Mumbai, INDIA – December 21, 2015: The Confederation of Indian Industry (CII) organised its 1st Annual Non-Banking Financial Companies (NBFCs) Summit with the theme: Regulatory Paradigm & Contours of Growth – Vision 2020 in Mumbai, with The Boston Consulting Group (BCG) as the technical partner. On this occasion, CII-BCG released a whitepaper on the potential of NBFCs in India, including outlining the ways to accelerate their growth in the country.
Credit penetration in India is low as compared to other economies. Added to this is the penetration of NBFCs, which is further down. NBFCs’ credit penetration in GDP of India is at 13%, well behind economies like Thailand and Malaysia at 25% and China, which is at 33%. However, between 2005 and 2015, the share of credit of NBFCs in India rose from 10% to 13%. The share growth is not only observed in traditional NBFC domains like commercial vehicle (CV) finance, but also in products like mortgages where commercial banks are very active.
NBFCs are dominating smaller ticket segments like micro finance, consumer durables, two-wheelers, etc. Also when it comes to credit with a wide reach, NBFCs are ahead of banks. While it is commonly expected that credit will grow rapidly as economic growth gathers pace, it is safe to assume that non-bank finance will grow even faster. NBFCs have outperformed banks on “Return on Equity (ROE)” by 1.5-2.0%. In the last ten years, only for two years has the average ROE of NBFCs dipped below the average ROE of banks.
According to Mr Y M Deosthalee, Chairman, CII National Committee on NBFCs, “Indian economy has a huge latent credit demand fuelled by a large self-employed population that is considered underserved by banks due to inadequate income proof. With the Government’s thrust on Financial Inclusion, demand for credit intermediation in sectors such as Micro Finance and MSME is expected to be substantial and NBFCs have played a meaningful role in this space. Overall considering the diverse nature of NBFCs, there is a huge potential for growth in the coming years.”
Large number of government initiatives such as smart cities, improvement in the ease of doing business in India and renewed focus on infrastructure development will create demand for credit. Similarly, digital India and e-commerce growth will give impetus to SME sector and demand for credit. Consumer consumption is also going to see significant rise.
Mr Saurabh Tripathi, Partner and Director, BCG said, “Traditional sources of advantage for NBFCs will erode over time with deepening of banking in the country. It is imperative that NBFCs harness latest trends in technology, digital adoption by customers, and the web of partnerships to innovate and come up with new models. NBFCs are likely to benefit from these underlying trends and developments in the Indian market.”
The recent introduction of payment banks, small finance banks, and proposed bill payment service providers will deconstruct the banking value chain in India. This opens up very strategic opportunities for NBFCs to partner with asset management companies, and payment banks to create complete financial offering for customers including savings, investments, transactions and borrowings. This “best of breed” banking model could be better than the bundled offer of traditional banks. NBFCs will need to take the initiative to put the coalitions together.