Health of the NBFC Sector, and Why it Matters!

Economic growth in the dynamic world we live in, depends to a great extent on start-ups and their progress. The optimistic goal of attaining a $5 trillion economy by 2024, presented by the NDA government, will only be possible if the MSMEs contribution to the GDP grows to 50% from 29%. Whether to meet operational expenses or make capital ones to grow their businesses, these MSMEs count on the credit they receive from various sources. Even with a number of loan schemes set up to meet their needs, the sector faces a Rs 16.66 lakh crore credit gap.

The NBFC sector hope to bridge this gap through customised products that are built based on a deep understanding of micro markets in tandem with the advances in technology that enable data driven unwriting models at risk-based prices. They service 20% of their credit needs today but the liquidity crisis that hit the sector could prove to be a challenge to this credit growth.

Apart from supporting the growth engines of our country, NBFC sector in India drives financial inclusion and contributes to nation building in many other ways: 

  • Delivering investment opportunities– NBFCs help individuals convert surplus funds / savings into investments. The liquidity woes that followed the IL&FS default have led to the common misconception that all NBFCs are a credit risk. However, investing in an NBFC can be a safe bet if you take the necessary precautionary measures. It is critical to consider the companies’ credit rating, assets and liabilities, and its overall stability before you invest.
  • Creating jobs and boosting employment- Much like a ripple in the water, the impact of NBFCs isn’t restricted to the immediate lives they touch. They provide access to credit to organizations across the board that would consequently boost human capital requirements.
  • Attracting FDIs- More than money, it’s the opportunities created. The funds that NBFCs pump into Indian companies help them grow and get noticed by investors both within the country and beyond every boundary.
  • Customised solutions and services- The credit delivered opens doors for the underserved. It’s looped cycle where NBFCs convert savings into investments, investments into loans, which are then converted back investments but in a different form. The flexibility, speed and lenience they offer, enables the flow of credit to financially weaker individuals and organizations who are unable to get loans from other formal sources of credit.
  • Improving market capitalization- The finances disbursed by NBFCs also help boost the valuation of listed, publicly traded firms.
  • Facilitating loans to core sectors- NBFCs also target and serve industries such as infrastructure, transport, power, etc. that involve longer tenures. They offer tailor-made solutions that meet the needs of these borrowers.

NBFCs have become one of the key vehicles for the mobilization of funds among the underserved audience in India. NBFCs are a crucial part of our financial system and the well-being of the sector could be the difference between getting to or falling short of the 5 trillion finish line. Although they sector seems to be unsteady at the moment, a number of institutions like Capri Global continue in their steady march into the future with technology at the helm.