Non-banking finance companies in India are expected to see an 18 per cent compounded annual growth rate (CAGR) for the next two and a half years and raise their share in total credit to 19 per cent by 2020, according to rating agency Crisil. In 2017, NBFCs increased their share in the total credit market to 16 per cent, from 13 per cent in 2015. The share of public sector banks (PSBs) reduced to 51 per cent, from 57 per cent in 2015. Crisil says PSBs will see a further shrinking of their share to 47 per cent by 2020 as they battle with capital constraints. NBFCs replicating traditional banking services with innovative products and delivery systems would also chip away at PSBs' share. The home loans segment, the largest business segment for NBFCs, is expected to grow at a steady CAGR of 18 per cent over the next three years as they focus on self-employed customers and lower ticket size. NBFCs are also set to increase their market share in the wholesale finance business from 12 per cent in 2014 to 19 per cent in 2020. Currently, they have a market share of 12 per cent of the total real estate and structured credit segment, increasing to 14 per cent in 2020, the rating agency said. With regulations and government policy pushing developers to focus on the affordable housing market, there is potential for growth by investing and financing these properties. Since the Pradhan Mantri Awas Yojana provides home buyers with a Credit Linked Subsidy Scheme, the effective rate of interest payment falls below rental yields.
This improves the conditions for buying affordable housing property, enabling housing finance companies (HFCs) and NBFCs to begin investing more in this segment. While HFCs scale up business activity, they have to be mindful of certain risks. Gurpreet Chhatwal, president of Crisil ratings, says they'd need to have stricter underwriting practices and closely monitor client repayment. The Gross Non-Performing Assets (GNPAs) of NBFCs have been in control over the past five years, although retail NBFCs (those lending to individuals) have reported more on this. This, Chhatwal says, is mainly a reflection of an improvement in their NPA reporting standards after regulations on such disclosure became stricter since 2015. The level of financing by NBFCs in vehicle finance, coming back from a recent weak performance, is expected to be 17-18 per cent by 2020. Further, believes there are multiple drivers in the vehicle finance and real estate finance segments that will, in the coming years, pose good opportunities for NBFCs to invest and expand within. The most significant driver of growth will be the ability to create innovative products, delivered efficiently through the use of technology.