By Nirmal Jain
In the past few years, NBFCs have filled the void created by PSU banks, which have been crippled for capital. These so-called shadow bankers bring new borrowers into the ambit of formal finance by developing unique underwriting standards and inculcating financial discipline. Although NBFCs do not have access to RBI as lenders of last resort or for liquidity; they are much lesser leveraged than banks.
Banks require lesser capital adequacy and have lesser risk weightage for most assets. NBFCs had debt-equity ratio of 5.4 times at the end of March 2018 and banks had twice that much. In last 20 years, many banks had to be rescued by forced merger into larger banks, whereas no large NBFC has faced solvency risk yet.
NBFCs have demonstrated superior asset quality with gross NPL ratio of 4.3 per cent at end March 2018. As NBFCs grow in size, market capitalisation and reach faster than most other sectors, they deserve a larger share of bank credit as well.
For the economy, credit delivery through NBFCs is superior for two levels of capital cushion, lower cost of last mile delivery and specialised underwriting and collection skills.
NBFCs now account for more than one-third of incremental credit. This is not a small sector and plays a vital role in economys growth and this sector is here to stay.
But the latest regulatory crisis has been a wake-up call. People who have been trying to work on the edge in terms of liquidity or in terms of managing their cost of funds have got a wakeup call and hopefully some balance will be achieved. As the dust settles, we will see the men getting separated from boys and the good players becoming stronger and playing a more meaningful role.
The liquidity situation has improved significantly since the last fortnight of September, immediately following the IL&FS default. Availability of funds has improved, and the rate of interest has dropped. The scare of default by some NBFCs or HFCs (housing finance companies) has now passed.
It seems, the industry has been able to tide over the short-term liquidity crunch.
Regardless of recent panic and meltdown in the market values of NBFCs, they are here to stay and will play an important role in the economic growth and financial inclusion. In fact, as the economy becomes larger and grows faster, the need for credit will rise disproportionately. We need both banks and NBFCs to rise to the occasion and provide the economy with its lifeblood, i.e., credit.
(Nirmal Jain is Founder & Chairman of IIFL Group. Views are his own)