NBFCs in India – India’s Growth Counterpart

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This analysis has been done by Pankaj Singhania, the founder of Lakewater Advisors. The original article can be read here.

Indian economy is undoubtedly going through turmoil with unemployment
at its peak (at 6.1%), high consumer price index (149.10 points), and
low performance in almost all the sectors, with banking being the

However, while the Non-Performing Assets (NPAs) in banking are
constantly growing in numbers, we planned to scan Non-Banking Financial
Companies (NBFCs) in the same segment and looking at the performance, are bullish about their growth.

To understand NBFCs better, let’s understand their classification and products covered first.

Classification of NBFCs in India

NBFCs in India are classified under three categories (as per RBI):

NBFCs in India

Products covered under NBFCs

Products under NBFCs in India

NBFC sector in India has gone through considerable reforms over the
past few years and has been synonyms to regular banking in the current

Nearly 10,000 NBFCs registered themselves with RBI till 27
March 2019.

With its steady growth, it is now accepted as a vital constituent from a micro-economic perspective.

Reasons being:

  • NBFCs in India have been a pioneer in providing credit facility to undeserved Micro Small and Medium Enterprises (MSME) and unbanked sector, which has helped in the overall economy of India.
  • NBFCs are an accelerator to RBI to expand the target market to semi-urban and rural areas.

Why are we bullish on NBFCs in India?

FY19 began with high expectations as it seemed the economy is settled
from the teething troubles of Demonization and Goods and Service Tax (GST).

However, the economy didn’t live up to the expectations due to rising
NPAs and liquidity crises. 

Among all these crises, inflation gave relief as the Consumer Price Index (CPI) was recorded below 4%.

Nonetheless, we believe while the banking sectors hold its hand
tight, it was NBFCs in India that kept the ball rolling.

~17% of the total credit in India is provided by NBFCs and it has registered a growth rate of 20% in FY18, which undoubtedly slowed down after the default of IL&FS.

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However, the aggregate capital adequacy ratio stood strong at 19.3% as of March’19.

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Looking at the road map, the following reasons can be attributed to NBFC’s consistent growth:

A: Retail Finance

In the retail finance space, NBFCs have swiftly developed a stand. ~80% of equipment leasing and hire purchasing activities in India are financed by NBFCs.

In spite of liquidity crises, NBFCs in India had a share of 30% in outstanding retail loans in FY19.

Share of outstanding retail loans by value in FY19(%)

B. Public Deposits

Public deposits of NBFCs grew at a CAGR of ~36% for the period FY09-18. This shows strong consumer confidence in the segment unlike the shaking hands in the banking industry.

C. Micro Finance Institutions (MFIs)

NBFC have made an instrumental reach in rural credit institution in the form of NBFC-MFIs.

Due to the regulatory guidelines on NBFC-MFIs; MFIs resulted in exceptional growth between 2013-2019 as per the joint Liability Group(JLG)model.

Below is a chart showing the number of clients outreached and gross loan portfolio generated.

D. Micro, Small and Medium Enterprises (MSMEs) –

Since NBFCs in India have profound knowledge about micro-markets, it has been able to concentrate on the lower segment via product customization.

In order to expand the reach, MSME focused NBFCs, have made their model based on segment, product, and geography.

NBFCs share in MSME Finance is increasing, while that of public sector banks is going down.

Market Share of NBFCs in India

E. Scheduled Commercial Banks (SCBs)

NBFCs surpassed SCBs on account of growth in advances, asset quality, and profitability.

While SCBs are giving nil or negative return on assets and equity, NBFCs had given ROE (Return on Equity) of 7.5% as of 31st March 2018.

This momentum will be accounted for in the Financial Sector’s growth in the near future.

F. Increasing Reach and Network

NBFC is increasing its network by reaching out to Tier-2, Tier-3 and
Tier-4 markets. Due to the evolvement of digitalization, NBFCs can now
provide a seamless 24*7 customer satisfaction experience.

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Also, collaborating with the alternate lenders on the digital platforms has increased their targeted customer base.

G. Government Support & RBI Working Committee Recent Guidelines

The Finance Minister has announced in Union Budget to provide a partial
credit guarantee facility to PSUs worth INR 1 lakh crore for the
procurement of high-rated pooled assets of fiscally stable NBFCs.

This measurement should benefit the NBFC sector and pump up investor’s beliefs. In addition to the above, RBI has ruled out a new set of guidelines for NBFC, with respect to capital requirement and provisioning norms.

A large NBFC or a Corporate House can apply for the license provided it has an AUM of more than 50000 Cr with operations spanning more than 10 years of existence.


It’s anticipated these new guidelines should support the growth of NBFCs in the long run.

Conditions Apply*

Also Watch: Large NBFCs in India that can Convert into Banks as per RBI Working Committee Guidelines


While all the above-mentioned points lead forward to a strong
foothold for NBFCs in India, they undoubtedly come with few conditions. On top being:

1. New Age FinTech Companies

Technology had helped NBFC to create credit assessment models and
optimize the same.

However, due to the new age Fin-Tech companies, NBFC has been facing stiff competition from them in terms of the upgraded technology and low cost operating models.

In the near future, NBFC should develop new channels by being aggregators to Fin-Techs or they may stay behind in the race.

2. Stay alarmed on NPAs

Non-Performing Assets have created distress in the Indian Banking sector.
Since the banking sector has constrained their hands in lending
activities, NBFCs in India have a new opportunity in credit sector to indulge in.

However, they need to trade on a cautionary note and should not
compromise growth with safety.


The budget of FY19 aspires the economy to achieve US$ 5 Trillion in 2024.

However, this seems challenging as the NBFC crisis has been highlighted in the Economic Survey 2018-19.

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The default of IL&FS in September 2018 played a major role in this survey, as this made investors watchful regarding their funding activities.

NBFC was just a 4 lettered word in the money market after this crumble.

Nonetheless, the importance of NBFC has been recognized by Prime Minister, and to promote the same certain policy announcements have been carried out.

One such step is coverage of NBFCs under the Credit Guarantee Fund
Trust for Micro and Small Enterprises Scheme.

Apart from that, domestic financial institutions like NABARD and SIDBI are also refinancing NBFCs. RBI too is streamlining the system to boost NBFCs and providing more liquidity.

All in all, these measures along with the growth numbers, project that
NBFC will be invigorated and reinvented. Lakewater is with them.


Performance of selected NBFC like Bajaj Finance / Consumer Finance companies for the last 5 years.

Bajaj Finance - NBFCs in India
Cholamandalam Finance - NBFCs in India
M&M FInance - NBFCs in India

This analysis has been done by Pankaj Singhania, the founder of Lakewater Advisors. The original article can be read here.

Disclaimer: The opinions expressed in this publication are those of the authors. They do not purport to reflect the opinions or views of the FinMedium or its members. The presentation of material therein does not imply the expression of any opinion whatsoever on the part of the FinMedium concerning the legal status of any company, country, area, or territory or of its authorities. For more info. please read our ToU & Privacy Policy here. If you have any concerns regarding this post, please reach out to our grievance officer Ghanisht Nagpal and drop a mail to editor@finmedium.com

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Lakewater Advisors

Lakewater Advisors

The founder, Pankaj Singhania, is a Chartered Accountant and Cost Accountant. He has a distinctive knack for analyzing company fundamentals in tandem with management credentials.
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