IN THE INTEREST OF BORROWING
The up-and-coming business models in the financial sector are challenging the conventional banking system. The rise of FinTech in services and the spread of digitization among consumers is nearing a future where the Big Banks do not shape the borrower’s destiny and the interest rates hardly affect the investor’s risk appetite. In our economy, with market demands and regulations in turbulence, the sector making waves is NBFC.
It is evident that NBFC is fragmented as a sector. Composed of a few selected and dedicated asset class, NBFCs serve the people in need of auto-finance, SME loans, healthcare finance, etc. or more than one of these. However, in comparison with banks, NBFCs are limited in scope and resources. In contrast, loaded with stringent regulations, the commercial banks are known to have better corporate governance, higher quality of loan assets, more accurate risk models, better analytics with large data they are able to collect, and most importantly, trust of borrowers and the market. The banks are not only able to report consistent earnings, but can also exhibit the nature of lenders that are able to approach any desirable market.
But when it comes to enabling the access to credit, the NBFCs have done well, if not better, with banking industry as a benchmark. Moreover, the NBFCs have leveraged on their role as lenders and have penetrated larger markets in less time. When compared to the banks, the trends in digitization have helped NBFCs more. What’s missing is the loan restructuring ability that the NBFCs lack. Unlike banks, the entire NBFC sector is seen to be dealing with the pressure of NPAs differently; in the face of this pressure mounting up, the businesses are resorting to redefining their capital structure, re-strategizing the issue of loans, lowering CAPEX and much more.
But given the credit-oriented (from govt. spending oriented) economy that India is about to become, NBFCs are becoming more and more effective than banks with the ability to reach out to more consumers and scale up their businesses much faster and much effectively. For empowering this sector even more and helping the credit growth, NBFCs need the loan restructuring ability. There has been push from the private sector and a few policy-makers for the same, but the debate continues.
The reasons given by the current policy-makers for such stance include the inability of NBFCs of assessing the credit profile of consumers. This concern is reasonable and has contributed to market risks and default risks in the past. However, this doesn’t remain a long-sustained issue and similar to the banks, the rating mechanism is bound to improve with better targeting in the market and the eventual integration of technology.
It is high time the regulators and policymakers recognize the diminishing tradition of banking industry and the eminent power of new businesses centered around FinTech and DeFi. Pursuing the empowerment of NBFCs would be just the first step.
