To serve the need of investors whose financial requirements are left are unattended by existing banking system, the Non-Banking Financial Companies (NBFCs) started its operations in India during 1960s. The financial entity attained some level of popularity in between 1980s and 1990s however, it gained good momentum in recent times when banks were pressurised due to surging bad loans. The unique and innovative offerings by NBFCs have drawn consumers and make them emerge as dependable sources for relief in the BFSI sector, writes Rashi Aditi Ghosh of Elets News Network (ENN).
NBFCs—Banking the Unbanked
The Non-Banking Finance Companies (NBFCs) have been silent contributors in nation-building for over eight decades now. NBFCs have played a significant role by providing financial services to the unbanked segment of the population. Explaining about the NBFCs and their importance in terms of Financial Inclusion, Raman Aggarwal, Chairman, Finance Industry Development Council said, “NBFCs over the years have played a vital role in the development of the economy, be it in financial intermediation in rural and semi-urban areas or financing activities that are engines of growth, such as transport, infrastructure, farm, and Micro- Small and Medium Enterprises (MSMEs).”
The NBFCs have been at the forefront of catering to the segment of customers who are un-bankable in the rural and semi-urban areas. “Through strong linkage at the grassroots level, ability to make quicker decisions and highly personalised customer service, they have created a medium of reach and communication and are very effectively serving this segment that was forced to approach unorganised money lenders for all their credit needs. NBFCs have transformed an unbanked borrower into “bankable”, he added. NBFCs are evolving as an alternative to mainstream banking especially for the customers in underserved and unbanked areas, through customer centricity, ground-level understanding, tailor-made credit and speed of delivery.
“The success of NBFCs can be clearly attributed to their lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, and better understanding of their customer segments. NBFCs are not only successful in their traditional bastions (passenger and commercial vehicle finance) but also have been able to build substantial assets under management (AUM) in the personal loan and housing finance sector,” said Kailash Baheti, Chief Financial Officer, Magma Fincorp Ltd.
Performance Graph of NBFCs
While NBFCs are gradually emerging as a popular choice for lenders, the facts and figures of several research reports also depict their rising significance. l The Economic Survey for 2016-17 mentions that the total balance sheet size of the NBFC sector as on 31 March, 2017 stood at Rs 12.56 lakh crores which is about $200 billion. l According to Microfinance Institutions Network (MFIN), the aggregate Gross Loan Portfolio of NBFCs-Micro Finance Institutions (MFIs) stood at Rs 38,288 crore in Quarter two (Q2) of Financial Year (FY) 2017-18. NBFC-MFIs disbursed 63.1 lakh loans in Q2 FY 2017-18. This is a 2 per cent increase as compared to 15 per cent loan disbursement reported in the corresponding period during last year.
NBFCs – The Leaders in BFSI Landscape
NBFCs are emerging as a preferred partner in the BFSI sector on account of three main factors – Innovation, Customisation and Technology. Today, NBFCs are innovating new solutions and novel financial products which are gaining acceptance from the market. These innovative solutions encompass every aspect of the partnership – from holistic credit profiling, to flexible repayment options, from integrating multiple information resources to entering new markets – NBFCs are innovating their way to the top. These innovations have helped NBFCs to build customised products for their customers. The Indian BFSI sector has evolved considerably and is no longer a homogeneous market. Thus, the conventional one-size-fits-all approach adopted by the banks has encouraged market players to pilot customised products and solutions offered by NBFCs and work with them to co-create products that meet their requirements.
These innovations and customisations are possible only because NBFCs have aggressively updated their technology stacks and have integrated technology as a fundamental enabler in their processes – both external as well as internal ones. As a result, NBFCs have shortened the cycle of product development considerably and are capturing the analytics required to build more efficient customisations faster. Technology has enabled NBFCs to become faster, innovative and agile.
“Today, most NBFCs are gaining momentum in the BFSI space owing to their robust business model, strong support from equity investors, low Non-Performing Assets (NPAs), low credit to Gross Development Product (GDP) ratio, customer centric approach and digital innovations. Large NBFCs have developed a business model that provides them the flexibility to grow their retail book and deliver credit to customers at competitive and reasonable costs.
The surge in liquidity at mutual funds, insurers’ investments in bonds, non-convertible debentures, commercial papers, public deposits, masala Bonds and securitisation have made funding a better proposition for NBFCs,” said Harshil Mehta, Joint Managing Director and CEO, DHFLFinance. “NBFCs are developing defined credit models to understand risks better. They are investing in upgradation of technology infrastructure and launching digitisation schemes to boost their operational performance while bringing down costs significantly,” he added.
Most NBFCs are committed to developing customer-centric products, services and innovations to cater to the emerging needs of their target audience in target markets. Proactive communication with existing and new customers, best-in-class technology and processes for enhanced efficiency have all bundled to offer a robust customer centric delivery mechanism.
NBFCs are focussing on panIndia presence with a larger, localised marketing and distribution network to enhance customer reach and accessibility. Legacy driven and experienced NBFCs have specialised credit underwriting competencies tailored for target audiences that facilitate quicker turnaround. As a result, NBFCs have been successfully driving customer satisfaction, delivering value to all stakeholders and thus, serving India’s vibrant economy.
Innovating for Excellence—Best practices in NBFCs
Piramal Finance Private Limited
Piramal Finance Private Limited (PFL) was set up as a NBFC in 2010. Since then the platform is strengthening its services reacting to feedback from existing clients as well as targeting newer market opportunities to build a sustainable, value-driven enterprise. It created value for the enterprise by creating long term relationships with Tier 1 developers across markets who would depend on us as a single provider of capital to achieve end to end financial closure for their projects. It also started a special situations lending business in non-real estate sectors (primarily Operating Infrastructure assets and Renewable Energy), which was rebranded as the Corporate Finance Group (“CFG”) in 2016. Piramal Fund Management had inked the single largest debt financing deal in the Indian Real Estate in 2016, where we invested Rs 2,230 crores in Lodha Developer’s Pvt Ltd.
Aye Finance was founded with an aim to transform the micro and small enterprise financing in India by innovating on the methods that enable effective credit underwriting of this segment. Since then, Aye Finance has been servicing small-scale manufacturing, trading, and services businesses having devised technically enabled processes to build credit insights through a variety of available business and behavioral data. The company has transitioned in a span of four years from a Start-up to a mid-sized company. It has a presence in 10 Indian States through its 72 branches. It has so far disbursed over Rs 500 crore to more than 45,000 micro enterprises.
Satin Creditcare Network Ltd
Satin Creditcare Network Ltd (SCNL) is India’s second largest MicroFinance Institutions (as of March 2017) having started its journey with individual micro loans to urban traders. At the moment, the Company has an established, scalable and a sustainable business model.
On a standalone basis, Satin had an Assets Under Management (AUM) of Rs 4,882 crore as on December, 2017. Satin offers its clients a variety of loan products under the MFI segment. The company also offers a bouquet of financial products in the Non-MFI segment (comprising of loans to MSMEs), and business correspondent services and similar services to other financial Institutions through TSL, a business correspondent company and a 91.11 per cent subsidiary of SCNL.
During 2016-17, SCNL raised around Rs 500 crore from NABARD as refinance facility along with Rs 250 crore of fresh equity capital through a Qualified Institutional Placement (QIP) transaction. Besides this, in April 2017, the company also raised $ 10 million of equity capital from the Asian Development Bank (ADB) which has been a proud moment for the company in their endeavor towards achieving financial inclusion for all. Recently Satin has also bagged their housing license and has disbursed the first loan.
Eduvanz Finance Eduvanz Finance – a two-year NBFC has built a strong niche in the domain of providing small ticket loans for skill development and certifications. These loans are unsecured and are given to aspiring candidates who wish to gain employable skills and upgrade their lives. Often, the borrowers do not have financial history as they are new-to-credit / new-to-banking. Typically, such segments have been underserved by conventional lenders. Eduvanz was able to create customised products for this market segment by building innovative risk mitigation factors and innovative credit profiling algorithms – all of which was enabled by technology. Today, Eduvanz offers a digital, paperless, presence-less and a seamless experience for loan seekers.
InCred is a new-age financial services group founded with the vision of providing credit to Incredible India and thus, furthering financial inclusion in the country. The company endeavours to disrupt the status quo in traditional lending that seems to exclude those most in need of credit, due to outdated, rigid and often inefficient processes. The company has designed its products with a razor- sharp focus on serving the unique needs of these under-served segments of customers and leverages technology and datascience to make lending quick, simple and hassle-free. It aspires to be the key partner for all financial requirements of an Indian family.
InCred has received a very positive market response to its products and services. InCred has already disbursed over Rs 1400 crores in loans to more than 19,000 customers across India. With a growing team of over 600 people and counting, InCred is now aiming to grow its loan book to Rs 4,000 crores by March 2019.
Incepted in 2015, i2ifunding provides a seamless user experience in terms of ease in transaction, detailed account statements, transaction analysis, thereby decreasing the hassles a borrower generally has to face. Headquartered in Noida, i2ifunding has its offices in Mumbai, Jaipur and Surat. The company has acquired 30,000 registrations for borrowers and around 4000 for investors. 200-300 new investors are added every month to its portfolio. So far, the company has disbursed over 500 loans, worth Rs 8 crores where the loan amount ranges from Rs 25, 000 to Rs 5 lakhs. While NBFCs are setting several benchmarks through innovations, the financial entity in particular is set to grow further in future in sync with technology. The industry is extending its offerings towards education and health sector. It is helping in filling the void created due to the rising NPAs of Public Sector Banks.