NBFCs Evolving Lending Landscape in India

NBFCs have emerged as a credible and reliable source of financing for a wide cross section of the population including small and medium-scale enterprises as well as the financially unserved and underserved segments. They have been able to meet diverse debt capital requirements of borrowers in the most technologically efficient and friction free manner considering their wide geographic reach, need based assessment of their numerous financial needs, and extremely swift turnarounds. Technology led distribution and more importantly inclusion within financial services have been the hallmark of NBFCs in 2023 and it will steamroll technologically well into 2024.

Therefore, non-bank lenders have contributed significantly to the cause of financial inclusion in this process and have also been a key component in fostering the expansion of millions of MSMEs and self-employed folk.

Market Outlook 2023
India’s credit market is growing north of 15 per cent and NBFCs form 25 per cent of this, this also paves the way for NBFCs to continue to thrive and not merely co-exist in 2024. While 2023 has not been easy on NBFCs especially with repo rate revision by the central bank, the siXth revision of FY 22-23 happened on February 8, 2023, moving the repo rate to 6.50 per cent. The earlier revisions in repo rate include a 40 bps increase on May 4, 2022, 50 bps increments on June 8, 2022, August 5, 2022, and September 30,
2022, and a 35 bps hike on December 7, 2022. The repo rate has gone up by 250 bps during FY 22-23. With this panning out, subsequent rate transmissions were imminent for many NBFCs depending on their asset liability positions. 2023 is a miXed bag coupled with technological, and regulatory changes coupled with robust credit demand at the same time, indicating a “Twin balance advantage “ contrary to a “Twin balance sheet problem” which chronically existed earlier. This is more so pronounced in the current times where markets are frothy and credit offtake is robust. Large part of the credit goes to the central bank on the overall recapitalisation of banks thereby helping them create greater capital buffers and subsequently higher provisions that could be provided for addressing the “Twin Balance sheet “ problem. The associated benefits have a cascade effect on Non banks, who are essentially the biggest beneficiaries when it comes to banks wallet share in lending.

A lot of disruption is being witnessed in removing friction in distribution channels by Tech NBFCs, The mid market space which was often ignored, as more top of pyramid segments were in focus due to their inherent balance sheet strength and relative industry position in the sectors they operate. With increased focus by fintech NBFC;s who are essentially solving for access, inclusion, data democratisation and more importantly distribution are solving for a credit gap in the mid market space. The companies operating in this market environment have a nature of business which are more just in time and have relatively shorter capital cycles, hence will need bespoke and structured financial solutions, a one size fits all approach doesn’t work.

Environmental, Social, and Governance (ESG) norms are also now mainstream and being increasingly viewed as an important element in how NBFCs are perceived by banks and various stakeholders within the financial services industry. The need for ESG is increasing within NBFCs, as they diversify and become mainstream alternative capital providers to the needs in the economy. Given the risks faced by the sector and to de risk, there is an increasing need for NBFCs to adopt strong ESG (environmental, social, and governance) practices. ESG factors can help NBFCs manage risks more effectively and create long-term value for shareholders.

Hyper personalisation within the structured finance space is also hotting up, this also addresses a huge credit access void left by traditional lenders with traditional products.
Fintech NBFC like Vivriti Capital have been an early mover in this space for over 7 years now, providing tailor made debt capital solutions to mid-market enterprises.

Regulatory Changes
The central bank on 16th of November 2023, announced increases in bank capital
requirements for personal loan credit cards and directed lenders to set limits on various retail segment loans, indicating RBI’s vigilance on the unprecedented growth in these types of loans, affecting the NBFCs on the capital buffer they would need to carry.

Other steps the central bank announced was an increase in risk weights on loans given by banks to NBFCs, effectively pushing up capital needs for all classes of lenders, NBFCs were
affected as most of their borrowings were heavily dependent on banks In turn, this has pushed up interest rates for the borrowing segment.

The central bank increased the risk weight on consumer credit for banks and NBFCs to 125 per cent from 100 per cent.

On the whole 2023, was an interesting year which had a miX of changes in policy interest rates, regulatory( Digital Lending Guidelines for retail lending) which in my view steadied the ship and put the NBFCs on the course of increased resilience and growth.

2024 Outlook Trends, technology Landscape and Platformisation

NBFC’s will witness their growth moderating to 16 per cent – 18 per cent in FY-24, on the
back of the recent regulatory changes and slower expansion in certain asset classes, NBFCs
will focus on diversifying their portfolio and recalibrate cost structures and funding profiles, funding avenues and strong asset liability mgmt. will be in focus to ensure growth moderation and increased cost of borrowing doesn’t lead to drastic NIM compression. While the recent regulatory changes have been more focussed on retail loans, how it affects various non banks will depend on the type of portfolio they manage. A diversified portfolio which consists of various asset classes will have a lesser impact as compared to a portfolio which is highly concentrated on retail. Unsecured loans now is the third largest segment in the Non bank AUM pie and this asset class will see moderation in growth as non banks recalibrate their path in 2024. How this will affect the non banks balance sheet will be a function of their reliance on bank funding sources largely, diversification in funding avenues namely capital markets is also expected in this space

Technology Landscape
The Tech NBFC space has undergone a radical transformation in recent years, driven by technological advancements and changing consumer preferences. TECH NBFCs
have been in the forefront when it comes to addressing the financial needs of people
and businesses which have been historically underserved by traditional lenders. The digital revolution which was accelerated by the JAM trinity ( JAM trinity refers to the government of India initiative to link Jan Dhan accounts, mobile numbers and Aadhaar cards) and the India stack has propelled tech NBFCs to cater to and provide capital efficient solutions to marginal and underserved sections of the society, and had bought about innovative and unprecedented growth opportunities to MSME sectors and the underbanked into the fold of credit

Platformisation & Analytics

Inexpensive mobile data and India being at 43 per cent internet penetration These lending
platforms have democratised financing, making it easier for borrowers to access capital and for Non banks to reach the depth and breadth of the market. Artificial intelligence (AI) and machine learning (ML) have enabled to make data- driven decisions and automate processes. The use of risk mgmt. and fraud detection engines running on top of analytics layers and machine learning has also allowed lenders to develop customised products and services that are tailored to individual customer needs. The central bank also has been at the cutting edge when it comes to provide technological framework. This via sandboXes for innovation, digital payments, open banking, and account aggregators, e-KYC, digital onboarding, AI and ML usage, cybersecurity frameworks, and financial inclusion programs are some of the initiatives that the central bank has implemented to enhance transparency and operational efficiency, risk management, and customer outreach for a stable and inclusive financial system. The environment has been catalysed to support digital transformation, the central bank is enabling NBFCs to better serve the financial needs of the retail consumers and businesses alike.

Views expressed by: Ajit K Menon, Executive Vice President & Group Head – Operations, Vivriti Group