Health of the NBFC Sector, and Why it Matters!
Economic Growth and the Role of NBFCs in Bridging the Credit Gap
Economic growth in the dynamic world we live in depends to a great extent on start-ups and their progress. The optimistic goal of attaining a $5 trillion economy by 2024, presented by the NDA government, will only be possible if the MSME sector’s contribution to the GDP grows from 29% to 50%. Whether to meet operational expenses or make capital investments to grow their businesses, these MSMEs rely on the credit they receive from various sources. Despite numerous loan schemes established to meet their needs, the sector faces a staggering ₹16.66 lakh crore credit gap.
The NBFC sector hopes to bridge this gap through customized products based on a deep understanding of micro-markets, combined with advances in technology that enable data-driven underwriting models at risk-based prices. Today, they service 20% of MSME credit needs, but the liquidity crisis that hit the sector could challenge future credit growth.
Apart from supporting the growth engines of our country, the NBFC sector in India drives financial inclusion and contributes to nation-building in many other ways:
1. Delivering Investment Opportunities
NBFCs help individuals convert surplus funds or savings into investments. The liquidity woes following the IL&FS default have led to the misconception that all NBFCs are a credit risk. However, investing in an NBFC can be a safe bet if you take necessary precautionary measures. It is critical to consider the company’s credit rating, assets, liabilities, and overall stability before investing.
2. Creating Jobs and Boosting Employment
Much like a ripple in the water, the impact of NBFCs isn’t restricted to the immediate lives they touch. They provide access to credit for organizations across various sectors, which consequently boosts human capital requirements and creates jobs.
3. Attracting FDIs
More than just money, NBFCs help create opportunities. The funds pumped into Indian companies by NBFCs help them grow and get noticed by investors both within the country and beyond.
4. Customized Solutions and Services
The credit delivered by NBFCs opens doors for underserved sections of the economy. It’s a looped cycle where NBFCs convert savings into investments, investments into loans, which are then converted back into investments but in a different form. The flexibility, speed, and lenience NBFCs offer enable the flow of credit to financially weaker individuals and organizations who cannot access loans from other formal sources.
5. Improving Market Capitalization
The finances disbursed by NBFCs also help boost the valuation of listed, publicly traded firms.
6. Facilitating Loans to Core Sectors
NBFCs target and serve industries such as infrastructure, transport, and power, which involve longer tenures. They offer tailor-made solutions to meet the needs of these borrowers.
NBFCs have become one of the key vehicles for mobilizing funds for the underserved audience in India. They are a crucial part of our financial system, and the well-being of the sector could be the difference between reaching or falling short of the ₹5 trillion target. Although the sector seems to be unsteady at the moment, several institutions like Capri Global continue their steady march into the future with technology at the helm.