Beyond Loans: How NBFCs Fuel India’s Economic Engine

Over the past decade, India’s GDP has grown from around $2 trillion in 2014 to $3.75 trillion in 2023, and the engine of this robust growth has been the small and medium enterprises (SMEs), contributing about one-third of the country’s total value of goods and services. There’s no doubt that India’s lofty dreams of economic growth over the next decade depends heavily on the continued thrust on these enterprises, as noted by the CRISIL 2023 SME report. 

A major impediment to growth that SMEs have faced in the past relates to easy credit availability, fostered by challenges around weak financial metrics, limited assets and uncertain growth trajectories. This is where India’s non-banking financial companies (NBFCs) have stepped up to create a unique niche. “The flexibility offered by NBFCs is advantageous to small companies, often meeting their credit requirements with reduced documentation,” says George Alexander Muthoot, the managing director of Muthoot Finance, one of India’s leading NBFCs that was founded in 1939 and became a publicly listed company in 2008. 

The annual growth in credit disbursements by NBFCs hit double digits in 2022 and has thereafter sustained the pace thereafter. According to the RBI’s recent Financial Stability report, though banks have remained the main source of funds, the NBFCs have shown a marked improvement in CRAR (capital-to-risk assets ratio) that rose from 26% to 27.5% between September 2022 to March 2023. In other words, NBFCs showed better soundness parameters in asset quality, capital levels and liquidity, thus preparing themselves for a broader and deeper engagement with the SME credit demand. 

While their role in providing credit is undeniable, their contribution extends far beyond simply disbursing loans. NBFCs act as catalysts for economic growth, injecting dynamism and innovation into diverse sectors, ultimately enhancing the lives of countless Indians. It has propelled the MSME engine by contributing to their unique financial needs, offering them flexible loans, working capital and trade finance solutions. However, that’s not all. Let’s untangle the threads of this intricate narrative and explore how NBFCs’ reach surpasses the realm of financial support. 

• Filling the credit gap: Scheduled commercial banks are often wary of financing the small businesses, the unbanked and the underbanked segments of the economy due to insufficient collaterals and/or inadequate creditworthiness. This is where NBFCs step in to bridge the critical credit gap by tailoring loan products to specific needs and offering flexible repayment options. This fulfills the financial inclusion goals of the government and inculcates grassroots innovation, promotes micro-entrepreneurship and stimulates economic growth grounds-up. 

• Driving infrastructure growth: Another area where NBFCs play a major role is in the funding of infrastructure projects, from roads to bridges, and renewable energy projects to logistics capex. Innovative financial models such as structured infrastructure debt and investment trusts are brought in by NBFCs to attract long-term capital and support the government’s infrastructure stimulus projects. Besides connecting people to goods, it assists in job creation at the grassroots and bolsters industrial production. 

• Financial literacy and inclusion: Over the years, India’s banking sector serviced a very small percentage of the population, while the majority found themselves borrowing money from local lenders at exorbitant rates. A major factor in this phenomenon was the lack of financial literacy. NBFCs have actively participated in spreading financial awareness through educational programs and digital initiatives to demystify concepts and educate people about saving and credit products. This has reduced the authority of local lenders as individuals are now empowered to manage their finances better via NBFCs. 

• Catalyzing innovation and disruption: Given the lower levels of regulatory requirements compared to scheduled commercial banks, the NBFCs have provided fintech-driven solutions to fuel innovation and disruption. Digital wallets, alternative credit scoring models, and lending platforms are now catering to niche segments such as student loans, healthcare financing, and green energy projects to fuel economic diversification. 

• Empowering the workforce: Over the past couple of years, NBFCs have shown a marked improvement in their financials, a factor that has helped them create new job avenues across diverse functions. They’ve deployed additional resources to tackle new areas such as risk management, technology, marketing, and sales, contributing to a culture of entrepreneurship and professional development. This new segment of NBFC operations is having a direct impact on raising credit and fiscal awareness among people who are turning their attention to micro-entrepreneurship that further boosts jobs. 

• Financial stability and resilience: One factor that often escapes notice is the NBFCs’ role as shock absorbers for India’s financial system. By diversifying the credit landscape and channeling funds to neglected sectors, these companies create an  inclusive system that is better equipped to withstand external shocks of the kind that the world witnessed due to the economic slowdown fired by the interest rate spikes in the US and Europe. 

• Sustainable development: Last but not least, NBFCs have shifted their attention towards the environment, social, and governance (ESG) principles in recent times. Several of these companies are involved in financing sustainable development, promoting green infrastructure and supporting micro-enterprises engaged in these projects. This integration of ESG values into NBFC targets is helping foster a responsible and sustainable economic growth model that will yield long-term benefits for India. 

The Road Ahead – The Best is Yet to Come

There’s little doubt that the NBFC sector is poised for robust growth and transformation over the next few years as India prepares for “Amrit Kaal” – the celebration of a century of freedom in 2047. A more streamlined regulatory framework and the digital transformation initiatives would potentially foster a deeper and broader engagement of NBFCs with India’s growing economy. In its mid-year report, ICRA predicted that NBFCs will grow between 13% to 15% in FY 2024, driven largely by retail assets. It revised the growth outlook upwards based on the assumption that retail assets under management with NBFCs could expand by one-fifth in FY24 as against about 12% during the previous financial year. 

However, a few challenges remain as NBFCs need to tackle data privacy, cyber security, and responsible lending practices on a war footing in order to sustain public trust, a prerequisite for growth. Given their value as engines of economic growth, catalysts for innovation, and champions of financial inclusion, NBFCs must continually adapt to customer needs and make financial transactions simpler and easier to access across all sections of society.

A major impediment to growth that SMEs have faced in the past relates to easy credit availability, fostered by challenges around weak financial metrics, limited assets and uncertain growth trajectories. This is where India’s non-banking financial companies (NBFCs) have stepped up to create a unique niche. “The flexibility offered by NBFCs is advantageous to small companies, often meeting their credit requirements with reduced documentation,” says George Alexander Muthoot, the managing director of Muthoot Finance, one of India’s leading NBFCs that was founded in 1939 and became a publicly listed company in 2008. 

The annual growth in credit disbursements by NBFCs hit double digits in 2022 and has thereafter sustained the pace thereafter. According to the RBI’s recent Financial Stability report, though banks have remained the main source of funds, the NBFCs have shown a marked improvement in CRAR (capital-to-risk assets ratio) that rose from 26% to 27.5% between September 2022 to March 2023. In other words, NBFCs showed better soundness parameters in asset quality, capital levels and liquidity, thus preparing themselves for a broader and deeper engagement with the SME credit demand. 

While their role in providing credit is undeniable, their contribution extends far beyond simply disbursing loans. NBFCs act as catalysts for economic growth, injecting dynamism and innovation into diverse sectors, ultimately enhancing the lives of countless Indians. It has propelled the MSME engine by contributing to their unique financial needs, offering them flexible loans, working capital and trade finance solutions. However, that’s not all. Let’s untangle the threads of this intricate narrative and explore how NBFCs’ reach surpasses the realm of financial support. 

• Filling the credit gap: Scheduled commercial banks are often wary of financing the small businesses, the unbanked and the underbanked segments of the economy due to insufficient collaterals and/or inadequate creditworthiness. This is where NBFCs step in to bridge the critical credit gap by tailoring loan products to specific needs and offering flexible repayment options. This fulfills the financial inclusion goals of the government and inculcates grassroots innovation, promotes micro-entrepreneurship and stimulates economic growth grounds-up. 

• Driving infrastructure growth: Another area where NBFCs play a major role is in the funding of infrastructure projects, from roads to bridges, and renewable energy projects to logistics capex. Innovative financial models such as structured infrastructure debt and investment trusts are brought in by NBFCs to attract long-term capital and support the government’s infrastructure stimulus projects. Besides connecting people to goods, it assists in job creation at the grassroots and bolsters industrial production. 

• Financial literacy and inclusion: Over the years, India’s banking sector serviced a very small percentage of the population, while the majority found themselves borrowing money from local lenders at exorbitant rates. A major factor in this phenomenon was the lack of financial literacy. NBFCs have actively participated in spreading financial awareness through educational programs and digital initiatives to demystify concepts and educate people about saving and credit products. This has reduced the authority of local lenders as individuals are now empowered to manage their finances better via NBFCs. 

• Catalyzing innovation and disruption: Given the lower levels of regulatory requirements compared to scheduled commercial banks, the NBFCs have provided fintech-driven solutions to fuel innovation and disruption. Digital wallets, alternative credit scoring models, and lending platforms are now catering to niche segments such as student loans, healthcare financing, and green energy projects to fuel economic diversification. 

• Empowering the workforce: Over the past couple of years, NBFCs have shown a marked improvement in their financials, a factor that has helped them create new job avenues across diverse functions. They’ve deployed additional resources to tackle new areas such as risk management, technology, marketing, and sales, contributing to a culture of entrepreneurship and professional development. This new segment of NBFC operations is having a direct impact on raising credit and fiscal awareness among people who are turning their attention to micro-entrepreneurship that further boosts jobs. 

• Financial stability and resilience: One factor that often escapes notice is the NBFCs’ role as shock absorbers for India’s financial system. By diversifying the credit landscape and channeling funds to neglected sectors, these companies create an  inclusive system that is better equipped to withstand external shocks of the kind that the world witnessed due to the economic slowdown fired by the interest rate spikes in the US and Europe. 

• Sustainable development: Last but not least, NBFCs have shifted their attention towards the environment, social, and governance (ESG) principles in recent times. Several of these companies are involved in financing sustainable development, promoting green infrastructure and supporting micro-enterprises engaged in these projects. This integration of ESG values into NBFC targets is helping foster a responsible and sustainable economic growth model that will yield long-term benefits for India. 

The Road Ahead – The Best is Yet to Come

There’s little doubt that the NBFC sector is poised for robust growth and transformation over the next few years as India prepares for “Amrit Kaal” – the celebration of a century of freedom in 2047. A more streamlined regulatory framework and the digital transformation initiatives would potentially foster a deeper and broader engagement of NBFCs with India’s growing economy. In its mid-year report, ICRA predicted that NBFCs will grow between 13% to 15% in FY 2024, driven largely by retail assets. It revised the growth outlook upwards based on the assumption that retail assets under management with NBFCs could expand by one-fifth in FY24 as against about 12% during the previous financial year. 

However, a few challenges remain as NBFCs need to tackle data privacy, cyber security, and responsible lending practices on a war footing in order to sustain public trust, a prerequisite for growth. Given their value as engines of economic growth, catalysts for innovation, and champions of financial inclusion, NBFCs must continually adapt to customer needs and make financial transactions simpler and easier to access across all sections of society.