BS Banking Annual: 'It is opportunity NBFCs rather than advantage NBFCs'

Experts shed light on the opportunities ahead for NBFCs and how they can capitalise on them

Leading names in the non-banking finance space, HDFC Vice Chairman and Chief Executive Officer (CEO) Keki Mistry; Centrum Group Chairman Jaspal Bindra; Indiabulls Housing Finance Vice Chairman and Managing Director (MD) Gagan Banga; Piramal Retail Finance CEO Jairam Sridharan; Sundaram Finance MD Rajeev Lochan; and Navi Chairman Sachin Bansal joined Tamal Bandyopadhyay at the Business Standard BFSI Insight Summit in October 2021, and shed light on the opportunities ahead for NBFCs and how they can capitalise on them. Edited excerpts:

Is it “advantage NBFCs?”

Keki Mistry: I don’t think there is anything like advantage NBFCs (non-banking finance companies) or advantage banks. Both have a role to play. There is liquidity and it is available to everyone in the system. Rajeev Lochan: It is “opportunity NBFCs”, rather than “advantage NBFCs”. There is tremendous opportunity for all financial services firms to play a meaningful role in shaping the trajectory of the Indian economy. 

We need to take advantage of technology to drive innovation. The regulatory support has been put in place, which will serve us well. All NBFCs who have set very high standards of governance and compliance will automatically be able to convert the opportunity into an advantage.

Sachin Bansal: If you are a well-run company, you have an advantage. The environment is very conducive. As an outsider who came into the sector a couple of years ago, I found the regulator extremely positive in its mindset. I see banks are leaving a lot of opportunities on the table. 

That’s where nimble NBFCs like ours can come in and have some advantage, mainly because we are faster compared to banks. We believe finance is a purely digital product, and the amount of physical intervention that should be required should be close to zero. That is the future we are envisioning. The next ten years will be golden for the financial services sector.

Jairam Sridharan: India has too few banks. The United States has 4,913 banks and India has 34. If we are looking to become a $5 trillion economy, we need to get $6 trillion in credit, and currently it is $2.6 trillion. The large public sector banks, with the capital they have, can provide $1.5 trillion extra credit. The number of banks that we have cannot provide the extra credit required, which is why we need non-banking finance institutions.

Jaspal Bindra: Pre-2018, it was “advantage NBFCs”, irrespective of any parameter. From late 2018 to 2020, barring a handful of NBFCs, it was disadvantage NBFCs. Now, we are seeing advantage NBFCs, but with a little more selectivity. It is “advantage NBFCs” in availability and cost of funds for everyone, but the highly rated, those with a better vintage and better governance are getting the real benefit.

Gagan Banga: It is “advantage NBFCs”, given the large asset side opportunity we have. It’s all about who focuses on the right niche segment. There are periods of a steady state, and then all businesses swing towards volatility. 

I am grateful the central bank has acted with great maturity and handled all the problems, indicating that NBFCs are not light-touch country cousins of banks. Rather, they are well-regulated entities. For those who choose to abide by regulations, the future is certainly very bright.

Does capital play a big role, with 15 per cent not being adequate?

Mistry: We at HDFC raised capital last year, by virtue of which our capital adequacy is in excess of 20 per cent. But traditionally, I believe, 15 per cent capital adequacy is more than enough. The capital adequacy that rises out of a debt-equity ratio, or leveraging, ultimately impacts your return on equity. The higher the capital adequacy, the lower your rn on equity, and vice versa. So, one has to balance these two factors.

Sridharan: There is a lot of liquidity in the system. Now, everybody has a significantly higher capital adequacy ratio than what they had two years ago. People are swimming in capital but not lending enough, and that is what we need right now.

Bindra: I agree that there should be a balance, rather than having excess capital or too little capital. The issue is, as we have seen on several occasions in the past, that people have been wrong-footed for not having enough capital. Now, we have too much capital and a desire to lend too much too soon, which itself is a risk. We need a balanced approach.

Bansal: We are overly capitalised because we are a startup, and we have to build a brand and make a name for ourselves. Our excess capital gives the lenders a lot of comfort to work with us. We are growing fast but I don’t see us getting to leverage limits. 

Lochan: There is a 15-20 per cent corridor at which we operate, and we have never had to raise capital at all. All our capital comes from internal accruals. It does build some sort of speed governor within the organisation. Our approach has been a prudent balance between growth, quality and profitability. I think 15 per cent is very good, and that is what the regulator requires us to hold. 

Banga: There could be different strategies, and one can manage with internal accruals. For companies that do not have a long history, they don’t have the flexibility. We have never gone below 20 per cent and are currently operating at 30 per cent. 

What are the lessons learnt from the 2018 crisis?

Banga: For companies that have high capital adequacy, even if you have done dumb lending, you will never grow, because of asset quality issues. We have forever believed that the existential risks for NBFCs come from the liability side. There were no liquidity buffers, and there were certain refinance mechanisms that fail in times of crisis. With hindsight, I believe that the counter to all risk is to have moderate gearing, work with banks, never compete with them, and live within your means.

Sridharan: Well capitalised institutions rarely go bust on the asset side, it’s always the liability side. And, it’s always liquidity that can create life-threatening issues for you. It’s critical that you are fully covered when it comes to liquidity, and clearly, many institutions underestimated the vicious power of liquidity to bring you to life-threatening situations.

Lochan: As intermediaries of risk, we should all aspire to be marathon runners. There may be temptations to sprint in-between, but we all know what happens when a marathoner sprints.