While the liquidity condition in market improves for non-banking finance companies (NBFCs), it is imperative for them to establish strong governance and risk management practices to restore investor confidence and reduce overall borrowing costs, according to a recent study by global consulting major PricewaterhouseCoopers (PwC).
Besides, NBFCs can improve their bottom line by optimising their operating expenses through digitisation and automation initiatives.
"The ability of NBFCs to develop strategic partnerships with key ecosystem players and leverage technology for meeting the demands of new consumers will determine the future course of industry," said the study titled 'Fit-for-future NBFCs: A key pillar of the USD 5 trillion economy.'
NBFCs have been instrumental in offering formal credit to the under-served retail and micro, small and medium enterprises (MSME) segment, thereby increasing the contribution of these segments to India's overall GDP. The NBFC sector accounts for nearly 17 per cent of the total credit in the country and registered a growth rate of 20 per cent in the financial year 2018.
The study said NBFCs have pursued aggressive business growth by building distribution capabilities across new, untapped and under-penetrated geographies and customer segments. Such expansion has required NBFCs to adopt technological advances and integrate with the fin-tech ecosystem to build cost-effective, lean and robust operations and risk management capabilities.
But the NBFC juggernaut was halted in September 2018 as a result of a default in debt obligations of about Rs one lakh crore. With the situation not easing as fast as policymakers and the industry might have desired, there may be a need to look at additional measures, including the regulator playing a more active role through policy stipulations and proactive checks and measures.
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The study said it is imperative that the prolonged stress in the NBFC sector be eased out on a war footing before it starts to impact the larger economy through a contagion effect.
"We strongly believe that a healthy NBFC sector is instrumental in maintaining India's growth momentum and achieving the target of a five trillion dollar economy by 2024," said Nitin Jain, Partner at Financial Services for Strategy and Digital at PwC India.
With their deep understanding of micro-markets, NBFCs have been able to focus on the lower end of the spectrum through product customisation. MSME-focused NBFCs have adopted unique business models through a segment, product or geography-based focus on the sector to improve their reach.
A healthy, growing NBFC sector is important to achieve the 2024 GDP milestone as well as move India forward towards developed nation status by improving social indicators such as employment rate, per capita income and percentage of population below the poverty line, said the PwC study.
However, NBFCs have seven opportunities to grow their revenues by developing new revenue streams, enhancing sales from their existing revenue streams, and leveraging alliances and partnerships to target a new customer base.
One: increase the penetration in MSME segment with new and dynamic operating models. Two: synergistic alliances with fin-tech to tap niche markets. Three: get access to new customers and cheaper funding sources by developing a viable co-lending business model. Four: target individual buyers, merchants and suppliers to tap into the fast-growing e-commerce segment.
Five: diversify assets by targeting new profitable segments and developing capabilities required to serve the segments. Six: develop digital capabilities to boost sales productivity. And seven: increase fee income through advisory services.
In addition, said the PwC study, key focus areas for their stronger governance and risk management include asset-liability management, liquidity coverage ratio, arm's length transactions, reporting standards, concentration risks and audit.