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NBFCs have shown a significant growth rate and now hold approximately 25% market share in loans and advances
NBFCs In India
India is on the path to achieving the goal of becoming the third-largest economy in the world, with a GDP of over $5 trillion in the coming years. With an expected growth rate of over 7% in the current financial year, a consistent trend has been exhibited toward treading this desired path. However, this calls for resilient development of the financial sector to support the economy with robust credit growth.
Commercial banks, as well as Non-Banking Financial Companies (NBFCs), have a crucial role to play in this respect. While banks have been contributing to lending activities for over two centuries, NBFCs, as purveyors of credit, came into existence in the 1960s under RBI regulations.
Over the years, NBFCs have shown a significant growth rate and now hold approximately 25% market share in loans and advances, leveraging their deeper reach, better usage of technology, flexibility in approach, and last-mile connectivity. Here, we delve further into the broad features, factors influencing market share, and the way forward for banks and NBFCs.
During 2023-24, bank credit growth remained robust at around 19%, mainly driven by personal loans and lending to the services sector. As of March 2024, banks have a credit portfolio divided among various segments: 13.1% to Agriculture, 23.5% to Industry, 29.2% to Services, 32.9% to Personal Loans, and 1.3% to Others (Source: RBI Financial Stability Report, June 2024). Commercial banks are also required to lend to the priority sector with a target of 40%; therefore, a part of their market share is earmarked for the agriculture sector, micro, small and medium enterprises, weaker sections, etc., which are included in the priority sector. Over time, banks have also contributed significantly to export finance and infrastructure finance.
During 2023-24, NBFCs maintained strong credit growth of 17.9%, despite some moderation in the second half of the year. Personal loan growth decelerated, whereas growth in lending to Industry and Services accelerated. The respective share of NBFCs’ credit portfolio across various segments as of March 2024 indicates a wider spread: Agriculture at 2.1%, Industry at 36.8%, Services at 14.9%, Personal Loans at 33.5%, and Others at 12.7%. A divergence was observed between banks and NBFCs regarding market share movement in certain segments.
Main Factors Influencing the Market Share
1. As per the market structure, while most banks lend across various sectors, the company/entity-wise lending by individual NBFCs is determined by the nature and classification of each type/category of NBFC registered with RBI. This largely influences the market share dynamics in a significant way. At a broader level, based on types of liabilities, NBFCs are divided into Deposit and Non-Deposit accepting NBFCs. Further, based on size and activity, RBI has classified NBFCs under the Scale-Based Regulation (SBR) framework into four layers: Base Layer, Middle Layer, Upper Layer, and Top Layer. The SBR framework considers capital requirements, governance standards, prudential regulation, and other aspects of NBFCs.
2. Considering the nature/categories of activities, we have various types of NBFCs catering to different market segments, which impacts their respective market share.
3. NBFC-MFIs (Microfinance Institutions) lend 85% or more of their assets in the form of collateral-free small loans to rural households. With a better-than-expected monsoon, the business share of NBFC-MFIs is therefore expected to improve.
4. Infrastructure Finance Companies (IFCs) are a category of NBFCs that deploy at least 75% of their total assets in infrastructure loans. These generally consist of large-scale loans used to finance sectors like roads, ports, and energy. With the government’s continued emphasis on infrastructure development, the business share of such NBFCs is likely to grow at an accelerated pace.
5. The availability of resources for NBFCs is crucial to their growth and market share. The RBI has indicated a preference for NBFCs to reduce their dependence on bank finance as a source, encouraging them to borrow more through capital market instruments like NCDs, ECBs, and Commercial Paper. This shift will impact borrowing costs and, consequently, their maneuverability in the market share.
6. Increased risk weights on personal loans will also affect the volume of such loans extended by NBFCs.
7. The Co-Lending Model (CLM), introduced by the RBI in 2020, is based on a collaborative approach between Banks and NBFCs to meet growing market demand. This model has the potential to further increase market share for both entities.
Both banks and NBFCs have their comparative advantages in the lending domain. Banks possess stronger risk management skills, while NBFCs offer deeper reach, flexibility, and greater use of technology. Each must leverage its respective strengths and establish robust mechanisms to serve the expanding credit market in a rapidly developing economy, creating a win-win situation for both.
Written By: Jyoti Prakash Gadia, Managing Director, Resurgent India
Disclaimer:The views expressed in this article are those of the author and do not represent the stand of this publication.
