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Think of Non-Banking Financial Companies (NBFCs) as the edgy, innovative cousins of traditional banks. Registered under the Companies Act of 1956 and/or the Companies Act of 2013, NBFCs shake things up in the financial world by offering loans, investment opportunities in shares and bonds, and services like leasing and insurance – all without a banking license. In India, the Reserve Bank of India (RBI) keeps them in check under the RBI Act of 1934 by imposing prudential norms to ensure their stability.
To fuel their operations, NBFCs tap into funds through deposits typically term deposits, loans, and other financial tools – just not your run-of-the-mill demand deposits. They’re all about reaching underserved communities and boosting Micro, Small, and Medium Enterprises (MSMEs). Staying on top of regulations, managing risk, and keeping liquidity flowing is the name of the game for these financial trailblazers.
NBFCs have been game-changers in India’s financial scene, carving out new paths for credit and services beyond the usual banking suspects. Their story is one of adapting to regulations, riding economic waves, and embracing cutting-edge tech. It’s a journey that highlights the dynamic nature of NBFCs and their vital role in shaping the future of finance in India.
Non-banking financial companies made their way into the economy dating back to the 1960s. These were typically introduced to assist both wholesale and retail customers to meet their credit needs along with providing financial assistance to investors whose financial requirements couldn’t be met by banks.
The first steps into the NBFC market were taken with the founding of companies such as Motor and General Finance Limited and Mahindra and Mahindra Financial Services. In their early stages, these enterprises catered mostly to the needs of individuals and businesses looking for alternatives to traditional banking channels by offering hire-purchase and leasing services. During this time, there were less strict restrictions, which gave NBFCs more leeway and freedom in how they operated. Together with a propitious economic climate, this regulatory laxity allowed NBFCs to quickly expand and carve out a position for themselves in the financial sector. Particularly for small and medium-sized businesses (SMEs) and people who would have had trouble obtaining financing from traditional banking institutions, these early NBFCs were essential in closing the credit gap.
Leading NBFCs of market capitalization as of April 2023, Bajaj Finance was the leading non-banking financial company in India with a market capitalization (at BSE) of around 4450 billion Indian rupees. IRFC followed with a market capitalization of around 1930 billion Indian rupees.
Comparing NBFCs to commercial banks in Q2 of FY24, the former had more credit growth and a better Gross Non-Performing Assets (GNPA) ratio. Due to a rise in the demand for personal and agricultural loans, the gross advances made by NBFCs climbed by 20.8% between September 2022 and September 2023. Between September 2022 and September 2023, the GNPA ratio decreased from 5.9% to 4.6%.
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| Banks | Credit Growth Rates |
| YES Bank, South India Bank, Dhanlaxmi Bank | 11% – 12% |
| IndusInd Bank, Bank of Maharashtra, CSB Bank | 20% – 23% |
| NBFcs | Growth Rates of Assets under Management |
| Mahindra Finance | 25% |
| Bajaj Finance | 35% |
| Poonawalla Fincorp | 57% year-on-year growth |
The above table indicates the credit growth rates of several banks and NBFCs in Q2 of FY2024.
It is indicative that YES Bank, South India Bank and Dhanlaxmi Bank recorded very low growth rates ranging between 11% to 12%. This indicates a stable yet conservative approach towards loan disbursement and a possible attempt to maintain a balanced risk profile due to regulatory constraints or economic cautiousness. On the contrary, IndusInd Bank, Bank of Maharashtra and CSB Bank had greater growth rates ranging between 20% to 23%. These banks have nearly doubled credit growth than the previous group. Such a figure illustrates that these banks are creating a robust credit growth fuelled by increased demand for loans and improved operational efficiencies.
As far as the NBFCs are concerned, the growth rates of Assets under Management (AUM) typically suggest the total market value of all the financial assets that they handle on behalf of their clients. This includes loans investments and other financial products. Mahindra Finance experienced a strong growth in its AUM indicating loan disbursements, financial strategies, effective asset management and expanded customer base. Bajaj Finance on the other hand has a 10% more AUM as compared to Mahindra Finance. Poonawalla Fincorp recorded a 57% year-on-year growth which indicates a very remarkable figure and a rapid scale-up of operations. It indicates substantially high investments into marketing, technology, and risk management frameworks.
The detailed analysis of Q2 FY2024 credit growth rates for banks and NBFCs reveals a clear distinction in growth trajectories. Banks like YES Bank, South Indian Bank, and Dhanlaxmi Bank are showing moderate growth, indicating a conservative approach. In contrast, NBFCs, particularly Poonawalla Fincorp, are demonstrating exceptional growth rates, underscoring their aggressive expansion strategies and ability to capture market opportunities swiftly. This divergence highlights the different operational dynamics and market positioning of banks and NBFCs in the financial landscape.
A recent central bank report highlighted that the co-lending framework for priority sector lending has helped NBFCs increase credit flow to the MSME sector by utilizing banks’ low-cost funds and NBFCs’ extensive reach.
In 2022–2023, NBFCs’ balance sheets grew more quickly, according to the RBI study, mostly as a result of significant increases in unsecured loans. In 2023, NBFCs extended more unsecured loans than secured loans in the same year. Large government-owned NBFCs’ infrastructure financing, which made up over 40% of the NBFCs’ overall lending portfolio as of March 2023, contributed to the industrial sector. Finally, retail lending accounted for about 31%. Credit extended by NBFCs to the industry expanded by 12.8% in 2022–2023, 5.7% more than the rise observed in the banking sector. Bank and NBFC credit to the retail sector climbed by more than 20%. NBFC lending to the services sector increased dramatically as well but at a little slower pace than that of banks.
The increasing demand for loans from MSMEs has been the main driver of the NBFC sector’s expansion. Strict qualifying requirements are frequently imposed by traditional banks, which makes it challenging for MSMEs to get loans. As a result, a plethora of digital lenders have surfaced, providing substitute loan options and substantially bolstering the growth of the NBFC industry.
Government programs like Stand-Up India, Mudra Yojana, and Pradhan Mantri Jan Dhan Yojana (PMJDY) have brought attention to the critical role that NBFCs play. Through these programs, NBFCs are positioned to play a major role in providing loans to the underbanked and unbanked populations, which heightens their prominence in the financial system.
The NBFC sector’s rise has been significantly fueled by digitalization. NBFCs have increased client happiness, reduced expenses, streamlined processes, and expanded their customer base by integrating digital platforms. Thanks to these technologies, NBFCs in the informal sector may innovate and provide low-income urban clients with customised goods and services. Moreover, the emergence of FinTech enterprises has intensified the mutually advantageous association between these companies and NBFCs. FinTechs supply vital services like process automation, security monitoring, and sophisticated risk assessment, which help NBFCs better serve their varied clientele.
The Confederation of Indian Industry (CII) highlighted the critical role that non-bank financial companies (NBFCs) play as a source of funding that is essential to driving the Indian economy towards the $5 trillion milestone. NBFCs have shown to be quite effective in connecting with the unbanked populations in both urban and rural areas throughout time. Their success is attributed to their operational flexibility, which is customised to meet the demands of borrowers, as well as their profound awareness of market trends, local dynamics, and consumer needs across several sectors. The suggestions made by CII to increase industry liquidity are expected to give short-term demand a much-needed boost.
NBFCs have indeed come a long way since their evolution in the 1960s. They have emerged as dynamic entities in the financial landscape, offering innovative solutions and extending credit to underserved segments and MSMEs, thus fueling economic growth. Their agility in adapting to regulations and leveraging technology has enabled them to bridge critical financing gaps left by traditional banks. The robust growth in their balance sheets, particularly through unsecured loans and infrastructure financing, underscores their vital role in driving India’s development. As the nation progresses towards a $5 trillion economy, NBFCs, supported by government initiatives and digitalization, are poised to play an increasingly crucial role in enhancing financial inclusion and stimulating economic expansion. Their deep market understanding and operational flexibility position them as key players in shaping the future of finance in India.
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“Written by – Durba Roy”
