Future of NBFCs in India

Non-Banking Financial Sector has attained a sky-rocketing success over recent years. It holds paramount value in regulating the growth of the financial system. These financial institutions have been a primary contributor to the core development of transportation, infrastructure and generated several employment opportunities. NBFCs largely cater to the financial needs of the economically weaker sections. Thus, it tends to bring equilibrium in the society.

Look back into the history of NBFCs

NBFCs first came into force in the year 1960 to suffice those investors or savers whose financial requirements were not considered by the banking system of that era. During the early stages of NBFC development, it was regulated by Companies Act. However, a need for a separate Regulatory system was felt due to the unique and complex nature of Non-Banking Financial Companies. Therefore, Reserve Bank of India took over NBFCs under its legal structure (RBI Act, 1934) and since then it emphasizes upon on the advancement of NBFCs.

Amidst the timeframe of 1980s and 1990s, NBFC got back on track and gained a tremendous number of investors. Since then, NBFCs never turned back and evolved substantially in terms of its operations, products, services and upgraded technology.

Currently, NBFCs offer a broad spectrum of financial services, such as the Acquisition of Bonds, Stocks, Debentures, Shares, Securities etc. Apart from that, Non-Banking Financial Companies also grant different types of loans or credit facilities like a Gold loan, Secured Loan, Marketplace/Digital Lending, Unsecured Personal and Business Loan.As per RBI guidelines, NBFCs have to maintain 50% of their assets as financial assets and 50% of their income must be generated from financial activities

Evolution of Non-Banking Financial sector

In order to anticipate the future of NBFCs, one has to closely undergo the journey of these financial entities. Let’s look at the factors which unfold the progress of NBFCs:

• Annual growth rate- NBFCs has overthrown banks in terms of growth rate. According to a survey, the Non-Banking Financial Companies grow at a rate of 22% every year on an average. Hence, NBFCs succeed in sustaining a powerful position by contributing to the economy each year.
• Higher profitability- NBFC has more profitable Business Model than Banks. As there is a lower cost involved, it helps an NBFC to render cheaper loans to the customers ,which results in credit growth. It implies that the amount of money being lent to the customers is more than that of the Banking sector, which further increases the customer-base of NBFCs.
• Size of NBFC sector- Despite a slowdown in the economy, NBFCs flourished at a steady pace in the former years from INR 26.2 lakh crore in 2017-18 to INR 30.9 lakh crore in 2018-19.
• Foster incisive growth- NBFCs provide financial services in both urban and rural areas. Generally, the Non-Banking institutions finance the projects of small Companies and play a vital role in stimulating credit services in rural areas. Besides, they offer small-ticket loans to underpin affordable housing ventures. NBFCs promote inclusive growth that helps in reducing poverty and creates employment opportunities.

Technology accelerating NBFC Functions

Technology has revolutionized the traditional system of lending and borrowing. By adopting robust technology like Cloud Computing, Artificial Intelligence, Machine Learning, the NBFCs can have a better reach to the remote corners of India. Here are the benefits that NBFCs can avail by deploying technology:

• Facilitate tailor-made products & services– It is indispensable for Non-Banking Financial Companies to revamp their marketing and operational techniques with the latest technology. To surpass the standard pattern of loan services, NBFCs need to level-up their game by innovating tailored products. Technology will enable NBFCs to send an automated message and have a better understanding of their customer’s needs, thus giving a user-friendly experience.
• Accumulate prospective customer data- NBFCs always keep an eye on the rejected Applications of Commercial Banks and loan seekers from rural areas. Non-Banking financial Companies urge to expand their services in those areas that have more number of their target audience. Technology acts as a perfect solution to capture, analyse and manage data of their prospective customers.
• Lower cost of operation- With the use of technology, NBFCs can significantly reduce their cost of administration and streamline their daily operations like filing of loan application, maintain customer data and other paper work. The digital lending will create a win-win situation for the customers as well as for NBFCs. By employing high-tech, the Non-Banking Companies can make an optimal use of their existing assets and workforce.

The new-age NBFCs are embracing the power of Blockchain, Artificial Intelligence, Automation and Cognitive Computing in their daily operations. The future of NBFCs seems to be firm and solid, if they continue to integrate tech-inventions in the functions.

There are over 55 to 60 million MSMEs in India that are contributing 30% of India’s GDP. In the year 2018, MSME sector had a credit demand of around INR 45 lakh crore from which 40% was financed by informal credit. It seems to be a big opportunity for NBFCs to shift their focus on financing the Micro, Small and Medium Enterprises and unserved population, thereby strengthening their stature in India’s economic growth

What is the Future of NBFCs?

On the basis of above parameters, here are some essential measures that NBFCs must undertake to stabilize their position in the financial market for a long run:

• NBFCs must formulate a segmented strategy; define the target customers, distribution channels, product proposition and geographical locations for smooth operations.
• To provide customised services, NBFCs need to have seamless interaction between sales and service departments. Also, they must have well-entrenched marketing schemes to attract and retain potential customers and maximise value.
• Non-Banking Financial Companies should leverage technology-based solutions to reform their functions.  Technology can help them to gain competitive edge and protection against any defaults with robust risk management.
• They must adopt a customer-centric approach by accessing data and building a strong relationship with the customers.
• NBFC lending must develop a tight information security controls to ensure safety from the rising number of threats.
• NBFCs should collaborate with Fintech Companies to attain additional capabilities and boost their value proposition, which further helps to compete stronger in a competitive market.