NBFCs - uncertain future or not?

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??Borrowing from banks, a key funding source for NBFCs has become costlier for the sector since the RBI raised the risk weight of banks’ exposures to the sector for the calculation of their regulatory capital. The measure has led banks to raise rates for loans to NBFCs to compensate for greater capital charges. Funding costs for large NBFCs increased about 0.5% on average in fiscal 2024 from the prior year, Moody’s said.

???According to the central bank's latest Financial Stability Report published in December 2023, 7.3 % of NBFC customers with personal loans of less than Rs 50,000 had at least one overdue loan, and 8.2 % of NBFCs' personal loans became delinquent within a year of origination.

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?? Despite rising funding costs, strong credit demand fuelled by the country's robust economic growth will support the sector’s profitability. Robust economic conditions will help them preserve their asset quality even as rises in interest rates increase the debt burdens of their customers. ?? The future of NBFCs holds promise and potential. A report by ResearchAndMarkets.com says that the sector is poised to grow at a CAGR of 18.5% between 2021 and 2026.

?? NBFCs have played a pivotal role in meeting the financial needs of individuals and business that have traditionally remained un-served or underserved by banks. But the regulations for NBFCs have become stricter in recent times, the cost of borrowing has increased and NBFCs are focusing on niche markets and personalised products and services.?

??NBFCs are now more focused on developing innovative products and catering to low-income, urban customers in unorganised sectors. In such a scenario, NBFCs are adopting business and operational models powered by technologies that seamlessly facilitate the design, launch, implementation and execution of tailored products and services.

??Investing in new technologies and strategic partnerships with incumbent FIs and Fintechs also allows?NBFCs to lower their costs when it comes to increasing their customer base, lowering customer acquisition costs, servicing existing customers or de-risking the portfolio while trying to overcome the increasing formal credit penetration in a growing economy.

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?? ?NBFCs are expected to witness a rise in attrition among front-line and mid-level staff as various new entrants ramp up hirings. As a result of this, the operating expenditure of incumbent NBFCs will rise further as they rush to make new hires and retain existing employees. There would be an increase in opex for sure because front-end employees would demand more money as the churn happens.

??With the demerger of Jio Financial Services from itself, Reliance Industries joined the list of large corporates that intend to capitalise on the rising demand for credit. Recently,?Bajaj Auto announced that its subsidiary Bajaj Auto Consumer Finance has received the RBI approval to carry out operations as a non-deposit taking NBFC. With the entry of these entities, incumbent NBFCs face a greater risk of attrition as the new entrants’ ramp up hirings with an aim to meet strategic objectives.

??Today, companies want skilled professionals who are able to deliver growth in a short period of time. Nobody wants to offer a learning curve. Everybody wants experience. This competition often leads to poaching of talent in banks and NBFCs and this results in churn. In order to deal with the churn these have adopted to variety of strategies including mass hirings, salary revisions and offering lucrative employee stock option plans.

??Any industry tries to shore up its defenses if there is a feeling of high attrition / talent movement. This creates a temporary shortage and may lead to increase in both salary and non-salary expenses in the said industry. With the entry of new entities, many incumbents are opting to increase their headcount so that they have sufficient manpower to manage their businesses. There could be a skill-gap among the available pool of prospective employees, and this has accentuated the challenge for these NBFCs.

?? What are your views on the above points ?

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