The Prospect Of Non Banking Finance Companies In India

Talk Of The Town

Non Banking Finance Companies have been the talk of the town with their remarkable ability to cater to the diverse entrepreneurial demands of the country. The sector has been an epitome of innovation and has ventured into infrastructure financing and micro-finance, mitigating the debt crunch of every segment of the Indian Economy.

While mainstream banks have been crippled by the weight of their Non Performing Assets, NBFCS have responded positively to regulatory norms by addressing such risks through regulations. It has been a remarkable story of evolution for the sector which began as an informally governed fragmented entity to being well-regulated and in most cases adhering to state of the art technological innovation, risk management and governance.

When Stress Is An Asset

India has topped the IMF’s (International Monetary Fund) list of countries with the most promising outlook even as Prime Minister Narendra Modi has set the ball rolling with his “Make In India Project” that promises to propel Asia’s third largest economy as the go to destination for global investors. India Inc. therefore would need a steady flow of finance to fuel growth and deliver on the promises made by the Government. The situation has been quite challenging as banks have failed to penetrate aggressively into the core of the economy.

NBFC’s have been basking in the glory of their growth story in the recent past even as global lenders debated on the risk arising from such entities. Although there are costs associated with the industry being laced with a greater panel of regulations it could well turn out to be a blessing in disguise in the longer run. Although there are dark patches that are prevalent in the regulatory landscape, there is enough clarity for NBFCs to turn into a well-regulated participant in the financial system and outweigh the cost of doing business in future.

NBFC’s are fast turning out to be a clear alternative to mainstream banking. The sector is also emerging as an integral part of the Indian financial system and has actively contributed to the Government’s agenda of financial inclusion. They have lead from the front in offering credit to retail consumers beyond the reach of conventional banking.

NBFC Regulations which has been broadly derived from the banking framework has been modified overtime by the RBI to ensure the ease of doing business in the midst of global volatilities. The modifications in the regulatory approach has been in keeping with the global standards even though the demands of the Indian economy has been quite different from its global counterparts.

Regulated Risk Is The New Name Of Reward

The sector has the unique advantage of adapting to market demand conditions. While formal categories face hurdles in the absence of regulatory benefits NBFC’s are reaping the benefits of a diluted asset income ratio which has been slashed to 50%. The approach offers regulators the additional benefits of dealing with issues through activity based regulations.

The sector has seen exponential growth in India which is reflected in its asset growth pattern. Over the years the NBFC’s have ventured into Infrastructure Finance, Automobile Finance, Gold Loans, Personal finance and Capital Markets.

The recognition of the NBFC’s as an integral part of the financial ecosystem is reflected in the recent policy measures. Unlike banks which have a different cost structure and are designed to service certain section of clients, NBFC’s by virtue of their business look well poised to grow in the financial ecosystem and create employment opportunities in the remote corners of the country.