Non-banking Finance Companies (NBFCs), which underwent a slew of qualitative changes over the years, have performed better than big brothers – the public and private banks – in some parameters in 2012.

For example, the NBFCs have experienced deceleration in growth rate of credit, which continued to outpace that of the banking sector.

Despite the regulatory overhang, most of them continued to expand their portfolio, reached more cities and diversified their product lines. These financial institutions have a deep and broad-based links with the Indian banks, which helped them to emerge strong in the retail finance space, sometimes, even at the expense of banks.

Recognizing the shadow banking services of NBFCs, the Reserve Bank of India took regulatory measures, denting the alarming pace at which some of them were growing. It also created new categories of NBFCs -- Infrastructure Debt Funds (NBFC-IDF), Micro Finance Institution (NBFC-MFI) and NBFC Factors in 2012.

Investment bankers say that the PE players would continue to look at the sector for more opportunities. Most NBFCs, particularly the PE-backed ones continued to perform better, thanks to their ability to take quicker decisions, assume greater risks and customise their services and charges according to the needs of the time. (See: PE-backed NBFCs report robust Q2 growth)

Sector exposure decided the growth numbers

For the NBFCs involved in the two-wheeler financing, the growth trends continued despite the rise in the fuel prices, the trend continued for the NBFCs in consumer finance as well.

NBFCs financing for construction equipment (CE) remained shaky in view of the delays and the slowdown in infrastructure projects and ban on mining in some regions. However, the NBFCs in the housing business space posted a good growth in their loan portfolio. The growing market for the home loans had attracted the attention of banks, where almost all banks started increasing their retail portfolio.

CARE research in its report said that commercial vehicle goods carrier segment posted a growth of around 20 per cent that has been mainly driven by healthy redistribution demand coupled with growth in non-discretionary expenditure (especially FMCG, pharmaceuticals, etc).

It estimates that used commercial vehicle would manage to post a healthy rise of around 10-11 per cent in FY13.

One of the leading players in the used vehicle category, Shriram

Transport Finance Company, is expecting a 12-15 per cent increase in its assets under management in the current financial year, largely coming from its rural markets. (See:Shriram Transport Finance Company aggressively betting on rural growth: Umesh Revankar, MD & CEO)

Gold loans

The rapid growth of NBFCs engaged in lending against gold in recent years irked the RBI. It believed that the companies such as Muthoot and Manappuram Finance Ltd could pose systemic risks due to its business model including the concentration of business among a few companies and their growing links with the banking system. The stress test carried resulted in limiting such non-bank’s credit growth and gave the lost opportunity to PSU banks.

The RBI in an unexpected move called for the capping of loan to value at 60 per cent for loans against gold jewellery for all NBFCs. The RBI also barred NBFCs from giving loans against gold bars and gold coins.

Such gold loan offering NBFCs' total asset size increased sharply from Rs 54.8 billion as at end March 2009 to Rs 445.1 billion as at end March 31, 2012. The borrowings of these two companies increased by nearly 200 per cent between March 2010 and 2011.

Bank credit to NBFCs accelerated as did the reliance of NBFCs on bank credit as a source of funding. Their dependence is evident in the in terms of reduced PE investments flows. The heterogeneous non-bank finance space saw above 30 deals worth $511 million, a drop of $273 million compared to 2011.

However, it has improved from the nadir of 2009, which saw deals worth almost half of 2012.

Some smaller NBFCs (deposit-taking) are opting for either merger or closure and some larger ones getting converted into non-deposit-taking NBFCs, because the central bank has made it difficult for the smaller NBFCs to raise money as well increased their provisioning norms, creating a huge crunch for funds.

Asset quality

The asset quality of NBFCs continued to see a significant increase in the gross NPAs to total advances of NBFCs, which is a deviation from recent trends. The trend is evident from the RBI’s data that show the net NPAs remained negative till 2011 from 2008.

The increase in NPAs continued to bother most of the NBFCs in the second half of the year as well. However, experts say the stress test on credit risk showed that the sector remained resilient even largely due to its comfortable Capital Adequacy Ratio position.

PE/VC opportunities

Some of the big ticket deals investments kick-started with Cholamandalam Investment and Finance Company receiving an equity investment of $42 million in January, followed by Ujjivan Financial Services, AU Financiers, Capital First and

Future Ventures.

“Within financial services, there is also significant opportunity for investors. In particular, there is a reason that certain leading non-banking financial services companies have consistently delivered solid returns to shareholders: they have succeeded by focusing on one of the biggest opportunities in India—credit extension, including mortgages, to a rising middle class,'' according to a report by KKR.

Private equity-backed technology firms and non-banking finance companies (NBFCs) see a big business opportunity emerging in white label automated teller machines (ATMs) or WLAs and they are now putting across plans to cash in on the market that has just opened up. (SEE: PE-backed firms smell big money in white label ATM biz).

(Edited by Prem Udayabhanu)

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