 13 per cent of the financial assets and expected to reach nearly 18 per cent by 2018–19. “Moreover, with the banking system clearly constrained in terms of expanding their lending activities, the role of NBFCs becomes even more important now, especially when the government has a strong focus on promoting entrepreneurship so that India can emerge as a country of job creators instead of being one of jobseekers ,” ASSOCHAM President Mr Sunil Kanoria said.
The success of NBFCs can be clearly attributed to their better product lines, lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, and better understanding of their customer segments. Not only have they shown success in their traditional bastions (passenger and commercial vehicle finance) but they have also managed to build substantial assets under management (AUM) in the personal loan and housing finance sector which have been the bread and butter for retail banks. “Going forward, the latent credit demand of an emerging India will allow NBFCs to fill the gap, especially where traditional banks have been wary to serve. Additionally, improving macroeconomic conditions, higher credit penetration, increased consumption and disruptive digital trends will allow NBFC’s credit to grow at a healthy rate of 7%–10% (real growth rate) over the next five years,” it said. Gradual economic recovery and proposed regulatory changes (scrapping of old commercial vehicles [CVs] and Bharat Stage [BS] VI pollution norms) will lead to an uptick in the overall CV segment, which in turn will drive growth in the pre-owned CV sector.
In its foreword, the PwC said, in order for the NBFCs to realise their true potential in the economy, the regulatory framework must succeed in walking the thin line between under-regulation and over-regulation. With this objective, the Reserve Bank of India (RBI) has brought about a spate of reforms in the NBFC regulations. Regulations for smaller NBFCs which do not have systemic importance have been rationalised while, that for systemically important NBFCs have been continuously strengthened to make them at par with the global standards