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With the country’s largest development financial institutions (DFIs) like ICICI and IDBI having been converted into banking entities, the term DFI has lost its relevance in the country. Institutions that today have replaced them in playing a vital role in long-term financing and project financing are the NBFCs, which have their relative specializations, for e.g. HDFC (mortgage loans), IDFC (infrastructure loans) and Mahindra Finance, Shriram Transport (auto loans). The trend of segmental monopoly is now changing with banks entering long term finance and FIs also meeting the medium and short - term needs of the business masses.
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Non Banking Financial Companies (NBFCs) have come a long way from the era of concentrated regional operations, lesser credibility and poor risk management practices to highly sophisticated operations, pan-India presence and most importantly an alternate choice of financial intermediation. Today, NBFCs are present in the competing fields of vehicle financing, housing loans, hire purchase, lease and personal loans. More often than not, NBFCs are present where the risk is higher (and hence the returns), reach is required (strong last-mile network), recovery needs to be the focus area, loan-ticket size is small, appraisal and disbursement has to be speedy and flexibility in terms of loan size and tenor is required.
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NBFCs’ growth had been constrained due to lack of adequate capital. Going forward, we believe capital infusion and leverage thereupon would catapult NBFCs’ growth in size and scale.
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NBFCs are not required to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is not applicable to them. While this is at their advantage, they do not have access to low cost demand deposits. As a result their cost of funds is always high, resulting in thinner interest spread.
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| Supply |
Plenty to meet personal finance needs but not enough to meet long-term infrastructure needs.
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| Demand |
India is a growing economy, demand for long-term loans and personal finance is high
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| Barriers to entry |
Licensing requirement, investment in technology, skills required for project finance, distribution reach.
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| Bargaining power of suppliers |
Providers of funds could be more demanding. As quality of services provided with minimum time matters a lot.
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| Bargaining power of customers |
High, as banks have also forayed into the long-term finance.
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| Competition |
High - There are public sector, private sector and foreign banks along with non-banking finance companies competing in similar business lines. |
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National Housing Bank (NHB) introduced 'reverse mortgage' scheme under which a senior citizen who is owner of a house can avail of a monthly stream of income against mortgage of his/her house, while remaining the owner and occupying the house throughout his/her lifetime, without repayment or servicing of the loan. Regulations are to be put in place to allow the creation of mortgage guarantee companies.
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The Union budget had proposed to create a fund with a corpus of Rs 1 bn to facilitate Public Private Partnership (PPP) in infrastructure financing, which would contribute upto 75% of preparatory expenditure in the form of interest free loan to be recovered from the successful bidder.
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The Budget also proposed that the surplus forex reserves should be deployed in infrastructure financing schemes by establishment of two wholly-owned overseas subsidiaries of IIFCL.
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The government eased the external commercial borrowing (ECB) norms by allowing non-banking finance companies and housing finance companies to raise money overseas through FCCBs subject to RBI approval.
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The mortgage penetration continues to remain abysmally low - in India the mortgage to GDP ratio is at around 6% (in FY07) against over 70% in the USA. Even if one were to benchmark against more comparable counterparts, the ratio ranges between 20% to 30% for most South East Asian nations. Also, mortgage credit accounted for merely 12% of total non-food credit in FY07, despite the meteoric rise in incremental lending to this segment. There is a yawning demand supply gap in the number of dwelling units and the shortage is estimated at 33 m units. While changing demographics and fiscal incentives, the mortgage sector is envisaged to witness a healthy growth (at about 25% YoY) over the next couple of fiscals too. Nevertheless, the spiraling property prices may prove to be a dampener. On similar lines, the yawning gap in infrastructure facilities calls for additional contribution from the private sector players.
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The conversion of the erstwhile ICICI and IDBI into banking entities and the following success of the entities, is the testimony to the fact that DFIs / NBFCs can benefit by incorporating the business model of banks into their otherwise ‘project loan’ centric business. This move will ensure that the institution will be able to accesses low cost retail savings and current deposits. It will thus help it significantly reduce the cost of capital and improve its operational efficiencies. It will also be able to enter into the banking arena, especially the fast growing retail segment.
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Non-banking finance companies (NBFCs) and housing finance companies (HFCs) that were banned from accessing the overseas market for resources by the Finance Ministry a few years back will now be able to access low cost funds through the FCCB route. This will not only ease pressure on their fund mobilisation but also help improve their net interest margins (NIMs).
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Increasing the risk weightage on the home loan portfolios of HFCs is expected to enforce a cautious stance on their part with respect to real estate lending and encourage better risk appraisal. The same, however, also calls for higher capital adequacy for the housing finance companies.
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Once the amendment to the Securitisation Act for the inclusion of mortgage backed securities (MBS) is passed, banks and housing finance companies (HFCs) can sell MBS in the market and raise additional funds at lower rates, which in turn would enable them to lower the home loan rates. Through MBS, banks and HFCs can also reduce their reinvestment risk besides shoring up their capital to meet the capital adequacy requirements and improve their balance sheets.
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