Updated On : March 2021
Non-Banking Financial Companies (NBFC) are establishments that provide financial services and banking facilities without meeting the legal definition of a Bank. They are covered under the Banking regulations laid down by the Reserve Bank of India and provide banking services like loans, credit facilities, TFCs, retirement planning, investing and stocking in the money market. However, they are restricted from taking any form of deposits from the general public. These organizations play a crucial role in the economy, offering their services in urban as well as rural areas, mostly granting loans allowing for the growth of new ventures.
NBFCs also provide a wide range of monetary advice like chit-reserves and advances. Hence it has become a very important part of our nation’s Gross Domestic Product and NBFCs alone count for a 12.5% rise in the Gross Domestic Product of our country. Most people prefer NBFCs over banks as they find them safe, efficient, and quick in assisting with financial requirements. Moreover, there are various loan products available and there is flexibility and transparency in their services.
There are a huge number of NBFCs operating in our country but here’s a look at the current top 10 NBFCs in India.
Power Finance Corporation Limited
Power Finance Corporation Limited was founded in 1986 and is a Navratna Status company. Rajeev Sharma is the Chairman & Managing Director of the company. Power Finance Corporation Limited is known to provide financial assistance to different power projects in the country. It supports organizations involved in Power generation, transmission, and distribution. The company is also listed on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Shriram Transport Finance Company Limited
Shriram Transport Finance Company Limited focuses on funding commercial and business vehicles, besides others. The company was founded in 1979 and has been offering funding services for Light Duty Trucks, Heavy Duty Trucks, Mini Trucks, Passenger Vehicles, Construction Vehicles, and Farm Equipments. The company’s specialization is in general insurance, mutual funds, common assets, stock broking, and general protection.
Bajaj Finance Limited
Bajaj Finserv was founded in 2007 and is a unit of Bajaj Holdings and Investments. It offers loans to doctors for career enhancement, home loans, gold loans, individual loans, business, and entrepreneur loans, and is an extremely popular finance company. Apart from these, Bajaj Finserv also provides services like wealth advisory, lending money, and general insurance. It has over 1400 branches across the country with more than 20000 employees.
Mahindra & Mahindra Financial Services Limited
Mahindra & Mahindra Financial Services Limited (MMFSL) was established in 1991 and has over 1000 branches, and a customer base of over 3 million, all over the country. MMFSL is one of the most renowned organizations and has two affiliates offering Insurance services and rural housing financial services. It also specializes in offering gold advances, vehicle advances, corporate advances, home credits, working capital advances, and much more.
Muthoot Finance Ltd
Muthoot Finance Ltd is India’s first NBFC tracing its history back to 1888 when it began as a small lender from a village in Kerala. Muthoot Finance Ltd sanctions loans only against pledge of gold ornaments. It is a leader in India’s gold loan and finance market. Besides financing gold transactions, Muthoot Finance Ltd offers foreign exchange services, money transfers, wealth management services, travel, and tourism services. Gold coins are also sold at Muthoot Finance Branches. The company has its headquarters in Kerala, India, and operates over 4,400 branches throughout the country. It is also the parent company of Muthoot Housing Finance (India) Ltd, which offers home loans.
HDB Finance Services
HDB Financial Services is operated by India’s largest private-sector HDFC Bank. It offers a variety of secured and non-secured financial loans through a network of more than 1,000 branches in 22 Indian states and 3 Union Territories. It provides secured and unsecured loans, including personal and business loans, doctors loans, auto loans, gold loans, new to credit loans, enterprise business loans, consumer durables loans, construction equipment loans, new and used car loans, equipment loans, and tractor loans. The company operates through Lending Business and BPO Services segments. It is considered the fastest growing NBFC in India today.
Cholamandalam Investment and Finance Company Limited (Chola), was incorporated in 1978 as the financial services arm of the Murugappa Group. Chola started as an equipment financing company and has surged ahead as a complete financial services provider offering all kinds of services like - vehicle finance, home loans, home equity loans, SME loans, investment advisory services, stockbroking, and a host of other financial services to customers. Chola has 725 branches across India with assets under management above INR 35,000 Crores.
Tata Capital Financial Services Ltd
Tata Capital Financial Services Limited is top of India’s leading NBFCs. Established in 2007, it is a subsidiary of Tata Sons Limited. TCFS describes itself as a one-stop financial service provider that caters to the diverse needs of retail, corporate and institutional customers across businesses. It is registered with RBI as ‘Systemically Important Non-Deposit Accepting Non-Banking Financial Company (NBFC)’. Among the various products offered by TCFS to individuals, families, and businesses, are commercial finance, infrastructure finance, wealth management, consumer loans, and distribution and marketing of Tata Cards.
L & T Finance Limited
L & T Finance Limited is a strong player in the non-banking financial sector and was established in 1994. Headquartered in Mumbai, L & T offers funding services to different sectors like trade, industry, agriculture, Commercial Vehicle loans, Individual Vehicle loans, and corporate and rural loans. The company caters to more than 10 lakh people. In 2010, L & T was awarded the “Company of the year” in the Economic Times awards.
Aditya Birla Finance Ltd.
Aditya Birla Finance Limited, a part of the Aditya Birla Financial Services, was incorporated in 1991 and is an ISO 9001:2008 certified NBFC. ABFL is registered with RBI as a ‘systemically important non-deposit accepting NBFC’ and it ranks among the top five largest private diversified NBFCs in India. It offers precise and customized solutions across a wide range, from corporate finance to commercial mortgage, and from capital markets to structured finance.
The impact of Covid 19 on NBFCs
According to CRISIL, Fitch, SBI Research, India could dive into a full-blown recession with Arthur D Little saying it will push 120 million people back into poverty and destroy opportunities of up to 1 trillion dollars in GDP. The RBI states, banks have credit outstanding of roughly 1.92 trillion dollars and hold deposits worth about 1.69 trillion dollars.
NBFCs, which are the key sources of funding for a lot of diverse segments not funded by banks, have been hit severely by COVID 19. They were immediately faced with a huge liquidity crisis and declining asset quality. Sectors critical to NBFCs, such as manufacturing, auto, real estate, and retail, are still operating at a subpar level. This has added to the pressure for NBFCs earlier affected by the IL&FS defaults.
While banks finance loans through public deposits, most NBFCs rely mainly on borrowing from banks to fund their disbursements. With the pandemic, banks have been reluctant to lend to NBFCs. To add to their woes, NBFCs were directed to offer moratorium to their debtors, whereas they did not receive any similar support from banks.
The RBI took several steps, first in April and then in August, to provide relief but there was no moratorium announced for capital market borrowings, which also form a significant chunk for NBFCs. In October, as part of its 20 trillion stimulus package, the government announced liquidity support of Rs 75000 crores to NBFCs – MFIs, to be imparted under two separate schemes. This comes as a relief but the reluctant approach of banks is still a matter of concern.
The future of NBFCs - Surviving and thriving
With their core business shrinking because of Covid-19, NBFCs are being forced to diversify and find other sources of income and reimagine their business. They will have to redefine themselves with a market-driven platform, leveraging their fortes – customer base, distribution reach, and collaboration with varied ecosystems.
It has become clear that to deal with the changing business scenarios, NBFCs will have to focus on their strengths which are essentially their five main functions.
- Origination, underwriting, and decision-making which is the crucial role of assessing the risk potential or creditworthiness of a potential borrower.
- Loan fulfilment and servicing by using different strategies to reach the target audience and providing end-to-end customized services.
- Risk management with proper risk mitigation measures and enhanced governance protocols.
- Collections with a prioritization framework and a well-regulated process through different collection strategies avoiding delinquencies.
- Funding involves raising money to perform the above four functions.
In an ideal situation, to tackle the two main issues NFBCs are facing, severe liquidity crisis and declining asset quality, they could take care of their asset quality by focussing on the first four of their functions. Since taking care of the liquidity crunch requires different skills, NFBCs could focus on doing what they excel in and leave funding to the bank, who are the experts. This could be a win-win situation for both if banks take on the liquidity risks on behalf of NBFCs with loans remaining on their balance sheets and NBFC bearing the default risk. This would solve issues at two levels, banks providing liquidity without hesitation, and NSFCs focussing their core strengths.
With Bloomberg reporting that NFBC is very slowly recovering, even with the economy struggling, the belief is that NBFCs can effectively come out of the Covid-19 induced depth they were flung into, by enabling an efficient marketplace driven platform. This will further expand with data-driven need-based servicing not limited to just in-house offerings.
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