Future of NBFC in India - Opportunities & Challenges
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NBFC to Introduction
Non-Banking Financial Companies (NBFC) are engaged in delivering credit to the unorganized sector and local borrowers and corporate sector, supplementing the role of the banking sector but are different from banks. NBFC provides loans and other financial services to the public, forming an integral part of the Indian financial ecosystem. Entrepreneurs thinks of NBFCs as an excellent option probably because it’s continuous growth and by the fact that contribution of NBFC to Indian GDP has gone past contribution by banks. NBFC has been a pivotal part for the development of Indian economy as they have been providing boost to the generation of employment, wealth section, transportation, have been providing credit in rural segments even financially supporting weaker sections.
India is a land of opportunities. This is so right for the NBFC, as there are opportunities for NBFC to succeed in the country. Structural changes in financial provides a boost for the NBFCs to succeed. NBFCs have been improvising themselves as per the need of the clients, have been providing better product lines, lower cost and have succeeded in understanding the customers segments. Apart from passenger and customer vehicle finance, they have managed substantial assets under management (AUM) in the housing finance sector and personal loan. NBFC enjoys flexibilities in the rules and privileges provided by the government to entertain people with the loans and financial services that has been a pivotal ingredient for the growth of NBFCs.
One of the biggest opportunities for NBFCs are the new to credit customers. These are the people who belong to the rural sector and have never borrowed from any financial institution in the past. Rural sector have limited ground presence of banks and other credit financial services and whatever banks are present in these sector as regulated by legislation, have to rely on banking and credit history while assessing the loan and cannot provide loans or financial services to the people who do not qualify for the bank loan. For such people, NBFCs are a boon. They have emerged as a lucrative segment as far as NBFC is concerned.
NBFC have implemented their machinery in a unique way which assess the creditworthiness of these people and grant them loans with less paperwork. For instance, NBFC grant loans to micro, small and medium enterprises making base of their invoices due for payment. These new to credit people are the biggest opportunity for NBFC as there is no competition due to probable risk and majority of people living in village areas and tier 2 and tier 3 towns across the country. Most of the population in India lives in the areas where banks would hesitate to provide loans and financial services because of absence of requisite paperwork. And these people long for financial help and are capable of returning the amount loaned to them but are caught up with the paperwork and denied loans.
These people need and want NBFC more than NBFC want these people and if these people are nurtured and educated accordingly, they can become long term business propositions for the NBFC. Given the rise in non-performing assets (NPA), banks are now being very cautious regarding credit worthiness of the customers and have been denying loans. This makes a credit gap which is beneficial to the NBFC as they can charge higher rate of interest, of course within the guidelines of government. Moreover, these customers are ready to pay additional interest charge for loan in order to skip the complications of complying with the requisites bank put on them.
Keeping in regard the financial needs of people and structure of banks, government has exempted NBFC from the hard rules and regulations levied on bank. NBFC enjoys the flexibility in rules regarding paperwork and other restrictions making it suitable for entrepreneurs to put their interest in NBFC. Government itself have provided with the opportunities to the NBFC to establish their place in the Indian market. For instance, foreign investment is permitted to the NBFCs up to 100%. There are continuing benefits for the NBFC as government are implementing rules to help the growth of NBFC. For instance, legislating SARFAESI act. This act empowers NBFC to take possession of the hypothecated assets, to sell the hypothecated assets and if already sold, third party would have to surrender the hypothecated asset. Also, the partial credit guarantee scheme would also help the NBFCs as now can sell their loans to banks on the strength of government guarantee, which will improve their rating. Government policies for NBFC are like cherry on top given the market of customers here.
Moreover, NBFC have been contributing to the India’s GDP to the extent that the NBFCs are favourites right now for Indian government and government have been coming forward and will do so in future to protect the interests and help NBFCs emerge as they have been providing financial help and services with ease to the people of the country which is the agenda of the government in first place. NBFC are in business of profit and their contribution in growth of Indian GDP displays the perfect picture how well NBFCs has been working since these past years.
But setting up an NBFC and its efficient working is not as easy as it seems. Despite of the opportunities been provided to the NBFCs, they face a lot of challenges. While starting the NBFC and even in its smooth working, NBFC have been facing a lot of problems which are summarised here.
Refinancing / NBFC Funding: Refinancing is a challenge NBFCs face in its smooth working. Major source of refinancing for NBFC are the banks, capital markets or maybe its competitors. There are no other option for NBFC for the purpose of refinancing and in the course of business, refinancing is an important element for the efficient working as well as sustainability of the growth. The present situation considering the refinancing options, is not favourable to the sustainability of growth. Banks and housing financing companies have many options for the purpose of refinancing such as RBI, NABARD, EXIM bank and SIDBI for banks and National Housing Bank as the regulator of housing financing companies.
NBFC license: Another challenge posed to the NBFC is procuring license for NBFC. This process for procuring license is not easy and requires approval and complicated requisite documents. Process for obtaining license requires a lot of compliances. Requisite documents may have to be in regards of the type of NBFC. It is not easy to carry all aspects together, it will be difficult to understand when and how the prescribed returns are to be filed. Moreover, RBI have put various restrictions before obtaining license. Working of the NBFC is supported by the government but to start a NBFC, procuring for license is challenging as it directly affects the general public at large and government simply cannot allow any imperfection in this area. For the purpose of obtaining license, requisite documents must be proper and apart from documentation some more criteria are needed to be fulfilled, that the one of the board directors must be experienced person with financial background and must not be convicted of any charge. Another criteria is related quality and quantity of capital. Procuring of license is one of the challenges NBFCs face in its establishment.
Non-flexibility in classification of loans NPA: Considering the large corporate, flexibility and classification under NPA is an essential element and shall be scheduled for efficient performance. Non-performing assets norms are relevant considering the efficient working of a larger corporate as irregular cash flow poses a threat in regards of delay in payments. NPA shall be classified on the basis of assets financed and a uniform system of classification of assets must be present
Statutory tools: Another challenge for NBFC is that there are no tools for statutory recovery. Absence of statutory tools for recovery is a challenge that NBFC face and may cause disturbance in smooth working of an NBFC.
Limited leverage ratio: Though small NBFCs are exempted from maintaining CRAR (Capital Adequate Ratio) but some restrictions are put upon them that they cannot surpass the leverage ratio beyond 7. As a result, these NBFC in order to comply with financial demand for efficient working have to depend on banks and financial institutions which causes problems to them as in lieu of this borrowed money, these financial institutions and banks carry out due diligence on the NBFC. This due diligence can be challenge to these NBFC.
Several bodies: In the current times, there are several representative bodies for the NBFC. This is quite a challenge for NBFCs as the NBFC sector is still in developing stages and presence of several representative bodies poses a challenge for the NBFCs. There is a need to ensure that every segment of NBFCs are adequately represented in an apex body in way that it promotes the balanced growth of the NBFC. It is advised that various segments of NBFC are developed in harmony and it could be achieved by setting a single representative body.
Lack of capacity building: One thing that NBFCs lack and needs to build up is a receptive ecosystem for capacity building. NBFCs nowadays, is in need to create an ecosystem for capacity building on both individual and collective basis.
Lack of education among people: People NBFC target or most of the population in India is uneducated and unaware with the norms and processing of NBFC. This can be a challenge to NBFC at various levels. People would hesitate at first to take loan or financial services from NBFCs and NBFCs may have to spend extra money on campaigns or educating people about its services. Even after taking advances from the NBFC people not familiar with the processing of NBFCs may cause NBFCs to indulge extra manpower and funds to make people learn about the NBFCs.
New to credit customers: New to credit customers on one hand provides opportunities for the NBFCs but they can be a challenge for them as well. It is always risky to do business with customers who are indulging in services for the first time plus the manpower and funds NBFCs have to invest for educating and regulating these customers.
Tax deduction: Currently, tax deduction is not permitted for non-performing assets for NBFC. Another challenge is the inequality in tax structures for NBFCs as compared to banks. Tax deduction at source (TDS), income recognition on non-performing assets and dual taxation on lease/hire purchase are the inequalities current legal framework provides for the NBFCs.
Defaulter’s information: There exists a credit risk to the NBFCs because of lack of information on defaulters. Banks does not provide NBFCs with the defaulters list which leaves NBFCs susceptible to credit risks. This poses a challenge to NBFC as there is lack of leverage regarding utility payments database in process of credit assessment.
Private sector status: Another major challenge NBFCs face is that the private sector status to bank lending to NBFCs have been removed. It results in less credit flow to the underserved sections of the society, to combat this situation collaboration between the banks and the NBFCs must be restored to continue. In order to create more assets and wealth in rural section of the country, this collaboration must be restored. RBI can also hand in help by putting a cap to create a fixed percentage of total bank lending priority through NBFC.
Credit rating: Obligation on deposit accepting NBFC to get investment-grade credit has been a challenge for NBFC. If this obligation is waived off, NBFCs will be eligible for accepting deposits. NBFCs cannot take public deposits if its rating is not up to minimum investment deposits. NBFCs right now is required to report to RBI about its position.
These were some challenges NBFCs face but considering the growth opportunities and policies of government, in the near future NBFCs are poised to growth.