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At the Business Standard BFSI Insight Summit held on Wednesday, top leaders of India’s non-banking financial companies (NBFCs) made it clear that they can succeed without transitioning into full-fledged banks.
During a discussion with Business Standard Consulting Editor Tamal Bandyopadhyay, Vishakha Mulye, chief executive of Aditya Birla Capital, said NBFCs play an essential role with their own unique models. “We are a large country, and in order to serve, we require different models,” she said.
Mulye emphasised that NBFCs have their own strengths and challenges, adding, “One does not have to be a bank to survive.” She stressed the need for a balanced approach when considering any new guidelines.
NBFCs and banks work together
Umesh Revankar, executive vice-chairman of Shriram Finance, spoke about the close relationship between banks and NBFCs, especially when it comes to funding. “Banks are cautious about lending to NBFCs, but they aren’t backing off entirely,” he said.
He also pointed out that NBFCs often reach customers in areas where banks do not and have created successful models in sectors like housing finance. Revankar suggested that if NBFCs were ever to transition into banks, it should be done slowly, through a “glide path” approach.
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Shriram Finance, he said, is growing steadily, with deposits increasing by 20 per cent Year-on-Year, offering competitive rates similar to smaller banks.
NBFCs lead in innovation
Jairam Sridharan, managing director at Piramal Capital and Housing Finance, highlighted how NBFCs have driven financial innovation with products like gold and car loans, which banks later adopted. However, he predicted that the number of NBFCs might shrink from the current 9,325 to 3,000-4,000 due to regulatory changes and market competition.
Sridharan also stressed the importance of diversifying funding sources to reduce reliance on banks, which currently account for 60-70 per cent of NBFC borrowings. “This has to come down to 40 per cent,” he said.
Balancing growth and costs
Rajiv Sabharwal, MD and CEO of Tata Capital, said NBFCs succeed because “they have a model that works well”. He further explained that while banks enjoy some advantages, many NBFCs are larger and better governed than smaller banks.
However, Sabharwal noted that recent Reserve Bank of India (RBI) decisions to increase risk weightage on loans to NBFCs have raised borrowing costs, saying, “The cost has gone up.”
He also suggested that NBFCs should aim for a better borrowing structure, with at least 20 per cent going into capital.
Impact of RBI guidelines
Vivek Kumar Dewangan, chairman and MD of REC Limited, commented on the recent RBI draft guidelines, which he said have prompted banks and NBFCs to reflect on their strategies. He expressed hope that the final guidelines would take a balanced approach.
Dewangan further explained that the guidelines introduced in May would not affect banks following Indian Accounting Standards (Ind AS). However, “banks that do not follow Ind AS will be affected,” he said. Looking ahead, he voiced optimism that the final guidelines would adopt a balanced approach.
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