Scoring in their second innings: NBFC entrepreneurs stage a revival

A clutch of shadow bank entrepreneurs have weathered the storm and are now evangelists for the business

“It’s time that the NBFC (non-banking financial companies) sector comes out of its own shadow as well as that of the banking sector. I am sure that NBFCs will play a significant role in achieving the dream of a $5 trillion economy going forward,” said M Rajeshwar Rao, deputy governor, Reserve Bank of India (RBI) in February last year. It was the first ever ringing endorsement of NBFCs from a senior RBI official in a speech dramatically titled by the central bank’s staid standards: ‘No more a shadow (of a) bank’. 

Gunit Chadha, founder of APAC Financial Services (and the former Asia Pacific chief executive officer of Deutsche Bank), could not agree more. “Six years into our journey, I’ve realised that the deeper differentiation lies in agility and adaptability to changing market and customer dynamics.” His point is that unlike banks, which operate on a massive scale with legacy systems and challenges of turning a big ship, NBFCs can run pilots, refine strategies, and pivot based on real-time feedback. At the same time, being a relatively young organisation gives the opportunity to build institutions the right way from the ground up – focusing on governance, risk culture, and people. “This was a priority for me from day one, shaped by my experiences at large global and Indian banks which provided good learnings on what to do, and what not to do,” he says.

  Banking veterans 

Chadha was among a clutch of banking veterans to reinvent the shadow banking plot. For company, there was Jaspal Singh Bindra, chairman of Centrum Group (Centrum Finance is now Unity Small Finance Bank), Shachindra Nath of UGRO Capital, Gaurav Gupta of Tyger Capital (the erstwhile Adani Capital), Aseem Dhru of SBFC Finance, Bhupinder Singh of InCred plus Vimal Bhandari of Arka Fincap, who got Atul Kirloskar’s backing. Of the lot, Bhandari is a veteran of a different kind: With a life spent only in the world of NBFCs. He was identified by former HDFC chairman Deepak Parekh, among a handful of others (Urjit Patel, Shikha Sharma, L K Narayanan, and Roopa Kudva, with Nassar Munjee steering them) who would draft a blueprint for IDFC when it was set up in 1997. 

What sets this crowd apart is they put Antonius Proximo’s advice to Maximus Decimus in Gladiator, the 2000 Hollywood historical drama, into play: “I was the best because the crowd loved me. Win the crowd, you will win your freedom”. Collectively, they had nearly ₹6,000 crore in equity riding on them when they started their journeys, which overlapped with the blowouts at Infrastructure Leasing & Financial Services (IL&FS) and Dewan Housing Finance Corporation. (Chadha had got Multiples — the private equity firm headed by Renuka Ramnath — to invest 37 per cent in APAC a month after the mess at IL&FS hit the headlines). A few have got listed; a few more are planning to do so, including Tyger Capital and InCred. 

Let’s situate NBFCs as on date. The ‘Financial Stability Report’ (December 2024) calls attention to the good capital buffers (capital adequacy stood at 26.1 per cent in September 2024), robust interest margins and earnings (net interest margins at 5.1 per cent and return on assets at 2. 9 per cent), and improving asset quality (gross bad loans at 3.4 per cent). Investors appear willing to supply capital. Equity capital recorded growth (year-on-year) of 26.5 per cent and 17.9 per cent for non-government NBFCs and NBFCs (upper layer), respectively, in September 2024 — forming 34.2 per cent and 18.4 per cent of their total liabilities, respectively. 

But surely, can it be denied that the shadow banking model was seen as less than desirable back five years ago? As Nath, vice-chairman and managing director (MD) of UGRO Capital, puts it: “Look at consumer finance, gold loan, tractor, and second-hand commercial vehicle finance…credit to small businesses is a significant opportunity; it aligns with the government’s mission to support the sector and generate employment. We believe that a scalable business under an NBFC format is a real opportunity.” 

Singh, founder and chief executive officer (CEO) at InCred, says when he considered starting out almost a decade ago, “It was an incredibly exciting time to be in India with startups across finance and other sectors getting huge focus…there was a huge financial gap waiting to be bridged…traditional underwriting methodologies couldn’t adequately assess their credit worthiness”.

The collective book size of these new-age NBFCs may not be more than ₹40,000 crore, but that misses the point. As Aseem Dhru, MD and CEO of SBFC, views it: Shadow banks are efficient coolies of credit in the financial system. They take wholesale loans from the banks and bond markets, and parcel them into small loans reaching the last mile in smaller towns where a large part of underserved customers reside. “Banking is a business of scale while an NBFC is a business of efficiency. So, it’s possible to make a small, but pretty NBFC. Banks make sense with a trillion rupee plus balance sheet size.” 

Overcoming challenges 

You also have to pencil in the rough ride this lot has had so for. The changes on the regulatory turf; the nearly four years of the pandemic and its after-effects; then the curbs on bank loans to NBFCs, and the high-risk weighting on certain business lines. Another aspect is that unlike banks, NBFCs have to work on the expected-credit  loss framework wherein stress has to be accounted for much before it shows up as losses. Read together with the fact that NBFCs cater to a segment, which banks otherwise find it tough to service, leads us to what Gupta, MD and CEO of the now Bain Capital-funded Tyger Capital, explains: Differentiated distribution and credit underwriting expertise for customer segments. Gold loans, microfinance, used vehicle financing, and small ticket business loans are segments that have been pioneered by NBFCs. And like the United States and China, we need several hundred banks and institutions if we are to truly meet our financial inclusion objective. “In fact, banks have only consolidated and reduced in number. NBFCs have a key role to play here. I am not sure if people question the need for NBFCs or the role played by them anymore,” says Gupta. 

 

In a sweet spot 

NBFCs’ capital adequacy in Sept 2024 stood at 26.1%, net interest margins at 5.1%, return on assets at 2. 9%, and gross bad loans at 3.4%

  Equity capital growth Y-o-Y was 26.5% and 17.9% for non-govt NBFCs and upper layer NBFCs, respectively

  Bankers-turned NBFC entrepreneurs have put up a good show despite various challenges

  They had to deal with regulatory changes, as well as nearly 4 years marred by the pandemic and its after-effects

  Another aspect is that unlike banks, NBFCs face a stricter expected-credit loss framework