NBFCs Conceding Lost Ground to Banks

November 21, 2018
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Non-Banking Financial Companies

Non-Banking Financial Companies act like banks in many ways, but there are a few differences between them and traditional banks. These organisations are registered under the companies act and may or may not come under the purview of Reserve Bank of India (RBI) depending on the type of NBFC. NBFCs are primarily involved in lending and credit activities just like banks. However, they may be classified into various kinds depending on their principal business.

  • Asset Financing Companies
  • Housing Finance Companies
  • Merchant Banking Companies
  • Investment Banking Companies
  • Loan Company
  • Infrastructure Finance Company
  • Residuary Non-Banking Company

As is evident from the various classes of NBFCs given above, they act mostly like banks being involved in the disbursement of loans, an extension of credit and investment activities. Moreover, a class of NBFCs may even accept deposits from customers. However, the major difference between banks and NBFCs is that NBFCs cannot accept demand deposits and they do not partake in the payment and settlement system, that is, they cannot act as drawee banks for issued cheques.

Why did NBFCs gain in popularity?

NBFCs experienced a sudden spurt in their fortunes because of several reasons, not least of which were easy availability of liquidity. The borrowers were attracted to these companies as they were easier to deal with than banks. In spite of charging higher rates of interest, they were successful in expanding their credit growth because they were willing to lend money more easily thereby taking on greater risks. The faster processing rates, leniency and less stringent regulations prompted the growth of such companies. A major source of easy liquidity for these NBFCs has been mutual funds.  

But the growth in the NBFC sector can somewhat also be attributed to mismanagement in banks. With bad loans and non-performing asset size continuously increasing, the loan books of banks did not experience the kind of growth that befitted them. The strict regulations by RBI made the lending activities of the banks more difficult. However, in the long run, such steps would prove to be beneficial as the balance sheets get healthier and returns on assets go up.  

Liquidity Crunch in NBFCs 

With the default of IL&FS on its loans, the market has suddenly turned cautious in dealing with NBFCs. The mutual funds no longer have the same level of confidence in non-banking financial companies as they used to have earlier. This has made things difficult for these companies who are no longer able to roll over their short-term loans as easily as they were able to a few months earlier. Housing and SME (Small and Medium Enterprises) sectors are major areas where the fallout effects of such phenomena are being observed.

Banks Are Set to Gain

With this squeeze in funds available to NBFCs, the institutions or organisations that are poised to gain are banks. The deposits in the banks have grown at a healthy rate of 30% Compounded annual growth rate, and the depositors continue to repose unwavering faith in banks. With the NPA (Non-Performing Assets) mess behind us, the banks look set to regain some of the lost ground that they may have conceded to non-banking financial companies.

With the infusion of fresh capital into banks, they have been accorded a new lease of life and are running at their full steam. Coming to their aid is better and more advanced technologies that are helping reduce operational times and making the customer’s experiences easier and hassle-free. As interest rates rise across the sector, the big, well-capitalised banks will look to make the best use of such lucrative conditions. The situation is ripe for these banks to make higher revenues not just by increasing the volumes but also the spreads on those balances.

A big cheer Christmas and New Year cheer seems to be on its way to cash in on the big banks!  

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