Non-Banking Financial Companies (NBFCs) have cemented their place in India’s financial ecosystem, maintaining a steady market share despite the formidable competition and increasing reach from traditional banks. This resilience can be attributed to several key factors, including regulatory support, niche market focus, innovative product offerings, and efficient service delivery.
Understanding NBFCs: A Brief Overview
NBFCs operate in the financial sector, providing services similar to banks but with some limitations, such as the inability to accept demand deposits. They play a crucial role in financial inclusion by catering to segments often underserved by traditional banks. NBFCs include finance companies, asset management companies, investment banks, and infrastructure finance companies.
According to the Reserve Bank of India (RBI), NBFCs in India have consistently maintained a market share of around 20-25 per cent of the total financial assets over the past few years. As of 2023, NBFCs accounted for approximately 23 per cent of the total credit in India, a slight increase from 21 per cent in 2021.(CRISIL Ratings)
Factors Contributing to the Steady Market Share
1. Niche Focus and Flexibility
NBFCs have carved out niches by focusing on sectors often overlooked or underserved by traditional banks, such as small and medium enterprises (SMEs), rural areas, and individuals with limited credit histories. This targeted approach allows NBFCs to serve clients who may not meet the stringent criteria of banks. For instance, Microfinance NBFCs provide small loans to rural entrepreneurs who may not have access to formal banking channels.
2. Innovative Product Offerings
NBFCs offer a diverse range of products, including microfinance, asset financing, consumer loans, and infrastructure financing. Their ability to innovate and tailor products to specific customer needs gives them a competitive edge. NBFCs offer a multitude of products, such as gold loans, personal loans, MSME loans and consumer durable loans, catering to a broad spectrum of customers.
3. Efficient Service Delivery and Customer Experience
NBFCs often outperform banks in terms of customer service and speed of delivery. Their streamlined processes, reduced documentation time, and quicker loan disbursements appeal to customers seeking prompt and hassle-free financial services. NBFCs typically process personal loan applications in 1-2 days compared to banks’ 5-7 days.
4. Technological Integration and Digital Platforms
Embracing technology has allowed NBFCs to enhance their service delivery, reduce costs, and reach a broader audience. Many NBFCs have developed robust digital platforms, enabling seamless online applications, approvals, and disbursements. As of 2023, over 65 per cent of NBFC loan applications are processed through digital channels.
5. Regulatory Support and Framework
The RBI has implemented a supportive regulatory framework that encourages the growth and stability of NBFCs while ensuring prudent risk management practices. This has helped NBFCs to thrive and maintain their market share alongside banks. The RBI’s recent regulatory framework in 2024 aimed at enhancing the governance and risk management practices of NBFCs.
Also Read | NBFCs Powering – India’s Economic Growth
Credit Growth and Asset Base
NBFCs have shown robust credit growth despite economic challenges. In 2022-23, NBFC credit grew by 18 per cent year-on-year, compared to 12 per cent for banks. The asset base of NBFCs reached INR 31.2 trillion in 2023, up from INR 26.3 trillion in 2021. (CRISIL Ratings)
Challenges and Future Outlook
While NBFCs have demonstrated resilience, they face challenges such as funding constraints, competition from digital-only players and fintech startups, and a need to enhance compliance as they grow. However, their adaptability, focus on customer experience, and ability to cater to underserved segments position them well for continued relevance in the financial landscape.
The steady market share of NBFCs in the face of bank competition underscores their vital role in India’s financial system. Through niche focus, innovative offerings, efficient service, and technological integration, NBFCs continue to meet the diverse financial needs of their customers. As they navigate challenges and leverage opportunities, NBFCs are poised to maintain their significant presence alongside traditional banking institutions.
Views expressed by Sumit Sharma, Founder, Radian Finserv
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