Non-banking financial companies are diversifying and realigning their businesses to tap into growing credit demand at a time when a large number of banks are struggling to clean up their stressed balance sheets, a senior Avendus Capital executive said on Tuesday.
Anshul Agarwal, executive director at the financial services company, said also that differentiated products, a wide reach, strong management capabilities and better understanding of customers have been key to the success of NBFCs.
Addressing a packed room of industry executives at the 10th edition of the News Corp VCCircle Financial Services summit in Mumbai, Agarwal delved into the Indian NBFC story and also spoke about how these companies are adopting digital technology to quicken the pace of growth.
Agarwal, who is also the co-head of consumer, financial and business services at Avendus, said the number of NBFCs has risen rapidly in recent years. The share of NBFCs in total credit has grown to 15% from about 9.5% a decade ago, he added.
NBFCs are now going beyond their traditional strongholds of commercial vehicle finance and gold loans, and are venturing into mortgages and other retail products, which are the bread and butter of retail banks, said Agarwal. “Going forward, the latent credit demand of emerging India will enable NBFCs to fill the gap that traditional banks have been trying to serve,” he said.
NBFCs have also diversified their sources of funds and, as a result, reduce their cost of funds. This has made them more competitive in the market, he said.
Agarwal estimated that the country added 12-13 million borrowers in the formal credit system over the past year. “We at Avendus believe it is not a one-off payment but a phase which has just begun and this will continue for four to five years and we will keep adding 14-15 million borrowers each financial year,” he said.
Agarwal also spoke about retail banking, stating that the affordable housing loan segment will drive the next phase of growth. He added that NBFCs will capture market share from banks in this segment, too.
More and more NBFCs are also catering to loan demand from micro, small and medium-sized enterprises. The MSMEs account for close to 10% of India’s GDP but only half of them are in the formal segment, said Agarwal.
“There are about 60 million MSME units… Only a small proportion has access to credit,” he said.
In another keynote address, Sanjay Agarwal, managing director and CEO at AU Small Finance Bank, advised new NBFCs to identify a single asset class and focus on it. A new entrant must understand its focus segment as well as the minute details of how to lend and collect, he said.
“If the economy grows by 7-7.5% for 10 years, financial services will grow by 25-30%, so we have the opportunity to take that piece. But in the end only those players will survive who can understand that market, manage their asset quality, growth and regulations,” he said.