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Leading NBFCs are bigger than many PSBs

Likely to account for 17.1% of total credit by 2018-19, against 13.1% at the end of 2014-15

Krishna Kant  |  Mumbai 

Non-banking companies (NBFCs) like and are slowly but steadily claiming the ground so far occupied by small and medium-sized public-sector banks like of Commerce, Allahabad Bank, and

In 2008-09, was the only NBFC whose balance sheet (net worth) size matched mid-sized state-run banks’. Today, three NBFCs’ net worth exceeds $1 billion (Rs 6,400 crore). And the number will rise to five if housing finance companies like and are included. By comparison, net worth of 10 mid- and small- sized state-run banks is more than $1 billion.

For example, Shriram Transport Finance’s equity is now comparable with those of and Andhra Bank, and more than those of Dena Bank, and Government-owned banks, however, remain ahead of in terms of total assets, including equity, deposits and advances.

expects to account for 17.1 per cent of the total credit in the country by 2018-19, compared with 13.1 per cent at the end of 2014-15 and 9.4 per cent in 2005-06. Most of this growth is expected to be at the cost of government-owned banks, whose share is estimated to fall to an all-time low of 58.6 per cent by 2018-19 (against 64.5 per cent last year).

“Until a decade ago, were marginal players with a small resource base. The equity of leading finance companies is now comparable with or larger than many mid-sized banks,” says Ananda Bhoumik, senior director & head (financial institutions), & Research, in a recent report on NBFC outlook in India.

The analysis is based on data for government-owned banks with assets of Rs 3 lakh crore or less at the end of March this year, and the country’s top 10 listed general non-banking finance companies. It excludes housing loan companies like and and gold loan companies like and

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If stock markets are an indicator, it is a matter of time before NBFCs will become larger than most Tier-II and –III state-owned banks. The combined market capitalisation of the top 10 NBFCs (Rs 1.27 lakh crore) is now twice that of mid- and small-sized government banks (Rs 63,500 crore). This gives these NBFCs larger fundraising capacity than government-owned banks.

In the past six years, the combined net worth of top-10 non-specialised NBFCs has grown at a compound annual rate (CAGR) of 20.6 per cent, against the small and mid-sized government banks’ 17.1 per cent. During this period, NBFCs’ assets under management grew at a CAGR of 22.9 per cent, against the 15.3 per cent annualised growth seen by the government banks in the sample.

The average does not fully reflect the extent of growth seen by retail-focused NBFCs like Bajaj Finance, Mahindra Finance, and For example, Bajaj Finance’s net worth has increased 4.4 times since 2008-09 while its assets have multiplied 12 times during this period, growing at a CAGR of 50 per cent. During this period, Mahindra Finance’s net worth grew four times while its assets rose 5.6 times.

Rating agencies largely attribute it to the resource constraints faced by government-owned banks. “The internal accruals for government-owned banks have fallen sharply due to losses from bad loans and general fall in profitability. This has constrained their lending ability,” adds Bhoumik of

It has opened up a large market for NBFCs. “There is a large opportunity out there but can’t meet the demand thanks to their legacy of bad loans and poor profitability. NBFCs are taking full advantage of the situation,” says Karthik Srinivasan, Sr VP and co-head financial sector ratings at

The trend is likely to continue as most banks credit growth ability is likely to be constrained by their capital requirements.

India Ratings expects NBFC to account for 17.1 per cent of the total credit in the system by FY19 up from 13.1 per cent at the end of FY15 and 9.4 per cent in FY06.

The biggest loser would be government owned banks whose share in overall credit may fall to an all-time low of 58.6 per cent by FY19 from 64.5 per cent last fiscal.

Analysts also attribute it to the niche business models followed by various NBFCs. “Unlike banks who service a whole range of customers, most NBFCs are focussed on a particular niche. It allows them to offer customised solutions and faster turnaround,” says Dhananjay Sinha, head institutional research,

Financial Services.

NBFCs also operate in customers segments that are not served by PSUs banks such as small & medium enterprises and self-employed. These segments offer higher yields allowing NBFCs to earn superior profit margins which they can leverage to grow even faster.

First Published: Mon, August 03 2015. 00:58 IST