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Are banking struggles fueling the market of NBFCs?

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NBFCs

By Rashi Aditi Ghosh

The banking and financial industry in India is beholding an unequalled augmentation. Portraying an evident role in this journey of growth, Non-Banking Financial Companies (NBFCs) since its inception has been contemplating the Financial Inclusion and gratifying the credit needs of the unbanked sections.

NBFCs are not just significantly assisting the emancipation of the unbanked sections; they are certainly scripting an extravagant story through their success graph.

Over the past, NBFCs have contributed to the economy extensively. Their contribution inflated from 8.4 per cent in 2006 to 15 per cent during 2015.

As far as financial assets are concerned, NBFCs for several years, have reported a whopping Compound Annual Growth Rate (CAGR) of 19 per cent over. This CAGR comprises of 13 per cent of the total credit and it is projected to hit the figure of closely 18 per cent by 2018–19.

According to various experts, with the rising stress of Non Performing Assets (NPAs) prevailing in Public Sector Banks majorly due to bad loans, the trend of lending especially within the rural populace is doing to go low as a result of which the presence of NBFCs will grow.

Research firms suggest that the success rate of NBFCs is majorly credited to their attractive range of product line, availability of low loan, extensive reach, robust risk handling and better control over bad debts and above all an exceptional rapport on their customer segments.

Furthermore, developing macro economic levels, rising credit reach, inflating usage and digital interface will enable NBFC’s to witness a healthy growth rate of 7–10 per cent (real growth rate) likely within the next five years.

Narrating a new growth story for the segment, the Reserve Bank of India (RBI) is now trying to prune various categories pertaining to NBFCs. According to the central bank, NBFCs are getting hindered due to the massive number of categories and regulations managing them. As of now, there are 11 categories under which NBFCs are divided.

The central bank is now planning to trim down these segments in a bid to initiate activity-based regulation from an entity-based one.

Prior to this, in November 2014 RBI had reviewed the complete regulatory framework for NBFCs in order to analyse its activity-based supervision.

Back then, the apex body had laid emphasis on making the regulations convenient by integrating the norms with banks to a limited extent.

Although RBI has not disclosed the level of transformation it will bring which trimming down the NBFC categories to but it is assumed that the initiations were made in wake of Deputy Governor N.S. Vishwanathan comment on the scope for harmonising the regulations for the sector.

The RBI deputy governor was quoted saying that several categories of NBFCS are creating the need for arbitrage.

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