NBFCs growth in India
Non-Banking Financial Companies (NBFCs) have been an integral part of India’s financial ecosystem. They are financial institutions that provide a wide range of banking services like loans, credit facilities, investments, and other financial products. NBFCs have played a significant role in the Indian economy’s growth story, especially in the rural and semi-urban areas. They cater to the financial needs of small and medium-sized businesses, entrepreneurs, farmers, and individuals who do not have access to traditional banking services.
In 2023, NBFCs will play a larger role in supporting the socioeconomic construct of the Indian economy. The opportunity for credit penetration still remains very high in India. Data shows that banks’ credit to NBFCs started growing by upwards of 30% since September 2022, registering a 35.5% Y-o-Y growth in December and 31% rise in January. While banks’ non-food credit grew 15.9% YoY to Rs 134.1 trillion in February, credit to NBFCs rose 32.4% to Rs 13.09 trillion during the same period. Lending to NBFCs now constitutes 10.5% of overall non-food credit outstanding, according to a research report by ICICI Securities.
NBFCs are expected to see their AUM grow 11-12% — a four-year high — to Rs 13 lakh crore by the end of this fiscal. Absolute profit for the NBFC sector has increased 67% YOY in H1 FY23. Increase in RoA YoY for MFI NBFCs is ~270 bps. Also, it is heartening to see that the RBI and policymakers recognise the contribution of NBFCs in supporting real economic activity and meeting the credit demand, especially reaching the unbanked. The recent RBI Scale based norms is another welcome step for the industry that will elevate the status of NBFCs in line with several other public sector NBFCs. Under these revised norms, we expect to attain more operational flexibility to meet the increasing credit demands and aid India’s economic growth.
According to ICRA’s recent report, in 2023 non-bank lenders will focus on reviving growth by improving asset quality supported by increasing retail demand and liquidity. MSME sector and other developing sectors will witness increased participation from NBFCs. Also, with the introduction of 5G services in the country, more NBFCs will tap into exploring Artificial Intelligence and Machine Learning for offering services or full fledged applications.
The rise of digitalization has also been a significant contributor to the growth of NBFCs. With the increasing adoption of digital platforms, NBFCs have been able to reach out to a wider customer base. Digital platforms have also enabled NBFCs to streamline their operations, reduce costs, and enhance their customer experience. This has resulted in NBFCs being able to offer competitive interest rates and customized products to their customers. Financial advisory services, investment advisors, and wealth management companies are expected to keep a keen eye on these developments.