How Non-Banking Financial Companies Came Into Existence: An NBFC-P2P View
The fancy new financial jargon we hear nowadays is NBFC or Non-Financial Banking Companies or in case you really follow the market, it has been branched out to several new avenues catering some specific needs. One of the most trending as well as customer-facing avenue is P2P lending, which brings all such Peer to Peer Lending platforms under the umbrella of a term called NBFC-P2P. The full form of NBFC-P2P is quite self-explanatory in itself, but what does it really mean?
The recent years, NBFC have enjoyed quite a spotlight but it wasn’t so when the story started. At one point in its history, it contributed to one-sixth of the global outstanding credit, and thus was potentially seen as a systematic risk to the financial sector as a whole. In India, starting its legislative journey under the tutelage of Reserve bank of India as early as 1964, the Chapter III-B which was first introduced with motive to regulate ‘deposit accepting’ NBFCs in 1963, under the Reserve Bank Amendment Act went through many innovations and committees appointed by Governors of RBI over the year. From the James S. Raj Committee of 1974 which successfully banned chit fund schemes to the Chakravarty Committee that assessed and recommended links between banks and NBFC in terms of their impact on the economy and the credit system in 1982, to the more recent Usha Thorat Committee of 2010.
Specifically, the Usha Thorat Committee was established in 2010 to regulate the risks involved with NBFC and ways to disentangle its participation the outstanding credit debt category. The committee was a type of a by-product after the uproar among NBFC over granting them banking license. They (and most of the finance sector) believed NBFC would never sustain in its current limitation, thus counter-arguing that the license would be the ticket to recovery. The decade long wait finally ended in April of 2014 when underwhelmingly RBI decided to grant license to 2 applicants out of the 27 who applied. The pool of the applicants went from conglomerates like Birlas and Ambanis to micro-lenders like Janalaxmi.
The tussle for a banking license by and for NBFC historically has always been an uphill battle, with the RBI’s issuance of the banking licence happening once-in-a-decade.
But RBI promised to change that, change it did!
Just as the NBFC obituaries were being rolled out by the market investors, a much needed reform was in the pipeline.
What followed were a series of guidelines and amends to revive the NBFC market. Starting from November 2014, there were stricter norms put in place for non-performing loans and gave them a three year time frame to implement, furthermore, certain tier-1 requirements are lowered to 10% from the previous 12%. This saw the NBFC flourish to new horizons, definitely clearing the air of uncertainty surrounding it. To supplement the growth further, the rough proxy for wholesale borrowing was bought down 150 points by the government. This caused an almost 100% rating on NBFC valuations since 2014. The annual loan growth of 16% in the last two years alone which is twice as fast as default bank credit growth is the sign of stability and progressive way ahead.
NBFC have already proven to be strong performers in consumer credit lending sector and while private sector banks with their wide spread network of branches and ATMs might delude you into thinking that they lead the retail lending market, in reality, even they are feeling the pinch of NBFC close on their heels. Considering the targeted high-volume marketing by the private banks, there still happens to be an unmet void of demands between small enterprises and start-ups with no real collateral or flowing cash assessment and credit lending.
Where on one side the private and corporate banking were focussing on project based finance and resolving non-performing loans, NBFC filled in the open need for peer to peer money lending.
Since Indians have an ingrained philosophy of borrowing money from informal sources like friends, family and money lenders, the offline crowd-sourced bazaar was just itching to sophisticatedly evolve into a consolidated and regulated online P2P marketplace. Micro-financing proved its worth during the aftermath of the Andhra Pradesh crisis in 2013, where the market leaders nearly tripled their loans books in just one year. For banks, the P2P lending poses a competitive conflict of interest, and they soon saw right through it. Now-a-days, corporate banks are funding NBFC, which can be seen in the exponential share of 50% (risen for ~6%-9%) in bank credit.
“The rise of NBFC and P2P lending from a minority to the mainstream proves its unprecedented progress and the potential to cause heavy disruptions to traditional, older direct financial models. It is difficult to pinpoint what shape and form it will finally settle at but we are certainly set to move this industry in a right direction”, says Rajiv Ranjan, Founder and CMD of PaisaDukan.com, which is among India’s first to receive the In-Principle NBFC-P2P approval from the RBI. He concluded by saying, “the future belongs to innovation, speed and change, and right now we are just scratching the surface”.