NBFCs cashing in on unmet demand by banks: Morgan Stanley

They're making inroads into microfinance, used car finance and rural housing; retail loans of top 12 NBFC are barely 5% smaller in size than those of top-5 private banks

There is a huge unmet demand for credit among small enterprises and NBFCs are cashing in on this as their distribution reach remains unmatched by banks in areas such as microfinance, used vehicle financing and rural housing, says a Morgan Stanley report.

According to the financial services major, though private sector banks are leading the charge in retail sector, non-banking finance companies (NBFCs) are quite close on their heels.

"Just as stock market investors were writing obituaries of NBFCs that did not make the cut for banking licences, a new cycle was emerging for some of these companies," the report said, adding asset quality for top-tier NBFCs over the last two years has held up better than expected.

The top 12 NBFCs with about $92 billion of retail loans are barely 5 per cent smaller in size than the corresponding retail books of the top five private sector banks, Morgan Stanley said, quoting Kotak Institutional Equities and company data.

Moreover, NBFCs now have a large presence in most retail lending segments and are estimated to account for a 44 per cent share in automobile loans and a 52 per cent share in loans against property, it added.

"Microfinance is seeing a huge boom after having absorbed the shocks from the Andhra Pradesh crisis five years ago, the report said, adding "there is a huge unmet demand for credit among small enterprises, where cash flows are difficult to assess and a residential property may be the only collateral".

Interestingly, the outperformance of NBFCs has coincided with a period of rising stress in the corporate loan books of most state-owned and some private sector banks that were focused on project finance.

"Arguably, these 'corporate' banks have been preoccupied with recognition and resolution of these nonperforming loans and have left an open space for NBFCs and consumer-focused private sector banks to grab share," the report said.