Analysis of the Growth Potential for India’s NBFC Sector and Its Impact on Financial Inclusion
Analysis for a Layman
This opinion piece delves into the evolution of regulations for India’s non-banking financial companies (NBFCs) since the country gained independence. It explains how NBFCs have played a crucial role in filling gaps when traditional bank lending slowed down, acting as an essential “spare tire” for credit supply, as per the analogy of former US Federal Reserve chairman Alan Greenspan. Despite their importance, commercial banks still dominate India’s financial system.
The article argues that as India aspires to become a developed nation by 2047, massive capital investment will be imperative. However, over-reliance on banks leaves the financial system vulnerable. The authors emphasize that NBFCs can play a critical role in providing inclusive access to credit for underserved segments such as MSMEs, small developers, and low-income groups. NBFCs have a nationwide presence and leverage digital infrastructure like Aadhaar, making them well-positioned to drive financial inclusion. However, they face challenges in accessing low-cost capital. The authors believe that granting more licenses from the Reserve Bank of India (RBI) to well-managed NBFCs to take deposits could provide a stable capital base. With appropriate regulations now in place, leading NBFCs have the potential to drive financial inclusion on a significant scale.
Impact on Retail Investors
For retail investors, particularly those interested in social impact, this analysis highlights the long-term potential in India’s NBFC sector. Leading listed NBFCs such as Bajaj Finance, LIC Housing Finance, Mahindra & Mahindra Financial Services, and Shriram Transport Finance are well-positioned for growth due to their reach, client bases, and digital capabilities. As financial inclusion accelerates, these firms’ customer bases could rapidly expand.
However, there may be near-term volatility given NBFCs’ reliance on wholesale funding. Investors need to assess NBFCs’ liability profiles, provisioning policies, and asset quality. Metrics such as cost of funds and margins are key indicators to watch. Conservative NBFCs with robust balance sheets, diversified liabilities, and a focus on higher-quality retail assets are likely to benefit the most from India’s growth trajectory. Overall, NBFCs offer retail investors exposure to the increasing credit penetration in underserved sectors.
Impact on Industries
The NBFC sector will experience increased urgency to diversify funding sources beyond banks. Leading firms will accelerate the issuance of bonds, commercial paper, external commercial borrowings, and other instruments to institutional investors. Those meeting eligibility criteria will pursue potential new deposit licenses from RBI. Industry associations are likely to advocate for regulatory reforms to ease NBFCs’ access to capital. Banks may consolidate NBFC partnerships under tighter risk management to manage exposures.
Fintech partners can help NBFCs leverage technology to enhance credit underwriting, monitoring, and collections while lowering costs. Sectors like MSME lending, affordable housing finance, microfinance, vehicle finance, and loans against property served by NBFCs will benefit from greater capital availability. However, NBFCs and their fintech partners must maintain robust risk management as underlying segments can be vulnerable to downturns.
Long Term Benefits & Negatives
In the long term, the growth of leading NBFCs will improve financial inclusion and widen access to credit for India’s unbanked and underbanked segments. Deepening credit penetration beyond tier 1 cities and established borrowers will have multiplier effects, spurring entrepreneurship, consumption, and job creation. A diverse credit ecosystem with banks, NBFCs, other institutions, and capital markets will be more resilient and stable.
However, rapid NBFC growth also risks loose underwriting and aggressive competition if not properly overseen. Concerns around overheating and excessive risk concentration in certain sectors may resurface. As new deposit licenses are considered, RBI must implement stringent eligibility criteria and ongoing oversight to protect small depositors. Overall, NBFCs’ growth must be nurtured responsibly to maximize sustainable financial inclusion.
Short Term Benefits & Negatives
In the near term, well-capitalized NBFCs have an opportunity to capture market share as risk-aversion weighs on banks following previous bad loan issues. However, funding constraints remain a challenge. Asset quality and collections could face volatility depending on external shocks such as a resurgence of COVID-19. Investor sentiment may remain cautious pending greater visibility on RBI’s approach to NBFC regulation and funding options.
Nevertheless, lending to previously excluded segments also offers scope for fintech-enabled innovation in underwriting and distribution. Partnerships with NBFCs give fintech firms scalable access and risk management. The shakeout since IL&FS’ default has strengthened sector discipline and supervision. Investors must still exercise diligence given inherent risks facing NBFCs’ borrower segments. But the policy direction seems geared toward enabling NBFCs to sustainably meet unmet credit demand.
Potential Effects of NBFC-Focused News on Companies:
Indian Companies Likely to Gain:
- Large NBFCs with strong track records: Companies like Bajaj Finance, HDFC Ltd., LIC Housing Finance, and Shriram Transport Finance could benefit from increased investor confidence and potentially higher valuations due to their focus on responsible lending and strong financials.
- MSME-focused NBFCs: Companies like Capital First, Fullerton India, and Ujjivan Small Finance Bank could see increased demand for their services as the article highlights the role of NBFCs in serving this underserved segment.
- Affordable housing finance companies: Companies like Aavas Financiers, Indiabulls Housing Finance, and Mahindra Finance could see increased business opportunities as the article recognizes NBFCs’ ability to contribute to affordable housing schemes like PMAY.
- Debt market participants: Increased participation of NBFCs in the debt market could benefit companies like Edelweiss Financial Services, IIFL Holdings, and Axis Capital through higher trading volumes and fee income.
Indian Companies Unlikely to Be Significantly Impacted:
- Large public sector banks: While the article suggests diversification of credit sources, major banks like SBI, Bank of Baroda, and ICICI Bank are unlikely to see a significant impact on their market share in the near term.
- Small NBFCs with weak financials: Companies with high reliance on bank funding or facing regulatory issues might not experience immediate benefits from the positive outlook on the sector.
Global Companies Likely to Gain:
- International asset managers and investors: Increased focus on the Indian NBFC sector could attract more foreign investments, benefiting global firms like BlackRock, Vanguard, and Fidelity Investments.
- Credit rating agencies: Companies like Moody’s, S&P Global, and Fitch Ratings could see increased demand for their services as NBFCs seek to raise capital and issue debt instruments.
Global Companies Unlikely to Be Significantly Impacted:
- Foreign banks with limited India presence: Global banks without a significant presence in the Indian NBFC sector might not see a direct impact from this news.
Overall, the article paints a positive picture for the Indian NBFC sector, highlighting its potential to contribute to economic growth and financial inclusion. This could lead to increased investor interest in well-managed NBFCs and potentially boost sentiment towards the broader financial sector. However, individual companies’ performance will depend on their specific strategies, risk management practices, and regulatory compliance.
Remember, this is just a speculative analysis based on limited information. The actual impact on these companies will depend on various other factors and market dynamics. Always conduct thorough research and consider various factors before making any investment decisions.
Piramal, Ajay, and Debopam Chaudhuri. “NBFCs, Keep This Spare Tyre Handy.” The Times of India, 26 Dec. 2023,