With the Lok Sabha clearing the Banking Laws (Amendment) Bill, RBI looks set to issue new banking licences to corporates and NBFCs. And as things stand, NBFCs appear to be best placed to get their hands on such licences owing to the fact that they have fared well despite rising costs and rigorous regulations in the past one year. Profit after tax in the last 12 months for NBFCs witnessed a 36 per cent growth compared to the 23 per cent growth in the case of banks. Loan books too witnessed a robust jump of 35 per cent as compared to the modest 18 per cent for banks in the same period.
A host of reasons can be attributed for this marked improvement in performance despite low industrial take off last year. One is the fact that consumer loan demand has remained intact all this while and NBFCs have looked to match the banking sector’s mass scale through mergers and acquisitions. For instance, companies such as Dewan Housing and Shriram Transport Finance through acquisitions in the past three years got access to newer clients which helped them further enhance their share in their respective fields. Moreover, a few also diversified into new areas through buyouts: Magma Fincorp recently bought a housing finance company from GE Capital while L&T Finance Holdings acquired an auto financing arm of Societe Generale Consumer Finance. Also, many of the NBFCs have a strong rural presence and diversified lending book. They will either have a choice to convert into a bank or transfer a part of their asset book to a newly set up bank. The RBI is also planning to allow conversion of rural branches of NBFCs into bank branches. This would also reduce the capital required for setting up new branches.
But there seem a few challenges too. The RBI is aware of the growth in loans/advance books in the sector. As a result, it may increase the tier-1 capital requirement of NBFCs to 12 per cent from 10 per cent to reduce credit risk. Loans overdue for 90 days might also be treated as non-performing assets, compared to 180 days as of now. Gold loan companies already have stricter tier-1 capital requirement and loan-to-value has also been reduced by the RBI. NBFCs are facing stiff competition on the assets side as well. In the corporate loan segment, banks are looking towards retail loans to maintain loan book growth. This has led to aggressive pricing of retail loans products which NBFCs may not be able to match.
However, the NBFC sector may enjoy further improvement in valuations once interest rates decline, which the market is hopeful will happen in the last quarter of the current fiscal. This would lead to a decline in the borrowing costs and NBFCs will be able to access debt markets to prop up their loan book growth.