BFSI Insight Summit: It's advantage financial sector, say CEOs of top NBFCs

Pie is large and open to all, may even take half a century to reach saturation point when firms can seriously worry about competition, they say at Business Standard Summit

The next few decades should see rapid growth in the financial sector, where banks, non-banking financial companies (NBFCs), and financial technology firms collaborate with each other to deliver essential financial products to India’s vast under-penetrated and under-banked population.
 
The pie is large and can accommodate all, and it may even take half a century to reach a saturation point when firms can seriously worry about competition, the chiefs of India’s top NBFCs said, at a session called ‘Advantage NBFCs’ on day three of the Business Standard BFSI Insight Summit.
 
It soon became apparent that this was rather a narrow point of view. The space is wide open and it wouldn’t be right to treat NBFCs, housing finance companies, financial technology (fintech) firms or even banks as separate silos. It is time to cooperate, rather than compete, the panelists said.
 
“It’s not advantage NBFCs or banks, but it is advantage financial sector,” said Keki Mistry, vice-chairman and chief executive officer of India’s largest mortgage lender HDFC.
 
The panelists were not overwhelmed by banks. If the economy has to reach a size of $5 trillion or even $10 trillion in the future to serve 1.3 billion plus people, the existing banking model won’t suffice.
 
Rather, the regulatory regime, enabling co-lending models, will spur more cooperation where banks and NBFCs leverage each other’s strengths and the best of both would be served in a package to the customer.
 
“I don’t see banks as challengers at all. Maybe 50 years from now, when we reach a certain level of saturation, there might be a conversation to have, but I see a long runway where NBFCs can thrive, and can support banks in the service of the Indian consumers,” said Rajiv Lochan, managing director of Sundaram Finance.

 
“If you look at figures for June, the increase in our individual loan book was 14 per cent. The increase in housing loans in banking loans was less than 10 per cent. So, we have actually gained market share in the last 12 months,” said Mistry.
 
The NBFC sector is in better health now, having weathered a liquidity crisis after the collapse of IL&FS and DHFL. Ample liquidity is available and financial firms are adequately capitalised. That way, the Reserve Bank of India’s (RBI’s) stricture on NBFCs having a minimum capital adequacy ratio of 15 per cent is not a hindrance. Rather, a capital adequacy ratio of 20 per cent should be the practice to operate in today’s environment.
 
Gagan Banga, managing director and CEO of Indiabulls Housing Finance, said his firm has a capital adequacy ratio of 30 per cent, and in most cases, the capital is dictated by the need to get better capital rather than complying with the regulator’s diktat.
 
“The RBI is setting the floor. But our capital adequacy is an outcome of what the rating agencies desire. I doubt NBFCs can go back to the era of 6.5-7 times gearing. The ideal gearing is 3-3.5 per cent, and we must work with banks as partners, not as competitors,” Banga said.
 
For NBFCs, the issue at present is not so much of building assets, but of managing liabilities. It is also important that NBFCs do not become complacent seeing the plentiful liquidity, thus, borrowing short and lending long and get into an asset-liability mismatch later.

“Well capitalised institutions rarely ever go bust on the asset side. It is always the liability side, and it’s always liquidity that can create life-threatening issues. Many institutions underestimate the vicious power of liquidity. And this always gets exasperated when short-term money is going cheap,” said Jairam Sridharan, CEO of Piramal Retail Finance.
 
Sridharan also pointed to the peculiar situation where the government is borrowing at 6.25 per cent, whereas an average home loan buyer is getting a 30-year loan at 6.5 per cent. 
 
“This is a ridiculous situation. When liquidity is flush, a lot of these things happen, when you can get a little carried away and you just don’t have enough margin of safety left. We were seeing this between 2017 and 2019 and it clearly caused a lot of grief,” Sridharan said.
 
There was a certain recklessness in how NBFCs lent till IL&FS went down, the panelists agreed.
 
“Pre-2018, it was en masse advantage NBFCs of any size, governance, quality etc. From late 2018 to 2020, barring a handful of NBFCs, it was disadvantage NBFCs. In 2021, we are again seeing advantage NBFCs,” said Jaspal Bindra, chairman of Centrum Group.
 
In the coming days, NBFCS will be heavily reliant on technology. For example, for a financial services firm like Navi Group, the entire banking services can be made digital.
 
“Customers in India don’t get a great experience banking, but banking can be a delightful experience,” said Sachin Bansal, co-founder and former executive chairman of Flipkart.
 
“There are a lot of under-penetrated and underserved users in the country, who do not have access to credit,” said Bansal, adding that technology is the way to reach them.
 
“Credit and banking are purely virtual products. There is no physical delivery of the product at the end of the day,” Bansal said.