Business Model Works
Non-Banking Finance Companies (NBFCs) are giving tough competition to banks in India, especially public sector banks (PSBs), eating up their market share
– Divya Gupta (Market Analyst, MUDS Management Pvt Ltd)
Following events track the shift in inclination to NBFCs:-
- December 2016: The bad loan woes of commercial banks have pushed the 11,682 registered NBFCs to be unexpected winners.
- 2017: NBFC loans have grown at 16.6%, compared to 8.8% for the banking sector.
- 2014-2017: Share of NBFCs in total loans is estimated to have increased from 21% to 44%, whereas, for public sector banks, it fell from 49% to 28%.
What makes NBFC business model so successful ?
- Surges in liquidity
- Regulatory arbitrage
- Crippled state of banks
Let us now do an in-depth study on the Business Model of NBFCs by focusing on their plan and practices:-
#1: Aggressive & Inclusive Services
- NBFCs have expanded their share rapidly, particularly in the number of loans disbursed—primarily driven by their aggressive push to expand and capture market share in certificate of deposits and gold.
- Not only have they shown success in their traditional bastions (passenger and commercial vehicle finance) but they have also managed to build substantial assets under management in the personal loan and housing finance sector which have been the bread and butter for retail banks.
- NBFCs have been game changers in certain areas like financial inclusion especially micro finance, affordable housing, second-hand vehicle finance, gold loans and infrastructure finance.
- NBFCs are largely involved in serving those classes of borrowers who are generally excluded from the formal banking sector. Moreover, NBFCs also often take lead role in providing innovative financial services to MSMEs, most suitable to their business requirements.
#2: Simplicity & Flexibility
- The characteristics of NBFC financial services include simpler processes and procedures in sanction and disbursement of credit; timely, friendly and flexible terms of repayment aligned to the unique features of its clientele, albeit at a higher cost.
- However, large NBFCs have developed business models that allow them the flexibility to grow their retail book and deliver credit to retail customers at competitive and reasonable cost. They are retail focused, have distribution reach and defined credit models to understand risks better.
#3: Better Management
- The success of NBFCs can be clearly attributed to their better product lines, lower cost, wider and effective reach, strong risk management capabilities to check and control bad debts, and better understanding of their customer segments. Strengthening of data analytics and information from credit bureaus helped NBFCs take a quick call on lending to self-employed and those working in informal sector.
#4: Technology & Innovation
- NBFCs have invested a lot in technology that brings down the operating cost. With the rising innovation and growth in the sector, newer business models of NBFCs such as ‘account aggregators’ and ‘peer to peer lending platforms’ (“P2P Lending”) are catching pace.
- ‘Account Aggregator’ is a form of NBFC engaged in collecting and providing information on a customer’s financial assets, in a consolidated, organised and retrievable manner.
- ‘P2P Lending’ is a form of crowd-funding which uses an online platform to match lenders with borrowers to provide unsecured loans. RBI notified P2P Lending platforms as NBFCs on 24 August 2017, and recently issued the Master Directions to regulate the P2P Lending platforms.
What is the Conclusion ?
While NBFCs are doing well, they must challenge the status quo in their business and find funds to invest into operating models with the potential to disrupt the industry, said a study jointly conducted by ASSOCHAM and PwC.
– Isha Malik (Company Secretary, MUDS Management Pvt Ltd)
NBFCs need to think hard about tweaking their current business models to grow in a hybrid world (digital + physical) as newer business models (of the NBFCs) evolve, so must the regulations governing the NBFCs the good news is that the government is working towards harmonising the regulations applicable to various categories of NBFCs to facilitate ease-of-doing business in this sector.
“Business has never been so good for India’s NBFCs ”
– Shweta Gupta, Founder and CEO, MUDS
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