Non-Banking Financial Companies (NBFCs) which account for 15 percent credit share in our financial system have achieved the present state of vibrancy largely on account of the inherent capabilities they wield. Rising up to their mandate to facilitate financial inclusion for the country, NBFCs are expected to command around 18-20 percent credit lending share by 2020, if the current pace of growth is any indication. But, has demonetisation – an unprecedented move to replace 86 percent our currency in circulation – put a brake to this phenomenal growth story?
At least in the short-term, there is a disruption due to liquidity crunch across the sectors and the NBFCs are not spared. Replacing Rs 14.18 lakh crore – which existed in the form of Rs 500 and Rs 1,000 currency bills till 8 November – is no small task. Hiccups are inevitable and that is what is causing the widespread disruption. Given the pace at which the process moves even after two weeks, we should be prepared for a long haul, which makes the need for NBFCs to be careful and hawkish.
These are challenging times for those NBFCs which are deeply linked to the cash economy. The first fallout of the liquidity crunch relates to the collection of EMIs for NBFCs, especially those cash-intensive ones in the micro-finance and customer loan segments. The exact extent of the problem can be measured only in the first week of December when the empirical data for the month of November will be out. The guideline by the RBI to give a 60-day grace period for the receivables has anyway come as a big respite for the sector.
There will be a reduction in volume of business as SMEs are reinventing their business models. With fall in prices of property prices, there is a need to reassess the existing portfolios in the LAP segment. The bottom lines of NBFCs are going to take a hit in the next quarter. If the disruption prolongs, there will be impact on the medium term, too.
But in long term, the current developments should not cause a major disquiet for the NBFCs as they are bound to survive with their intrinsic strengths and emerge the mess unscathed. More transparency will make cash flow assessment easier; SME balance sheets will become stronger and there will be enough liquidity for quality credit in the long run. Besides, the macro-indicators that make India a bright spot should further augment the sector.
There are more than one reason for me to believe in the resilient nature of NBFCs to overcome the current crisis. First of all, they enjoy a strong connect with the customers on the ground, unlike the banking institutions. Riding on this strong customer links and their in-depth knowledge over the regional dynamics, especially in the semi-urban and rural areas, they grew phenomenally during the last one decade. In the last four years, the credit share of NBFCs in the financial system has gone from 12 percent to 15 percent. By 2020, the share of total credit lending by NBFCs is expected to be between 18 and 20 percent. Their contribution to economy has grown from 8.4 percent in 2006 to above 14 percent in 2015. Overall, NBFCs are set to clock a record robust growth of 19–22 percent CAGR in retail credit to reach an AUM of approximately Rs 6.044 trillion by March 2017.
The NBFCs scripted the success story largely because of their innovative product lines, wider and effective reach, strong risk management capabilities to check and control bad debts, and better understanding of their customer segments. The same set of qualities will help them pass through the present turmoil.
Secondly, NBFCs are strongly managed. Veteran professionals with vast experience in the financial sector are managing them with best of global practices in place. We have seen proven hands with global experience joining the NBFC sector en masse in the recent past. Thirdly, the well capitalised and structurally robust NBFCs are better-placed in risk management, if their growth trajectory is any indication. On the asset quality front, net NPA as a percentage of total advances was 2.5 percent during the last fiscal. They have healthy liquid assets in their balance sheets to overcome the current disruption. Return on equity (ROE) for the NBFCs outperformed the banks by at least 1.5-2 percent in the last year.
According to a report, the bank loans to the NBFCs have risen 15 percent last year, against 0.3 percent a year ago. This growing confidence endorses the asset quality of the NBFCs. Moreover, with the banks adequately recapitalised through the demonetisation, credit is not going to be a worry for the NBFCs. Going by the fundamental values, tenacity over the years and the broad macro indicators of India, the NBFCs have enough guards and guts to overcome the present disruption caused by demonetisation.
The writer is MD and CEO, IndoStar Capital.