For development needs of the nation RBI will continue to approve of new types of NBFCs. Myth that NBFCs compete with Banks, they complement them. CII BCG whitepaper on the NBFC sector released.
The Non-Banking Financial Companies sector, NBFCs received a major boost today at the Confederation of Indian Industry – CII’s 1st NBFCs Summit with the theme ‘Regulatory Paradigm & Contours of Growth – Vision 2020’. Despite global reservations on the sector, Mr R Gandhi, Deputy Governor, Reserve Bank of India said, “The Reserve Bank is allied to the developmental needs of the economy and therefore will continue to approve of new types of NBFCs if the economy will so require them.”
“World over there is an awakening post the financial crisis of 2008 about the existence, contribution, magnitude, significance and risk of the NBFC sector. From benign neglect to indifference of this sector, the world has now become anxious and seriously concerned about it. This has resulted in enhanced attention, monitoring and regulation of the sector. While the world sat up and noticed the sector recently, India had understood its relevance way back in 1963, chapter 3B dealing with regulations of Non-Banking Financial Institutions was added to the Reserve Bank of India Act 1934. It recognised that non-banking financial activities are an integral part of the financial system and compliments commercial banking. Only appropriate vigilance will be required,” said Mr. Gandhi.
Mr. Gandhi also praised NBFCs when he said, “NBFCs can be advantageous due to their ability to lower transaction costs, quick decision making, customer orientation and prompt delivery of services. In terms of products and services offered, NBFCs complement banking services. They have their risk elements that have led to continuous monitoring and assessment. However RBI has been dynamically making regulatory framework suitable for the day.”
Talking about the future of NBFC Mr. Gandhi said, “In my opinion, prospects for sector are not going to be uniform. Different segments of the sector are posed for different prospects and challenges. Infrastructure NBFCs will have a greater scope in the coming years both because economic growth will bring forth new projects and banks having a restrained approach towards such projects.”
Speaking at the summit, Mr. Y M Deosthalee, Chairman, CII National Committee on NBFCs and Chairman & Managing Director L&T Finance Holdings Limited, said, “NBFCs in India have evolved over the past five decades to emerge as a notable alternate source of credit intermediation to meet the diverse financial needs of the economy. The resultant capital formation has become a catalyst for India’s growth and development. Over the years, NBFCs have exhibited an ability to create innovative products and reach out to new client segments and regions, those which banks have typically been slow to expand into. NBFCs thus play a proactive and complementary role to the banking system by broadening access to financial services, enhancing competition and diversifying the financial sector.”
He highlighted their importance in the growth of the economy when he said that, “Establishing their strong presence as an integral part of the Indian financial system, NBFCs have played a vital role in providing credit to growth-enhancing sectors (such as MSMEs) through products like project finance, transport fleet finance, trade finance, equipment finance and microfinance.”
He also talked about a key pain point for NBFC that of being considered ‘shadow banks’ after the global financial crisis in 2007-08. “Shadow banking activities constitute a very useful part of the financial system. Their main advantage lies in their ability to lower transaction costs of operations, quick decision-making ability, customer orientation and their prompt provision of services. In the Indian context however, it may be a misnomer to term NBFCs as shadow banks, since NBFCs have been brought under progressively prudential regulations by RBI and many of the activities which contributed to the global crisis are either not allowed, or, if allowed, are allowed in a regulated environment with appropriate limits.”
Mr Ramesh Iyer, Managing Director, Mahindra & Mahindra Financial Services, put the NBFC sector into perspective when he said, “While we are all under the financial umbrella, I do not believe NBFCs compete with one another. Each one of us is a niche. Some have chosen a particular geography, some focus on products while others have segmented themselves only on customers. It is also a myth that we compete with banks because we service different needs and different customers. We do not compete with Banks, we complement them. It is hence with certainty that I say that NBFCs have a great future.”
Mr. Iyer stressed that the greatest strength of the NBFC sector are customer, “Historically NBFCs are focussed on customers more than on products. Everything we do: our products, processes, channels etc. are all customer driven. This has helped us differentiate between intentional and circumstantial defaulters and that I think has been a key success factor of NBFCs. Our processes have an ability to ensure that over a period of time we are able to understand and hence service customers well.”
Our other strength is that we have continuously been able to innovate products. We have gone deeper and expanded the market by pricing better than others. We have recruited people from local markets that has helped us individualize products. We have invested in technology that has helped us control and bring down costs. These have resulted in the successes of the NBFC sector.”
Talking of the future he said, “Our future rests on investments in technology. It will decide how fast and well we grow. We also have to go to banks on a partnership mode and say that together we will sever every need of the customer. Unless we partner, costs will not come down.” He also addressed the need to reposition NBFC in the mind of the various stakeholders. “Every stakeholder – bankers, customers, regulators, training agencies, promoters – has a doubt about NBFC. This despite the fact that NBFC are India’s best promotors and that this industry has never defaulted on its bank loans. We have to zero in on one point of each stakeholder and go and collectively address and convince them. This way we will raise the level of the industry substantially high.” He ended by coining a new term for NBFC to call it Need Based Finance Companies.
CII and technical partner Boston Consulting Group (BCG) released a whitepaper on the potential of NBFCs in India, including outlining ways to accelerate their growth in the country. Mr Saurabh Tripathi, Partner and Director, BCG said, “Traditional sources of advantage for NBFCs will erode over time with deepening of banking in the country. It is imperative that NBFCs harness latest trends in technology, digital adoption by customers, and the web of partnerships to innovate and come up with new models. NBFCs are likely to benefit from these underlying trends and developments in the Indian market.”