There is an urgent need for the government to bring the non-banking financial companies (NBFCs) under the ambit of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act to enhance the investor confidence and ensure robust growth of this sector, an Assocham-Resurgent India joint study said.
''A suitable legislative change to bring NBFCs under the purview of the SARFAESI Act would go a long way in fortifying the faith of investors which in-turn would greatly contribute to their growth,'' said a study titled 'Non-Banking Financing Companies: Game Changer' jointly conducted by The Associated Chambers of Commerce and Industry of India (Assocham) and consultancy firm Resurgent India.
Currently, NBFCs have been kept outside the purview of SARFAESI Act and a reform in this area is critical as the Act empowers the banks and financial institutions to recover their non-performing assets (NPAs) without courts' intervention.
''There is a compelling need to induct uniform practices and ensure a level playing field for NBFCs in India considering that they are useful and successful for evolution of a vibrant, competitive and dynamic financial system in India,'' further highlighted the Assocham-Frost & Sullivan study. ''NBFCs play a complementary role in banking system by broadening access to financial services, enhancing competition and diversification of the financial sector.''
''NBFCs need to focus on core strengths and improve upon their weaknesses by being dynamic and constantly search for new products and services to survive in the ever-competitive domestic financial markets,'' said D.S. Rawat, secretary general of Assocham while releasing the study.
''The future of NBFCs is very challenging and only those NBFCs will survive in the long run that are able to face the challenge and can stand the test of time more so during the prevailing global economic slowdown,'' said Rawat. ''NBFCs can be a significant link in promotion of financial inclusion by meeting financing needs of the under-served segments of society such as small enterprises and rural households.''
NBFCs have the potential to emerge as a one-stop shop for all financial services which is apparent in its moderate consolidation activities in recent years, a trend expected to continue in the near future, noted the Assocham-Resurgent India study.
Besides, NBFCs will go a long way through financial product innovation and swift services such as speed of credit delivery and the zeal to expand their reach across India, mainly to the unbanked areas, it added.
In India, NBFCs finance more than 80% of equipment leasing and hire purchase activities and have been pioneering at retail asset backed lending, lending against securities, microfinance etc and have been extending credit to retail customers in under-served areas and to unbanked customers.
The NBFCs in India, accounted for 11.2% of assets of the total financial system, according to the Economic Survey of 2010-11.
Besides about 12,385 NBFCs with total assets at USD26 billion (bn) were registered in India in FY 2012.
''NBFCs are emerging as strong financial intermediaries in retail financing space and have gradually increased their share in retail lending and currently account for 47% of such business in the country,'' highlighted the Assocham-Resurgent India study. ''The new RBI (Reserve Bank of India) guidelines on NBFCs with regard to capital requirements, provisioning norms and enhanced disclosure requirements will further boost the growth of the sector as it would help the people in understanding the business in a much better way and would simultaneously lead to greater professionalism in the industry.''
Vehicle finance is the major segment contributing to over one-third of the gross assets of NBFCs, followed by loans against property and gold loans.
The share of NBFCs in total gold loans has increased dramatically from 13% during FY 2008 to 27% in FY 2012. Gold loan NBFCs grew at a CAGR of 89% during FY'08-FY'12. Total Assets of gold loan NBFCs were USD 9.5 billion in FY'12 from USD 0.9 billion in FY'08. ''However, this business has taken a hit of late because of the restrictions imposed by the government on import of gold, quantum of loan (LTV) that could be given against gold etc,'' highlighted the Assocham-Resurgent India study.
In retail NBFC segment, domestic players will continue to be the dominant contributor, whereas in the medium term contribution from foreign players will remain limited.
In spite of better operating environment, the overall performance of foreign NBFCs remains muted. Besides, competitive pressure and high delinquencies in the unsecured retail loan portfolios led foreign NBFCs to downsize their operation. On the upside, increasing losses from unsecured portfolios and movement to secured classes is expected to boost growth in future.