Non Banking Financial Companies or NBFC in India are registered companies conducting business activities similar to regular banks. Their banking operations include making loans and advances available to consumers and businesses, acquisition of marketable securities, leasing of hard assets like automobiles, hire-purchase and insurance business.
Though they are similar to banks, they differ in a couple of ways. NBFC’s cannot accept demand deposits (deposits that can be withdrawn at immediate notice), they cannot issue checks to customers and the deposits with them are not insured by the DICGC (the India equivalent of FDIC in the US system). Either the RBI (Reserve Bank of India) or the SEBI (Securities and Exchange Board of India) or both regulate NBFC’s.
Though the NBFC’s have been around for a long time, they have recently gained popularity amongst institutional investors, since they facilitate access to credit for semi-rural and rural India where the reach of traditional banks has traditionally been poor.
NBFC’s have also had a major impact in developing small business in rural India through local presence and strong customer relationships. Usually the loan officers in such NBFC’s know the end customer or have a strong “informal” understanding of the credibility of the borrower and are able to structure their loans appropriately.
With the next wave of growth in India expected to come from the semi-rural and rural sector, the unique access of NBFC’s to these sector puts them in a great position to benefit from this growth. As evidence of their attractiveness, Goldman Sachs bought a 20% stake in Sriram Credit for 75 mUSD in Q1 2008. Credit Suisse is planning to take a majority stake in Bokdia Marketing and Finance (as reported in May 2008). Foreign Institutional Investors (“FII”) are also setting up their own NBFC’s in India to offer corporate banking and private banking operations. As an example, Societe Generale got approval for its NBFC launch in the country in October 2007. The French financial services group plans to strengthen its brand in India though NBFC’s.
There are three categories of NBFC’s,
a. Asset Financing Companies (“AFC”)
b. Loan Companies (“LC”)
c. Investment Companies (“IC”)
In my current post, I will focus on two NBFC sectors of Microfinance and Infrastructure finance which fall under the category of AFC and LC. In a future post, I will focus on consumer finance with specific focus on the automobile sector.
Microfinance Sector (very attractive)
There is a huge need for credit in the rural sector in India. Roughly 245 million people need 52 bUSD of microfinance credit. This includes small and marginal farmers, landless laborers, micro entrepreneurs in the rural and semi-urban areas. NBFC’s constitute almost 66% of the microfinance (MF) sector. The customer base covered by microfinance is expected to reach 49 million people by 2012 growing at a CAGR of 43% with an expected loan portfolio of 6 bUSD. (Source: Recent report on microfinance by Intellecap, a research firm specializing in microfinance).
The key growth drivers in the microfinance sector are:
a. Need for broader suite of products: Products such as investment products, insurance products, retirement planning can be offered to the customer base
b. Regional diversification: The NBFC’s in this space are mostly concentrated in South India. I expect this to grow in other regions.
c. Market consolidation and entry of FII: The smaller NBFC’s will get acquired and large FII’s (such as Fullerton) will come in and build franchising models to accelerate the quality and penetration of MF in rural areas.
On the flip side, there are some constraints in the microfinance sector such as lack of regulatory rules which are still evolving, lack of standardization, ability to attract quality human resources and an industry attitude that it is still a social enterprise versus for profit professional enterprises.
Lastly, in terms of recent investment activity, SKS microfinance (37.3 mUSD), Share Microfin (27.5 mUSD) and Spandana (12 mUSD) were financed in the last year. Additional NBFC’s such as Bandhan, Cashpor and Grameen Koota are looking actively for investments.
Infrastructure Finance Sector (very attractive)
During the economic boom of the 1990’s, the Govt. implemented many policies for infrastructure development with focus on roads, telecommunications, ports, and power. Special purpose vehicles (“SPV”) were formed to facilitate the credit demands of various projects. A majority of these were setup as NBFC’s. The Govt. also implemented public private partnerships (“PPP”).
As a perspective, during the period 1990-2006, 233 PPP projects were completed with total investment of 69 bUSD. The PPP investments grew from 0.6 bUSD in 1991 to 17.1 bUSD by 2006 representing a CAGR of 25%.
During the period 2007-2017 the levels of investment is expected to further accelerate fueled by the economic growth and the need to catchup on infrastructure to facilitate this growth. During this period investment of roughly 1500 bUSD (Source: Govt. website, World Bank and E&Y report) would be needed on power, roads and telecommunications.
The Govt. is setting up favorable policies to attract at least 50% of this investment from the private sector. The private NBFC’s are expected to become a major investment vehicle to funnel the private investment into the growing infrastructure sector in India.
SG Analytics an investment research firm based in India which i work for does sector research work on emerging markets such as India and China.