As per a study conducted by YourStory, roughly 47 deals amounting to $954 million were made in the Indian fintech space in 2015 alone.
And as of 2016, the collective funding of more than 500 fintech start-ups in India was believed to have reached an aggregate of $1.4 billion since 2012.
Gone are the days of SMEs (Small and Medium Enterprises), unbanked sectors and customers with a not-so-impressive or even non-existent credit rating being left behind to languish on the side-lines, neglected by the government and traditional banks alike. With the entry of NBFCs in the microfinance industry in India, all predictable glitches in traditional lending scenarios – cumbersome loan obtainment processes, sky-high interest rates, and collateral and security requirements against credit – are history now as financial inclusion is promised to thousands of these players earlier hovering on the fringes.
Some of the factors that have led to the rise of NBFCs
- Technology at the head of financial and banking services as well as an increasingly digitised India;
- Sector-specific expertise (home loans, commercial vehicle loans) that allows these financial companies to have an edge over traditional lenders;
- Ease and speed of NBFC registration as well as low costs in establishing one.
While NBFCs have indeed succeeded in catering to the diverse financial needs of a country like India, their beginning, evolution and manifestation as reliable lending models has not been an overnight success and has undergone tremendous layered changes, most of which contribute to present-day monumental success of NBFCs and are just as instrumental in shaping the future of these financial companies:
- Introduction of Entry Point Norms (EPNs) in the years 1996-1997 that called for stricter and more detailed regulations to allow for a more focussed supervision of deposit-accepting NBFCs;
- Requirement of compulsory registration of all NBFCs with the RBI before embarking on any kind of business;
- Maintenance of a share of deposits in liquid assets;
- Enhancement of capital requirement (in 1999) for fresh registration from Rs. 25 lacs to Rs. 2crores;
- Further classification of non-deposit accepting NBFCs (in 2006) into systematically important NBFCs and non-systematically important NBFCs based on asset size;
- Founded on the key discussions held in November 2010 at the G-20 Summit, Seoul, and the Financial Stability Board’s (FSB) persistent efforts in regulating the shadow banking system, RBI’s concerted moves into curbing shadow banking in India (through regulation of NBFCs) and thereby, mitigating financial risks;
As part of a comprehensive review of NBFC Regulations conducted by the RBI –
- Revision of systematic significance from Rs. 100 crores to Rs. 500 crores and different set of regulations introduced for systemically important and non-systematically important NBFCs, thereby, bringing more operational efficiency in the functioning of these companies;
- Relaxation in norms for non-deposit accepting NBFCs with an asset size of more than Rs.100 crores but less than Rs. 500 crores (sweeping over around 11,500 NBFCs in this category );
- Relaxed prudential norms for ND-NBFCs without public funds and an operational customer interface;
- Enhancement of Tier I Capital to 10% for NBFCs-ND-SI and NBFCs-D;
- Requirement of mandatory constitution of various committees for systematically important deposit-accepting NBFCs as well as NBFCs-D;
Other changes applicable –
- Enhancement of minimum Net Owned Fund of at least Rs. 2 crores, irrespective of their registration prior to 21 April 1999;
- Reduction in the limit for acceptance of deposits by AFCs-D (deposit accepting Asset Finance Companies) from 4 times to 1.5 times the net owned funds;
- Prior written permission of the RBI to be sought before seeking any kind of change in management or control of the NBFCs, except in cases where the shareholding exceeds 26% on account of buy-back of shares/reduction in capital and where it is also endorsed by a competent court;
- Surge in lending limits for microfinance NBFCs which inadvertently means a bigger pool of borrowers; among other radical amendments.
What does the future hold in sight for NBFCs?
In addition to the aforementioned changes brought about with respect to NBFCs, recent trends in the lending space are believed to change the way these unique financial models are perceived in general –
- the shift from short-term borrowing to long-term borrowings;
- the possibility of the Micro Units Development and Refinance Agency Bank (MUDRA Bank) becoming a major source of funding for NBFCs-MFIs, in addition to an alternate funding source inherent in hefty deposits made by high net worth individuals (HNIs) to these NBFCs directly;
- more expansion opportunities for NBFCs as they have branched into Infrastructure Finance, Gold Loans, Capital Markets, Personal Finance, etc.;
- Partnering with payment banks, insurance and asset management companies, and the like has made NBFCs a formidable alternative for customers owing to its coverage of maximum benefits under this model. That means tying up with firms that use governmental mandates (AADHAR scheme), access to financial data and the massive explosion of e-commerce as level-playing grounds for lending. Lending companies such as Capital Float, Rubique and LendingKart fall under this category.
- Working in collaboration with unique online lending firms such as Finomena that focuses on a large chunk of the millennial generation and makes loan accessibility possible for college students, freshers at jobs, freelancers who are generally kept out by banks due to an absence of credit score;
- The emergence of online lenders in this space that operate either as NBFCs, intermediaries for NBFCs/banks, or act as a P2P lending marketplace in connecting borrowers and lenders directly, is another major reason why NBFCs have a more than fair chance of succeeding in future.
All is not hunky-dory though; NBFC expansion cannot be taken for granted, given the results published by the Financial Stability Report in December 2016. Cautious approach meted out by the RBI in handling NBFCs, as well as bleak performance of the banking sector affecting NBFCs negatively (in diluting the asset quality) can be attributed to the declining performance of the NBFCs in the last financial report.
If some of these glitches are worked on strategically, the future of NBFCs can be more diverse and certain.