Business India ×
  Magazine:
Guest Column

Published on: Sept. 20, 2020, 11:42 p.m.
Shadow banking needs to thrive
  • NBFCs cater to MSMEs through unsecured, cash flow-based lending

By Dr Harsh Kumar Bhanwala. The author is Executive Chairman, Capita India Finance, ex-Chairman, NABARD

Being regulation light, NBFCs, also termed as shadow banks, are nimble, leverage on technology and produce a cost-efficient model which caters to customers traditionally unbanked and having limited access to capital. NBFCs have managed to carve a space for themselves, be it in consumer lending, asset backed lending or unsecured lending through their unique pricing model and customer outreach.

Today, with the added edge of digitisation, NBFCs are innovating and further extending their reach. NBFCs have pioneered efficient credit underwriting processes and are basing their value proposition on turnaround time. Getting credit, in a matter of minutes, has been made possible and accessible by NBFCs. Despite the setback faced by NBFCs in the last 2-3 years, NBFCs still manage to contribute significantly to the overall credit mix.

NBFCs have, in recent years, stepped up in providing the vital capital to MSMEs, especially to micro and smaller enterprises. The outstanding NBFC credit to entire MSME segment has increased from roughly Rs50,000 crore in December '14 to around 2.2 lakh crore in December ’19.

NBFCs cater to MSMEs through unsecured, cash flow-based lending or asset backed financing or through secured loan. Product offering anchored by distinctive approaches to lending to MSME has helped in creating a greater outreach in a more systematic and structured manner.

The IL&FS fiasco along with the fall of DHFL in recent years and current Covid impact have left lasting scars on the sector. Few NBFCs have failed to effectively monitor portfolio performance leading to higher provisioning requirements and blocking of capital. Several NBFCs have an asset-liability mismatch which has engendered not only a liquidity crunch but has also made it difficult for them to raise long term funds.

In a bid to gain market share, some NBFCs have over-extended themselves geographically. This has resulted, at times, in increased costs, dubious credit underwriting and ineffective operations. NBFCs are also subject to differential tax treatment on provisioning and not at par with banks. Tight capital, loss of revenue, due to Covid along with a limited support have had an adverse effect, particularly on smaller NBFCs.

Digital payments, more so during Covid times, have emerged as the solution for transfer of money. This can be further leveraged to push down collection cost of NBFCs. Tie-up with Fintech players can significantly drive their competitive advantage. Analytics can be used for better customer segmentation and designing customer-need specific product which can generate higher sales conversion rates. Real-time view of sales pipeline, lead conversion, servicing of customer and customer ageing enables companies to drive sales and risk better. Co-origination guidelines introduced by RBI allow both banks and NBFCs to meet their objectives while leveraging on each other’s strength.

The market share of NBFCs with <Rs10,000 crore AUM is estimated to be close to 20 per cent as per a research done by CRISIL last year. There exist many smaller NBFCs which are well capitalised, having a good quality asset base and are categorised as ‘systemically important’ by RBI. Some banks deprive these smaller NBFCs, which also cater to SMEs and to customers in geographically remote areas, of much needed cheaper finance. As per the Financial Stability Report of July 2020 by RBI, ‘Smaller/mid-sized and AA or lower rated/unrated NBFCs have been shunned by both banks and markets, accentuating the liquidity tensions faced by NBFCs’.

NBFCs may take years to reach the desirable credit ratings, but the problem of credit needs be tackled today. Banks could always have a risk adjusted pricing model to address this situation, and can get these smaller NBFCs under their lending ambit. Recent decision by the government to extend the Partial Credit Guarantee Scheme (PCGS) 2.0 by another three months and easing the investment cap for AA and AA-rated bonds is a step in the right direction.

The synchronous efforts by the government and RBI – namely enhancing the investment and turnover limits for classification of MSME and the recent notification allowing one-time loan restructure brings a number of entities under the relief purview. Notably, the financial parameters in resolution framework are designed in such a way that it limits the potential for abuse by ensuring restructure of only those entities that have potential for revival. These measures require further fortification through sectoral policy reforms. This will go a long way in facilitating a better outcome of the recent initiatives taken by the RBI through the lending institutions.

Views expressed in this column are personal

Don't miss this

Cover Feature

Emcure’s new prescription

Beyond the mRNA vaccine for Covid, Emcure intends to develop a pipeline of mRNA vaccines

Special Report

Crude rally

One may have to live with costlier crude for some time to come

Focus

Is there a real recovery?

The domestic real estate market has rebounded strongly

Corporate Report

Yasho Industries on the move

Yasho Industries is well on its way to becoming another Indian MNC

Our letter to you, once a week.
Register with The CSR Weekly for free!

E-MAGAZINE
New Prescription
COP26 Race to NET ZERO
High Expectations
FROM THIS ISSUE

Corporate Report

Corporate Report

Guest Column

Government

Hospitality

Books

Social Responsibility

Healthcare

Goodyear India partners Americares India Foundation

Published on Feb. 2, 2021, 9:21 p.m.

The partnership will support COVID-19 healthcare facilities in Faridabad and Aurangabad

Environment

Tata Motors launches a 'Go Green' initiative

Published on Dec. 23, 2020, 10:34 a.m.

The company will plant a sapling for the sale of every new commercial vehicle

Women Empowerment

Tata Starbucks ties up with Educate Girls to empower women

Published on Dec. 2, 2020, 3:10 p.m.

The partnership aims to provide volunteering and educational support to those who have relocated to urban cities from villages

Environment

Indian Oil has a social initiative for a clean and green world

Published on Nov. 25, 2020, 2:53 a.m.

The public sector company is planting a tree for every retail customer visit during its TreeCheers campaign period

Climate Change

Green Buildings

Buildings to go green by 2050!

Published on Nov. 24, 2021, 6:34 p.m.

CII’s green building council takes a leaf out of India’s Glasgow pledge

Energy

IEX resumes trading

Published on Nov. 24, 2021, 6:30 p.m.

Of about 1,381 billion units of electricity consumed in India, only 7 per cent is traded on power exchanges

Air Quality

The black carbon threat

Published on Nov. 24, 2021, 6:13 p.m.

India and China are the biggest contributors of black carbon – the chief aerosol pollutant

Energy

Jindal to build coal mine in Botswana

Published on Nov. 24, 2021, 6:11 p.m.

The company is shortlisted for a 300MW coal-fired power plant in the country

Stay ahead of the times.
Register with The Climate Change Weekly for free!