A surge in liquidity, regulatory arbitrage, and the crippled state of banks converged to make the non-banking finance company (NBFC) business model a success with equity investors latching on to any business that would reflect the Indian financial services growth without its baggage of bad loans. Life has come a full circle with premium attached to banks shrinking while NBFCs gaining traction. There is huge opportunity in the NBFC space given that the credit-to-GDP ratio is low. Historically, NBFCs were a neglected lot in the financial services. Once the regulations tightened, they found it difficult to access funds. NBFCs were dependent on banks with 70 per cent of their total funds coming from banks. After the global financial crisis caught them on the wrong foot, they began to tap the market for funds. The surge in liquidity at mutual funds and insurers’ investments in bonds has made funding a better proposition. Apart from credit bureau score, NBFCs are using credit underwriting processes such as profiling a customer based on mobile usage, social activities and information available on the social media. They are investing in faster turnaround time of loan applications. The balance sheet of the NBFC sector expanded by 14.5 per cent during 2016-17. Loans and advances increased by 16.4 per cent and investments increased by 11.9 per cent in March 2017. Despite the growth they managed their asset quality better than banks. Gross bad loans of the industry are down to 4.4 per cent in March 2017, from 4.9 per cent in September 2016 when banks in general witnessed a rise. Net NPAs as a percentage of total advances also declined from 2.7 per cent to 2.3 per cent.

(Economic Times)