Five-point agenda for NBFCs to create a sustainable business model

Here is wishing each one of you a very successful New Year. 

As I reflect on the year gone by, it came with both positives and negatives. 

Non-banking financial companies (NBFCs) continued to contribute significantly to the economy. Assets of deposit and non-deposit-taking systemically important NBFCs, excluding housing finance companies, grew from ₹28.30 trillion in September 2018 to ₹31.95 trillion in September 2019, recording a 12.90 per cent growth. While the better managed NBFCs emerged stronger and wiser, the less well managed companies struggled to weather the financial volatilities. Given the current scenario, a relevant point to discuss would be on how this sector can create a sustainable profitable business model and contribute to India’s 5-trillion-dollar economy ambition. Here’s my 5-point agenda

Rajiv Sabharwal, Managing director & CEO, Tata Capital

Calibrate growth with matched ALM 

NBFCs will have to focus on creating a diverse set of offerings to cater to a wide range of customers across sectors. This would in turn serve to insulate NBFCs in a downturn in specific industries. It is imperative that the duration of assets and liabilities complement each other. This will create a natural hedge which will reduce liquidity risks. On the liabilities side, NBFCs will have to be well capitalised with assured streams for future growth. Conscious calls will have to be taken to augment resources through an array of debt options. Clearly, borrowing decisions cannot be based on cost optimisation only. Also, strong asset liability management.

Build robust governance and risk management structures

Implementation of stricter underwriting norms to build a superior quality portfolio is of primary importance. Earlier, monitoring systems predominantly focused on asset origination. But now an increased emphasis on application of risk management over the entire life cycle of the asset is a must. This will give early warning signals and prompt corrective action can be taken. In the past, a few NBFCs could afford to be careless while managing their risk -- this has to change. We need to understand taking risk is not bad, as long as it is well calculated. 

Invest in your customer 

Building a customer-centric model would serve to differentiate among NBFCs. It would be important to keep the customer in mind while designing new products, and be ready to serve the digitally-savvy 'Gen Z’ and millennials. Leveraging newer technologies such as robotics, machine learning, and big-data solutions across the lending value chain to increase efficiency and productivity would enable greater success. Fostering new alliances with the fintech ecosystem would also help enhance capabilities. 

Build nimbleness

The markets have been volatile. Till about two years back, we were seeing a market with surplus liquidity, high growth, dropping interest rates and rising asset prices. We are now in a period where liquidity comes to high governance entities, growth seems to have slowed down and asset prices are dropping. The need to adjust one’s strategy with the changing environment is critical.

Prepare for tougher supervisory norms

It would be prudent to expect stricter supervision and tighter norms — whether it’s on capital requirement, liquidity or risk standards. The need to have a dedicated chief risk officer also points towards that. The technology platforms will also need to be oriented for providing real-time information on all the above aspects.