NBFCs need to focus on niche offerings, consolidate to survive

Non-banking finance companies (NBFCs) will have to reinvent themselves with niche offerings and consolidate for survival and growth after getting bruised in the last round of credit squeeze.

These non-bank lenders, also known as shadow lenders, would have to work out other ways of funding their books and look at models such as originate and distribute so that they are not stuck due to swings in the financial market conditions, experts said.

“NBFCs have always been in niche segment; whether gold, housing, CVs (commercial vehicles),” said Umesh Revankar, CEO, Shriram Transport Finance at the ET Dialogues meet. “NBFCs who tried getting into a lot of segments faced problems. Today there are co-lending. NBFCs do not compete with banks. Only first-time customers may come to NBFCs. NBFCs will keep doing onboarding. India’s credit penetration is not more than 40-50 per cent of unorganised sector.”

Intense debate is on about the future of NBFCs after they got burnt in the last one year with funding problems after the collapse of IL&FS. Many of them who were dependent on short-term funds from mutual funds faced severe constraints as the fund industry shut this sector out for fear of losing money. Many are fighting for survival with some big lenders such as Dewan Housing Finance defaulting on loans, and many are cutting down on their balance sheet size by selling portfolios to banks and larger rivals.

“NBFCs who are choosing to reduce their balance sheet by selling portfolio are moderating value expectation and selling to larger NBFCs,” said Dinanath Dubhashi, CEO of L&T Finance. “NBFCs with ₹2,000 crore-₹3,000 crore are asking for two-three times valuation. Growth will be more knowledge-based than capital-based. Fee income will become the main source of income for NBFCs rather than spreads. It is two-three years from there. Some NBFCs will close down and smarter ones will merge.”

NBFCs constitute around 12 per cent of the total assets of banking and non-banking space and have been growing at a faster pace in recent years. As of March 2019-end, the aggregate capital adequacy of NBFC sector was 19.3 per cent, while the gross non-performing assets ratio was 6.6 per cent. The credit growth of NBFCs, which was over 20 per cent earlier, slowed down in the second-half of 2018-19 after the debt default by a systemically important NBFC.

“Out of 15,000 (NBFCs), 14,900 are likely mom-and-pop shops that are a regulatory burden for RBI,” said Nirmal Jain, chairman of IIFL. Jain said RBI will better regulate larger NBFCs than focusing on the small ones.

The government and the Reserve Bank of India have brought in several changes in the last twelve months to provide more liquidity to NBFCs and ensure better regulations. “Typical retail NBFCs would not compete with banks,” said Jayesh Mehta, MD, Bank of America-Merrill Lynch. “Banks would look at income tax returns, including for companies, corporate, and retail. Only 4.84 crore people with more than₹5 lakh (income) have filed return. NBFCs have their own way of evaluating retail outside of the tax net. The other three niche are capital market, M&A, land acquisition financing for real estate.”

The government has also come up with guarantee scheme on asset purchase from top-rated NBFCs originated before March 31, 2019. “When demonetisation happened, and banks stopped lending, NBFCs started thinking they could compete with banks and started getting cheaper money. We still want to get banks to get to lending,” said Mehta.

But the days of handsome profitability with leverage of short-term borrowing to lend long-term may well be over.

“Borrowing short term and lending long term is hopefully a dead phenomenon,” said Dubhashi of L&T Finance. “Using balance sheet as a strength for NBFCs is not going to work. NBFCs’ strength is reach and specific knowledge.”