The most talked-about issue in the financial groups of India now is the impending bad loans of the banks and how it’s going to affect the banking industry.
While the news seems grim for most, a particular sector is basking in success — Non-Banking Financial Companies (NBFCs). Be it compared to the bad loans of banks or call it the effect of demonetisation, NBFCs have been reporting a growth at a faster rate than banks in lending.
Demonetization – A Blessing in Disguise
Demonetization triggered a wave of chaos across the country and even the Micro, Small & Medium Enterprise (MSME) sector, which forms the backbone of Indian economy, was affected as the move disrupted their flow of working capital.
“Small businesses usually depended on acquiring their working capital from the informal sector, mainly money lenders. With demonetization, these money lenders, who dealt mainly with cash and also charged exorbitant rates, were hit badly. Now that the cash component was out, the small business owners started resorting to the more formal sector – NBFCs,” said Mohit Sahney, MD and CEO, Finova Capital.
But demonetization did not prevent borrowers from paying their installments on time. “Even while their flow of money was disrupted and it was a radical shift for them to borrow from NBFCs, they would continue to pay their installments successfully,” said Sanjay Sharma, Founder of Aye Finance.
The Sector is Growing At a Fast Rate
Talking about how the NBFCs are growing, even while banks are facing bad loans, Sharma said, “The portion of NBFC lending is smaller. According to the latest data, in the lending segment, banks have been growing at 8.4 per cent whereas NBFCs have been growing at 15.1 per cent. So, NBFCs have been growing their base faster. This is because we focus purely on lending while banks have more diversifications.”
Sharma went to on to explain how NBFCs were more entrepreneurial in nature. “We are willing to explore more. There are sectors that banks easily dismiss as high risk zones, but we have been doing well there. For example, Aye Finance lends to micro-enterprises, but we have a delinquency of 2.5 per cent,” he said.
Government Push a Big Boost
The government’s shift in focus brought more attention to MSMEs. “That turned out to be a great push. Even while the economy has slowed down, NBFCs continued to grow because we focus on smaller segments. The more formal or documented sectors are with banks, whereas the relatively small-ticket sizes lie with NBFCs. There’s a clear-cut bifurcation here,” added Sahney.
Talking about credit growth, Sahney said, “In the last quarter, the credit growth for banks has reduced as they have become more cautious owing to Non-performing Assets (NPAs). After demonetisation, the liquidity has gone up, but the credit offtake has come down, and so our cost of funds is also coming down. The smaller guys have been least affected and as we cater to that segment, we are safely placed. Also, the demand supply gap in these sectors is huge, making MSMEs more resilient.”