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We are witnessing fundamental changes in the banking sector. On the one hand, we have public sector banks with traditionally large share in the market, grappling with the problem of non-performing assets (NPAs) and at the same time we have new players entering the industry — such as new universal banks, small banks and payments banks. In the credit market, existing banks are also facing competition from non-banking finance companies (NBFCs) and debt mutual funds.
The banking credit industry growth rate fell to a 20-year low of 8.6 per cent in June 2015 whereas NBFCs almost doubled their growth rate as they expanded at 18.8 per cent year-on-year during the nine-month period ending December 2015 versus 9.5 per cent during 2013-14. This resulted in a gain in share for NBFCs in total credit in India, from 10 per cent to 13 per cent between 2005 and 2015. According to RBI data, the loan book of deposit-taking and systemically-important NBFCs was at ₹11 trillion as of March 2015, three times the book size of ₹4 trillion, as of March 2010.
Scope for growth Within the NBFC space, various sub-segments have emerged more dominant than others. Mortgages, microfinance and unsecured loans appear to be driving growth. According to estimates, credit grew at a rapid 30 per cent plus (year-on-year) for mortgages and 80 per cent plus for microfinance as of December 2015. Housing finance companies, have increased their share of the overall pie from 26 per cent in FY09 to 38 per cent in FY15. NBFCs also have a large share in niche segments, such as commercial vehicle finance, the share estimated to have increased from 42 per cent to 46 per cent in the last three years ending FY15.
According to a report by BCG, India’s credit-to-GDP ratio stood at 97 per cent as of FY15 versus 165 per cent in China, 149 per cent in Germany, 244 per cent in the US and 447 per cent in the UK.
This implies growth opportunity for the credit market in India as a whole. Interestingly, for the same year, the NBFC-credit-to-GDP ratio in India was just 13 per cent, versus 33 per cent in China, 29 per cent in Germany, 130 per cent in the US and 264 per cent in the UK. If one overlays on this the fact that the largest segment in the banking sector is facing some challenges, then the opportunities to grow should be even higher.
Non-corporate loans NBFC credit appraisal systems have held out reasonably well so far, with GNPAs (gross NPAs) for retail and small and medium enterprises (SMEs) at around 1-2 per cent. With their intrinsic ability to move fast and tap into specific customer segments, it seems that NBFCs would be able to meet the non-corporate needs of the economy, that is, those of SMEs and retail customers.
With one estimate suggesting that over 50 per cent of micro, small and medium enterprises (MSMEs) not having access to formal credit, the need statement cannot be overstated. Other than the opportunity in SME financing, increased penetration of housing finance will certainly drive double-digit growth over the next decade. India’s housing finance segment continues to show massive potential for growth and housing finance companies with 40 per cent share are clearly leading the way here. Further, as newer customer needs emerge from a digitally-savvy customer segment, NBFCs could potentially open up new avenues for growth.
Globally, a concern for regulators has been the size and consequent systemic risk posed by shadow banking entities. In India, several structural changes have been instituted by the regulator. These include phasing in of NPA recognition norms in line with banks and higher capital requirements, along with dilution of the advantages that NBFCs enjoyed in capital markets-based lending vis-à-vis banks.
Even while the NBFC sector shows better performance, there is wide dispersion in the performance and the long tail of NBFCs shows a need for fine-tuning of economic drivers. There are also new entrants eyeing this sector. NBFCs have become an integral part of our financial system and are here to stay.
As long as they stick to tight credit standards and focus on the right customer segments, the growth momentum is expected to continue.
The writer is CEO, Financial Services, Aditya Birla Group
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