Non-banking financial companies (NBFCs) are an essential component of India’s financial system. The history of India’s NBFC industry is one of under-regulation followed by over-regulation. Policymakers have swung from one extreme to the other in their attempts to create rules and then restrain them so that they do not stifle industrial growth. This paper focuses on the industry. Most of these NBFCs are involved in high-risk lending, and they often lend to small and medium-sized businesses, which are classified as high-risk assets. To evaluate such high-risk assets, we require a thorough model.
Financial institutions are utilising more analytical solutions and tools to analyse and mitigate cyber dangers as cyber-attacks become more common and complex. As the usage of cyber models expands, so do the hazards associated with their design and implementation. This is why the emphasis on model risk management (MRM) for cybersecurity solutions is growing, in an effort to identify and mitigate significant risks in corporate cyber solutions. MRM analyses risks posed by the potential negative outcomes of decisions based on inaccurate or misapplied models.
While operating in the financial sector, NBFCs are subject to inherent risks. The NBFC sector has evolved significantly over the years in terms of size, operations, technological sophistication, and entry into newer areas of financial services and products, as well as the size of NBFCs.
Rishikant Dubey, Chief Risk Officer, Poonawalla Housing Finance, during a panel discussion at Elets NBFC 100 Tech Summit, while addressing the delegates, says, “If we go into the roots of NBFC growth, we can see that in the last 5 years there is a continuous growth of 5 to 10 per cent in the NBFC industry and it is doubling every three years. So industry growth is high and with that complexity is also increasing. Public sector banks are driving financial inclusion and NBFCs are going to nukes and corners of the country. When we talk about massive digitisation and fast lending, there is always a risk, be it credit or operational risk.”
PHFL managed to achieve the key milestone of Rs. 5,000 crores AUM in FY 2021-22, closing the year at Rs. 5,060 crores, delivering 27 per cent YoY growth with the highest ever yearly disbursals of Rs. 1,970 crores, 57 per cent higher YoY, despite the challenges and disruption caused by Covid’s 2nd and 3rd wave, followed by global political tensions. When compared to the previous fiscal year, the Earning Assets Book increased from 73 per cent to 84 per cent of AUM in the current fiscal year.
(ANNUAL REPORT FOR THE FINANCIAL YEAR 2021-2022)
Other panellists during the discussion also shared their views on the risk management model.
Amol Deherkar, Chief Product Officer, NeoGrowth, says, “One of the big four surveys says that 64 per cent of small businesses conduct their business digitally, and 55 per cent of them want their loans to be delivered within 7 days. The other thing they need is the ease of application and a limited time on the entire loan acquisition process. To serve them better, the lender needs the data to be readily available at a lower cost and intelligence to make sense of that data.”
NeoGrowth Credit Private Limited is a digital lender that specialises in Micro, Small, and Medium Enterprises (MSMEs). These businesses are the Indian economy’s development engine. They are a Non-Deposit Taking Systemically Important Non-Banking Financial Company. They provide a diverse choice of products that are suited to the changing demands of small businesses. They have also served and interacted with over 100,000 businesses, assisting them in their growth goals.
They increased our assets under management by 140 per cent over nine years (2013-2022). They have constantly serviced customers with handpicked products and frictionless processes, bringing them several benefits and boosting their growth. Their digital payments-based lending, modular product suite, analytics-based underwriting, and flexible payback alternatives are the primary factors that have propelled us to the forefront of the digital lending industry.
(Annual Report 2021-22, NeoGrowth)
Sachin Agarwal, Chief Credit Officer, Arka Fincap Limited, said, “What is very important is that the risk function has to make sure that we can leverage technology to our advantage and we put in enough processes to make sure that the decision is taken because that is not going to come back and haunt us in the later period.”
Arka Fincap Limited is a non-deposit-taking NBFC with systemic importance. Through their Corporate Lending, Real Estate & Allied Financing, SME/MSME Lending, and Personal Financing products, they offer structured-term financing solutions.
To better serve the customers and achieve our growth goals, they have implemented digital technology at various points along the value chain. Their approach to growth entails creating long-term value for all of our stakeholders.
Arka Fincap offers a wide range of financing options to a wide range of clients. This allows the organisation to capitalise on positive sectoral growth trends while remaining immune to slumps in certain segments.
(Annual Report 2021-22- Arka Fincap Limited)
Deepti Rathor, Head – of Internal Audit, JM Financial, says, “Everything in the entire ecosystem is getting connected, as the banks are lending to NBFCs, mutual funds are investing in NBFCs; NBFcs are securitising their assets, which ends up on the balance sheet of the banks. So if a large and deeply connected NBFC or bank fails, then it will have a domino effect, which is going to disrupt the entire banking system.”
JM Financial is a significant integrated financial services provider in India. They provide enterprises, financial institutions, high-net-worth individuals, and retail customers with a wide range of integrated and diverse financial services. With over four decades of experience, they have worked with a number of prominent Indian and international clients. They have also earned the trust and confidence of a diverse client base across multiple geographies by providing innovative transaction strategies.
Their focus, passion, and determination help them to be well-positioned to capitalise on the forthcoming market and industry possibilities to give value to stakeholders and clients across business segments. They have a presence in 634 locations across 185 Indian cities and 4 overseas locations through subsidiaries and a representative office, with headquarters in Mumbai.
They are a people-focused organisation where talented professionals from various backgrounds come together to pursue common organisational goals and values, thereby assisting our businesses in reaching the next level. They are still deeply committed to promoting community progress through their social interventions in education, healthcare, skill development, entrepreneurship promotion, disaster relief, and animal welfare.
(JM Financial Limited, Annual Report 2021-22)
Ashutosh Mishra, Chief Risk Manager, NABARD, says “We work with the businesses to make sure we design products in tandem. We work to optimise the technology building in risk capabilities within the organisation so there are several things that a customer wants, like speed, transparency and personalisation. And as a risk manager, I would want the risk manager to work with technology with a product to make sure that these three attributes are built into the product and processes. That is how the risk management will become the true partner in taking forward the organisation and will also not lose the role of protecting the organisation.”
During the current fiscal year, NABARD operated in a very unstable economic environment. The pace of growth recovery, fiscal and monetary policies, and money and debt market conditions (which became volatile in the second half of FY2022 due to global inflationary pressures and prompted monetary policy action from central banks of advanced economies, Eurozone, and major emerging market economies) have all had an impact on our business and finances.
The Indian economy began to recover from the second quarter of FY2022, after two years and three waves of the COVID-19 pandemic, even as a few industries battled to recapture pre-pandemic strength. Several high-frequency indicators, growth figures, and sectoral indicators all indicated that the economy was on the mend. In FY2022, India’s GDP increased by 8.7 per cent, exceeding the prepandemic level, reviving our hopes of becoming the world’s third-largest economy by the mid-2020s.
Expansionary fiscal policies, as well as monetary, regulatory, and liquidity initiatives that prioritised growth over other goals, aided the GDP recovery in Q2-Q3 FY2022, though it slowed in Q4 FY2022 due to COVID-19 Omicron infections and global geopolitical conflicts. Because of more localised (rather than comprehensive) lockdowns, the adaptability of COVID protocols, and vaccination pushes, the growth rate was relatively fast. Business expectations and consumer confidence improved, as did the investment climate, resulting in a higher gross fixed capital formation to GDP ratio of 32.5 per cent in FY2021 versus 30.5 per cent in FY2021.
ANNUAL REPORT – National Bank for Agriculture and Rural Development (NABARD)
Rajaram Manian B, Chief Risk Officer, Adani Capital, says, “NBFC is growing and thriving, thus, we are having an era of banking that started with nationalised banks. NBFC is also a part of that revolution that happened. And today, the last mile distribution of financial services happens to be NBFCs.”
FY21 was a very historic year. COVID-19 wreaked havoc on social, economic, and financial infrastructure. Throughout the year, people’s lives and livelihoods were lost.
From time to time, the Ministry of Finance and the Reserve Bank of India (RBI) announced various measures to assist borrowers and institutions in navigating this unprecedented and turbulent period.
The RBI’s loan moratorium (March 20-August 20) for all borrowers helped most borrowers address their immediate liquidity concerns.
The banking and NBFC sectors were also damaged in the first half; on the one hand, credit demand fell, and on the other, collections fell as firms closed and people’s mobility was constrained. However, total loan demand increased near the end of the third quarter and into the fourth quarter of the year.
As the lockdowns were lifted and businesses resumed normalcy in Q4FY21, India experienced a second wave of infections at the start of FY22. This second wave appears to be more potent and has penetrated deeper into the country’s hinterlands. However, the impact on economic activity and the overall effect on credit quality will need to be monitored in the coming months.
(Annual Report- Adani Capital)