When it came to the financial landscape of yesteryears, the commercial banks ruled the roost. But fast forward it to today and dynamics of the sector have changed dramatically. Non-Banking Financial Companies or NBFCs are increasingly making their presence felt.
Fundamentally sound NBFCs are growing much faster than the banks. And more or less, this growth is coming at the cost of PSU banks that are saddled by bad loans, weak balance sheets and poor profitability.
As the economy has been growing, the credit demand too has been increasing steadily over the years.
But ability of old-era PSU banks to cater to such demands has been hampered by their bad loan burden, shrinking balance sheets, muted loan expansion due to Basel III capital requirements and their inability to be nimble footed.
This in turn has led to the rise of NBFCs as force to reckon with.
Many niche NBFCs have come up over the years lending to segments like gold, housing, infrastructure and retail. Unlike banks which try to be everything to everyone and service a whole range of customers, most NBFCs such as Tata Capital focus on particular niches such as personal loan, home loan, car loan & business loan. And this approach allows them to offer customized solutions and faster turnarounds. These NBFCs at times also cater to customer segments that are not served properly by commercial banks. For example self-employed professionals, SMEs, etc. These are segments that offer higher yields and therefore allow NBFCs to operate at higher margins.
Global rating agencies like Moody’s too have acknowledged this change in power equation of the Indian financial space. According to one Moody’s report, “NBFCs could well outpace commercial banks, which are struggling to grow amid muted loan expansion and bad loan burden.”
In fact, if stock market valuations are any indicator, then recent trend of investors pulling out money from banking stocks and putting in NBFCs is a clear sign of the superiority of NBFC business model. NBFCs are growing faster than most banks and their quality of assets is far better too. So as far as the future of NBFCs is concerned, it wouldn’t be wrong to say that its blindingly bright.