The great dynamism and clear vision displayed by the Government has led to a target based approach to governance. The quantum jump in India’s ranking on the “Ease of Doing Business” index prescribed by the World Bank, is a classic example. Following this, came the upgrade of India’s Sovereign Rating by Moody’s. This has cemented the recognition and appreciation of the bold structural reforms by leading International bodies. With the rupee getting stronger and the actual interest rates being attractive, foreign investment shall receive a big boost. Continuing with this approach of target based governance, Hon’ble Prime Minister has laid out the agenda to build a “New India” by 2022.
Non-Banking Finance Companies (NBFCs) have been the unsung and silent contributors in nation building for the past more than 8 decades now. Moody’s have stated that one of the important factors, to this rating upgrade, has been the Government’s efforts to formalize economic activity. NBFCs have played a significant role in this, by providing financial services to the unbanked segment of the population.
Prime Minister Narendra Modi’s Vision of New India By 2022
Hon’ble Prime Minister shared his vision for building a New India by 2022 during his Independence Day speech this year. Some of the key elements of his vision are :
- promoting entrepreneurship
- greater focus on the lower strata of the society
- promoting framers prosperity
- greater use of technology to bring transparency
NBFCs to Play an Important Role
Promote Financial Inclusion
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 MSMEs.
NBFCs have been in 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 personalized customer service, they have created a medium of reach and communication and are very effectively serving this segment that was forced to approach unorganized money lenders for all their credit needs. NBFCs have transformed an“unbanked” borrower into “bankable”.
The Economic Survey, Volume – 2 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 bn USD.
RBI’s Financial Stability Report dated June 2017 states :
- The greater role of the non-banking sector in resource mobilisation, and hence credit intermediation, helped commercial sector, albeit partially, to make up for historically low bank credit outstanding growth. Thus, problems in the banking sector are leading to greater reliance on non-banks for borrowers as well as savers.
- Against asset quality concerns, credit intermediation by public sector banks has retrenched and that by NBFCs and Mutual Fund Funds has increased significantly.
As per this report, NBFCs growth during the last two years has been quite impressive in spite of the challenging environment and developments like demonetisation. Moreover, this has been a “healthy” growth as reflected in the better asset quality, and that too complying to the regulatory framework, which has been “harmonised” with that for banks and other financial institutions.
Recent Developments and the Way Forward
NBFCs expertise and potential have been duly recognised by the apex International body like World Bank Group, Government of India and leading Financial Institutions :
- World Bank Group has signed Engagement Letters (MOUs) with FIDC to conduct Training Programs on :
- Commercial Credit Reporting to develop alternate credit scoring models for unbanked and MSMEs who do not have any reported credit history
- Movable Asset Based lending to develop models for financing against the security of “intangible” movable assets, doing away the need for tangible assets.
- Prime Minister Narendra Modi in his address to the nation on 31st December 2016 announced coverage of NBFCs under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) – this shall give the much-desired boost to the aggressive financing of MSMEs by NBFCs.
- NABARD has initiated refinancing of NBFCs in a big way. While the big NBFCs are being funded by NABARD, the small and medium NBFCs are being refinanced by its two subsidiaries namely – NAB SAMURUDDHI and NAB KISAN.
- Both SIDBI and MUDRA have also engaged with FIDC to aggressively start funding of NBFCs including small and medium NBFCs.
- In order to develop a skilled workforce and offer them “industry outcome” based degrees, FIDC has initiated dialogue with some of the leading academic institutes to include NBFCs as part of their academic curriculum.
Why NBFCs ?
- Driving Financial Inclusion for more than 80 years
- Display Innovation and Flexibility – making them more acceptable and accessible
- Promote and Encourage Entrepreneurship
- Play a key role in MSME Financing
- Adapted and practice the latest technology including mobile apps – making them user-friendly
- Enhanced Reliability
The views and opinions expressed in this article are of Raman Aggarwal, Chairman, Finance Industry Development Council and do not necessarily reflect the views of The Banking & Finance Post.