NBFCs - Changing the Bank-centric lending culture in India

NBFCs (Non-Banking Financial Companies) have emerged as a better alternative to Banks, for loans, including Business Loans, because of their innovative products, quicker Turn Around Time, higher Risk taking capabilities (because of better risk assessment and credit assessment systems), and better understanding of the segment in which they specialize.

This fact is well understood by the policy makers at Banks as well, which is why Banks are more willing to lend to NBFCs, for onward lending to segments untouched by Banks. NBFCs have now, backed by the funding from Banks, become strong enough to challenge the Banks’ bread and butter areas - MSME lending, and Housing Loans and other personal loans.

GROWTH IN BANK CREDIT
The year-on-year growth in the Bank Credit, as on 22nd December 2017 was 10.70% as compared to 4.70% in the last year. The growth can largely be the effect of the following:
1.       Post demonetization, Banks had surplus deposits for investment and providing loans; and
2.       The surplus deposits led to a massive reduction in the Marginal Cost of Lending Rate (MCLR), upon which the rate of interest for Bank loans are dependent.

As per the data available from the research wing of CARE Ratings, the increase in credit during the period December 2016 to March 2017 was almost 68.50% of the total increment in Bank Credit from December 2016 to December 2017.

Growth in Bank credit (y-o-y) November (%) – Source CARE Ratings

Sector
o/s Nov 2017
(Rs. Bn.)
2016
% Growth
2017
% Growth
1.       Gross Bank Credit
71,501
4.0
8.3
2.       Agriculture etc
9,882
10.3
8.4
3.       Industry
26,041
-3.4
1.0
i.                     Micro & Small
3,592
-7.7
4.6
ii.                   Medium
947
-10.1
-8.3
iii.                  Large
21,502
-2.3
0.8
4.       Services
17,593
7.1
14.0
i.                     Transport Operators
1,145
5.6
12.6
ii.                   Professional Services
1,353
24.5
15.0
iii.                  Trade
4,328
3.4
16.1
iv.                 Com Real Estate
1,819
3.2
3.2
v.                   NBFCs
3,603
1.3
13.8
5.       Personal Loans
17,630
15.2
17.3
i.                     Consumer Durables
180
18.2
-8.2
ii.                   Housing
9,221
15.6
13.1
iii.                  Credit Card
637
23.1
37.5
iv.                 Education
717
4.8
1.0
v.                   Vehicle Loans
1,808
21.4
8.0

The growth in Manufacturing Sector was only 1.00%. Within the sector, Credit towards Micro and Large enterprises registered growth, while the lending to Medium Enterprises continued to shrink.

The Services and Personal Loan segment together made up 87.00% of the total increase in the Bank Credit during this period.

Within Personal Loan segment, Housing and Vehicle Loans showed impressive growths. The same could, to some extent, be attributed to reduced Rate of Interest and subsidies provided to those availing fresh Housing Loans.

Within Services, NBFCs, Trade, and Transport Operators showed an increase in growth, compared to the growth in previous year.

NBFCs CHALLENGING BANK-CENTRIC LENDING (INCLUDING BUSINESS LOANS)
The most interesting aspect of this trend is the growth in Banks’ lending to NBFCs (a growth of 13.80% this year, as compared to 1.30% last year), which also points to a shift from Bank centric lending to a Financial Services culture amongst the consumers.

NBFCs engaged in lending are expected to change the current lending scenario in India. Majority of the NBFCs focus on a single lending segment (Unsecured Business Loans, Secured Loans to MSMEs, Secured Loans to Large Enterprises, Housing Finance and Loan Against Properties, Bridge Loans to Small and Large Businesses, Car Loans, Personal Loans, etc).

The segment specialization helps in providing better solutions for the lending needs of the consumers, in comparison with the Banks, albeit in some cases, at a higher rate of interest.

The success of NBFCs is also because of their better product lines, lower cost, wider and effective reach, higher risk taking capacity due to the strong risk management capabilities to check and control bad debts, and better understanding of the customer base (which may again be attributed to the segment specialization).

BETTER SOLUTIONS FOR BUSINESS LOANS THROUGH NBFCs
Contrary to the expectations of analysts regarding the positive effects of demonetization, the Bank lending towards MSMEs has not increased at the same rate as the demand for business loans, which is one of the major causes for the short-term arrested growth of this segment.

As highlighted in one of our earlier posts, Banks (in particular the Private and Foreign Sector Banks), although mandated to provide Business Loans under CGTMSE to eligible Micro and Small Businesses, and under Start-up India and Stand-up India Schemes to the eligible Start-ups, are not particularly keen to consider business loan proposals where 100% or more Collateral Security is not provided by Businesses.

The risk taking capabilities of Nationalised Banks has been reduced due to the rising NPAs. This has meant that the bankers to the masses haven’t been forthcoming in providing business loans to eligible MSMEs, especially if the loan is not secured by Collateral Security, in addition to the primary security of Hypothecation on Current Assets and/or Plants and Machinery. The trend is expected to continue, till the time the Banks are upgraded from PCAP (Prompt Corrective Action Plan), and there is a better risk and credit assessment policy in place.

However, the latent credit demand of a growing economy like India, has opened the doors for NBFCs to step up and make inroads into the traditional bastions of the Nationalised Banks. Segment specialization has enabled NBFCs to play a bigger role in Financial Inclusion, than even a lot of the Nationalised Banks.

As mentioned earlier in this post, many Banks are more aggressive towards lending to NBFCs, for onward lending to small businesses / agrarians, MSMEs, etc, because of the strong risk assessment, recovery, and foothold of the segment specialist NBFCs.

For example, Bank “A” lends to NBFCs “B” and “C”. “B” specializes in providing unsecured loans to small businesses and retail stores, say “D”. “C” specializes in providing agriculture loans to marginalised farmers, say “E”. Both “B” and “C” have better understanding of their segment than the Bank “A”; have a stronger foothold, easier repayment terms, and a very strong recovery mechanism for their respective segments, as compared to Bank “A”.

The lending from the Bank “A” to the end users “D” and “E” becomes a lower risk proposition for “A”, because of the intermediation of “B” and “C”, the NBFCs.

Similarly, Banks are more comfortable in lending to NBFCs which specialize in providing Business Loans to MSMEs (with partial or no collateral security), than directly dealing with such MSMEs. The intermediation provided by NBFCs makes this a win-win situation for all parties involved.

NBFCs, continuing on the path of innovating and reenergizing the Business Loan segement, are also providing solutions for Working Capital Requirements, Term Loans for establishing or expanding an existing business, demand loans for short-term business requirements, bridge loans for requirements for 3-12 months, and unsecured business loans with end-use towards business expenses.

While the rate of interest at an NBFC may be higher in some cases as compared to Banks, if the value that the loan will bring to the business outweighs the Financial Costs of such loans, it is advisable to MSMEs to consider Business Loan facilities provided by NBFCs.

MSMEmitra.com specializes in providing funding solutions (business loan or private equity investment) to businesses of all sizes. Our services include – assessing the actual funding requirement, finding out the best funding option available and sourcing funds. If you are a business owner, and need our assistance in the funding requirements for your business, connect with us at support@msmemitra.com

Make an informed decision about the best funding options available for your business, and find out how to avail the benefits of the schemes and subsidies applicable for your business, by visiting https://msmemitra.com

Thank you for reading.

--
SOURCES: Research Reports published by CARE Ratings, and other third party materials.

Disclaimer:

This write-up has been collated from various publicly available materials and secondary data, and MSMEmitra.com does not have any copyrights over the content, or guarantee its accuracy.

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