Financial sustainability has been a challenge for any entity that is not a big player in the Indian market, especially in the post-Covid times. However, policies framed by the Central Government have been instrumental in sustained economic growth in the recent financial years. The first three-quarters of FY2024 maintained a GDP growth of over 8% as a result of such policies, including CapEx-led growth strategies that have drawn investment. The catch, however, is the reason behind the flourishing of MSMEs – the non-banking sector.
This particular sector has grown to an enormity of over 27 lakh crores, according to 2023 figures. Furthermore, it has maintained a growth rate at par with the big industries, which only underlines its importance concerning the Indian economy. Let us now delve into the challenges and opportunities that lie before the NBFCs so that we may have a better understanding of the current financial landscape in India.
The challenges to NBFCs
Despite a considerable potential to hold together the structure of growth, the non-banking sectors face a lot of technical struggle in building a relationship of trust with the Reserve Bank of India (RBI). Let us take a look at the technicalities that hold back this sector from unleashing its true potential and driving an upsurge of growth in the market.
- Stringent regulatory policies: The RBI has a strict regulatory framework in place that informs the lending policy of the NBFCs. These measures are justified to ensure that the market does not form a vulnerable financial bubble as a consequence of aggressive lending and the resultant bad loans. However, these measures often require this sector to adapt quickly to the new scenario, forcing tweaks in management strategy that can hamper an existing vision for growth. In the current times of AI-led innovation, a sudden policy change can trigger the shelving of key projects and resource allocation plans. To counter this situation, the NBFC sector must focus on keeping an eye on government policies and device strategies that follow the essence of existing guidelines.
- The stumbling block of funding: Traditional institutions like banks do not have to depend on funding because of their huge customer base. However, the non-banking sector must depend on online markets to raise enough funds so that their innovative projects can take shape. Since reliance on external sources is a characteristic of this sector, the lack of liquidity often mars a good chance of business expansion. The competitive e-commerce market and a rise in microfinancing applications do not help the cause either. Thus, it can be inferred that the key to sustainability lies in how far the liquidity crisis and the utilisation of external financial resources can be balanced.
- The onus to maintain profitability: No sector can survive for long without profitability. Therefore, it is a primary challenge for the non-banking sector to maintain a steady flow of funds by depending on a workable model. A strong presence in the online market also makes sure that there is no shortage of funds at any point.
Opportunities Galore
While there is no shortage of challenges, the non-banking sector also has opportunities that can gain them significant ground if the potential is tapped to its true merit.
- Leveraging niche markets: Due to its intrinsic operational nature, the non-banking sector can attract specific niches that tend to rely on them rather than larger financiers like banks. One such market is the education sector, which requires the channelling of funds in a strategic and personalised manner. Customers might have specific requirements, such as longer repayment periods or loans against property to access funds. The non-banking sector must be prepared to structure its loaning system in such a way that caters to such requirements of students.
- Focusing on co-lending: Collaborating with the banking sector can help non-banking entities generate liquidity without burdening their balance sheets. Doing so also helps maintain a more diverse portfolio, which is a good way to reduce potential risks involved in investments. Sharing of financial liabilities makes sure that there is reduced financial pressure and more breathing space for the survival of the company. These partnerships also open up new avenues for potential business expansion, like in the field of student loans, and have a greater hold over market share. The collaborations also let the companies have more options for tweaking their strategies in case of an overhaul of government strategies and thus restructure new strategies.
- AI-powered data interpretation and sorting: The NBFC sector has the opportunity to use AI to integrate the process of loan origination and underwriting to evaluate creditability. Moreover, customer engagement through mobile applications and other online means of diverse loaning policies is sure to bring in more revenue. However, it must be borne in mind that in such cases, cybersecurity must be ensured to protect users and foster a relationship of trust.
Thus, the NBFC sector faces challenges in survival in the online marketplace but also has a lot of opportunities to tap into. The key to survival and sustainability is good, long-term strategising in line with government policies and gradually maintaining a stronghold over the market shares. Thus, a brand will be built over time that would have a better chance at survival.