Non-Banking Financial Companies– Scripting Dawn of New-Age Banking

Dawn of New-Age BankingWith India striving to join the developed nations’ club, there is a lot that needs to be done in various sectors. As the country’s development narrative is being influenced by banking sector, the Central Government driven schemes like Pradhan Mantri Jan Dhan Yojana (PMJDY) could be key to effect a major transformation as it has already surged the number of bank accounts, writes Rashi Aditi Ghosh of Elets News Network (ENN).

Evolution of NBFCs

 NBFCs started their operations in India in the 1960s. Today, they have turned substantial contributors in the national economic growth by supplementing the effort of banks and other financial institutions.

“NBFCs (unlike banks) have operational viability at lower volumes due to relatively fewer regulatory requirements, which makes it possible for NBFCs to focus on niche products or market segments, and have a greater understanding of their focus segments. This, in turn, leads to better/customised products, lower delinquency rates, greater customer satisfaction and overall Financial Inclusion,” Ashok Bajaj, Managing Director and Chief Financial Officer, Insta Capital.

 In a country like ours , where 70 per cent of the population resides in rural areas,  NBFCs certainly have a greater role to play to consolidate the Indian financial system.

 Its inevitable role in nation building through financial inclusion and assisting banks in providing credit facilities to the unbanked segments of the society, especially to the micro, small and medium enterprises (MSMEs), has boosted up the level of entrepreneurship and innovation.

“NBFC are the last mile connectivity in the overall financial intermediation chain. Banks do not have adequate branches and their ability to reach out is restricted. Hence, NBFCs are very important in the financial chain,” K M Vishwanathan, Managing Director and Chief Executive Officer, M Power Micro Finance Pvt Ltd.NBFCs’ grass root level understanding of its customers socio-economic profile and relevant knowledge of their credit needs have ensured them an edge over other financial institutions. Their ability to innovate and customise products based on clients’ need have enabled them to deliver perfect credit to the MSMEs.

“India is a land of financial diversity that garners most of its Gross Development Product (GDP) from Micro, Small and Medium Enterprises (MSMEs). It is a matter of irony that most of these enterprises are starved of capital to a large extent,” he added.

“While banks have not been able to fulfil the requirements of these underserved segments, NBFCs have been able to create greater Financial Inclusion by lending on the basis of business potential and cash flow rather than credit history or collateral cover,” he said.

 Understanding NBFCs

According to the Reserve Bank of India, an NBFC is a financial entity registered under the Companies Act, 1956, that can deal with business of loans and advances, shares, stocks, bonds, debentures, securities, leasing, hire-purchase, insurance, or chit business.(Source: Reserve Bank of India)

 However, it is important to know that any institution whose prime business handling agriculture, industrial activity, purchase or sale of any goods, or related to selling, buying or building immovable property; is not necessarily an NBFC.A non-banking company that deals with receiving deposits in any form can be termed as an NBFC.(Source: Reserve Bank of India)

Rising Significance of NBFCs

The mounting debt on the public sector banks due to the exponential rise of the Non-Performing Assets (NPAs) is affecting their capacity to meet the lending demands especially in the rural areas. This is elaborating the scope of NBFCs among the rural populace by befitting the credit necessities.

The consistent growth of NBFCs is credited to the wide range of product line, better affordability, effecting reach, strong risk management capabilities and relevant understanding of the customer segments.

 It is evident that the latent growing demands of the digitally rising India will further fuel up the growth of NBFCs. Pricewaterhouse Coopers (PWC)  has predicted that the improving macroeconomic conditions, greater credit penetration, inflated consumptions and increasing digital trends will enable the NBFC’s credit growth to attain a healthy rate of 7 to 10 per cent (real growth rate) over the next five years.

In terms of financial assets, NBFCs have recorded a compound annual growth rate (CAGR) of 19 per cent over the past few years, comprising 13 per cent of the total credit and expected to reach nearly 18 per cent by 2018–19.

“NBFCs that are truly bringing down the turnaround time of loan applications to as little as a few hours or even minutes (for small ticket sizes). Such short turnaround time is only possible due to e-Know Your Customer, online banking and cloud based lending systems that are being implemented rapidly. Today, every company knows that they must innovate or sooner or later they will cease to be relevant,” said Bajaj from Insta Capital.

 The Way Forward

Introduction of various specialised players is transforming the banking value chain completely. This offers a strategic opportunity for the NBFCs to assure a sustainable growth in the long run.

Collaboration with players like Payments Banks, bill payment providers and other financial institutions, such as insurance and asset management companies, will assist NBFCs a complete preposition, starting, from deposits to lending, investments and transactions.

The government and regulatory bodies have taken positive measures to increase this number (and subsequently financial access) by allowing, in principal, licenses to as many as 21 players to establish specialty banks over the next 18 months. This will also enable the NBFCs to escalate their sustenance further.

It is evident that the strong understanding of the market enables the NBFCs to extend their reach to a greater extent. This is emerging as a better alternative to the traditional ways of banking.

In addition,the Indian consumers are increasingly getting inclined towards digital way of living. According to PWC, India is currently the second biggest smartphone market, with a user base of 220 million, and is expected to cross 300 million users by 2017.

For staying relevant in this rapidly changing environment, NBFCs need to coin a strategy to enhance their product portfolio (positioning and pricing), processes (internal and customer facing) and end-to-end customer experience.

Further, NBFCs need to leverage the vast digital and social customer data available for offering a better customer service to the customers.

For accelerating its growth, NBFCs need to work in sync with Narendra Modi Government’s  Digital India programme, a flagship programme initiated by the Government of India to digitally empower society. To sustain in this dynamic environment, NBFCs will have to find ways to serve the millennial customers through digital means.

Credit rating agency ICRA have predicted that NBFCs, excluding NBFC-MFIs, are likely to attain an increase in the 90-plus day delinquencies, by about 20-50 basis points.

The firm has predicted that the implementation of the Goods and Service Tax (GST) is likely to have a transitional impact on small businesses and self-employed borrowers, the key target segments of NBFCs.

Factors Leading to NBFCs’ Growth:

  • Stress on Public Sector Units (PSUs)
  • Latent credit demand
  • Digital disruption, especially for micro, small and medium enterprises (MSMEs) and small and medium enterprises (SMEs)
  • Increased consumption
  • Distribution reach and sectors where traditional banks do not lend

 Role of RBI in boosting NBFCs

Narrating a new growth story for the NBFCs, the Reserve Bank of India is planning to prune various categories of the sector. According to the banking regulator, NBFCs are getting hindered due to the massive number of categories and regulations managing them. As of now, there are 11 categories under which NBFCs are divided.

The apex body is now planning to trim these segments  to initiate activity-based regulation from an entity-based one.

Prior to this, in November 2014, the RBI had reviewed the complete regulatory framework for NBFCs to analyse its activity-based supervision.

 Then the apex body had laid emphasis on making the regulations convenient by integrating the norms with banks to a limited extent.

But it is assumed that the initiations were made in wake of RBI Deputy Governor N.S. Vishwanathan comment on the scope for harmonising the regulations for the sector.

The RBI deputy governor was quoted as saying that several categories of NBFCS are creating the need for arbitrage.

Recently, the RBI made it mandatory for the NBFCs to appoint a grievance redressal officer. The important credentials such as the name and contact details of the officer is mandatorily required to be displayed in the premises of the NBFCs.

In case of any complaint, the customer can approach the grievance redressal officer of the NBFC.

If the customer is not satisfied by the settlement assured by the grievance redressal officer, the complainant can approach the nearest office of the RBI.

Details of the respective RBI offices have to be mandatorily displayed in the premises of all NBFCs.

However, if complaint is related to a credit card operated by an NBFC, then a fee is charged in the process. If the complain is not handled satisfactorily within 30 days of filling the complaint, the complainant can approach the concerned bank’s ‘banking ombudsman’.

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