BS BFSI Summit 2023: Margins sacrosanct for NBFCs, says Umesh Revankar

Non-banking financial companies (NBFCs) will focus on margins to build a healthy profile and cushion to face stress in their books even if that means moderating the pace of growth in lending, according to top sector executives who spoke at the Business Standard BFSI Insight Summit.

Dwelling on the challenge of maintaining margins, Umesh Revankar, executive vice-chairman, Shriram Finance, said they were “sacrosanct” for the companies.

Seconding Revankar’s argument, Rakesh Singh, managing director and chief executive (MD & CEO) of Aditya Birla Finance, said margins were important and NBFCs would not sacrifice them for growth. The customer is ready to pay extra if the finance company is giving quality service and experience.

Rajiv Sabharwal, MD and CEO, Tata Capital, said while the cost of funds had gone up in the past 12-18 months, his company had been able to maintain margins. It has been able to pass on the increase in the cost of funds to customers, he said

India Ratings, in its review of the NBFC sector (October 2023), said it was facing stiff competition in secured lending from banks and small finance banks, and that could incrementally restrict the complete pass-through of increases in borrowing cost in the second half of FY24, driving margin compression by 20-25 basis points (year-on-year) in the financial year.

This has led to NBFCs venturing into unsecured lending to protect margins where growth has been elevated through partnerships with fintechs.

Relating to margins, which have been affected by the cost of funds, NBFCs have made a case for the Reserve Bank of India (RBI) to take a more favourable view of allowing them to raise money.

Revankar of Shriram Finance, a deposit-taking company, said mobilising deposits depended on brand positioning -- reputation and the service provided to customers over a period. 

For his company there is no asset-liability mismatch since the average tenure of credit is 36 months, matching the average tenure of deposits, which too is 36 months. The RBI should look at deposit taking more favourably, he added.

Sabharwal linked liabilities to ratings, governance standards, and the scale of financial companies’ operations. Many NBFCs with top ratings and governance standards never faced problems in raising funds even during the crises concerning IL&FS and DHFL in recent years.

Making a case for allowing NBFCs to tap customers for deposits, Singh said at present credit companies took an exposure to customers through loans but the liabilities flowed to banks. If they come to NBFCs (as deposits), it will help in managing assets and liabilities, and liquidity, he added.

The RBI has not granted a new NBFC licence with permission to take public deposits. After the merger of Housing Development Finance Corporation (HDFC), a deposit-taking company, with HDFC Bank, only 48 finance firms with permission to raise deposits remain in the arena.

Referring to prospects of higher rates of lending growth turning into a matter of concern, NBFCs’ top executives said high growth in recent quarters had come after the pandemic phase, which had impacted demand. They were in agreement with the RBI on the need to be watchful about high growth and any signs of stress in unsecured credit.

On August 25, Reserve Bank of India Governor Shaktikanta Das had asked NBFCs and housing finance companies to remain alert about complacency during good times. The RBI flagged risks associated with high credit growth in the retail segment, mostly unsecured.

Revankar said for the economy growing at 8 per cent, credit would grow at more than 20 per cent. While NBFCs have to be careful about high growth, margins in small-ticket loans are enough to work as a cushion. There has not been much challenge from them so far for his company. 

The situations now and 10 years ago are different. More information about customers is available and credit underwriting standards are strong now.

A loan growth rate of 25 per cent in the past two years reflects pentup demand after the pandemic. If one takes the view of the past four-five years, growth is about 15 per cent, Sabharwal said.

Rating agency ICRA has said the unsecured loan segment, consisting of personal and consumption loans, unsecured small enterprise loans, and microfinance loans, which drove growth last financial year, would continue to support growth in 2023-24. This segment is expected to expand 26-28 per cent this financial year.