Amid increasing pressure on the banking system due to bad loans and NPAs, an ASSOCHAM-PwC joint study noted that in order to meet credit demand, non-banking financial companies (NBFCs) in India could explore investments in newer technology, particularly in the area of analytics and Artificial Intelligence (AI).
With banks implementing more stringent policies owing to increasing bad loans, Indian NBFCs are growing their market share. However, the study stated that NBFCs will have to keep pace with new technologies and changing customer aspirations to attract timely private equity (PE) investments.
"NBFCs must challenge the status quo in their business and find funds to invest into operating models with the potential to disrupt the industry," noted the study titled 'Fuelling NBFCs through private capital.'
It added that in the wake of digital advance of policy initiatives such as India Stack, Aadhaar Pay, Direct Benefit Transfer (DBT) and exponential increase in smartphone/internet access, NBFCs need to think hard about tweaking their current business models to grow in a hybrid world.
The report also said in order to ride the wave of increasing formal credit penetration in a growing economy, NBFCs will need to invest in new technologies to lower the cost of acquiring new segments (including thin files), servicing existing customers and de-risking the portfolio.
"New tech-based business models have the potential to crunch the learning period substantially and re-balance the strategic advantage of information access by inserting themselves into the value chain with technology," the study noted.
The paper noted that state-run and some private sector banks have been grappling with bad loans for the past three years, which, in turn, has given a tremendous opportunity for NBFCs to ramp up their scale. In fact, in the last two years, they have doubled their market share in small and medium enterprises (SMEs) and wholesale loans and have made substantial inroads in other consumer loan categories.
Coupled with lower cost, a focused approach on limited credit products and strong underlying risk management capabilities help NBFCs to not only underwrite credit to a targeted set of customers, but also to control bad debts, making them one of the attractive sectors for PE funding, the study noted.
Highlighting the importance of PE investment for the growth of the Indian NBFC sector, the report stated that private equity firms can provide the necessary capital and financial muscle to undertake strategic decisions, right from expanding existing markets, building newer capabilities, improving efficiency or even to refinancing existing high cost debt.
It, however, said PE firms look to invest in NBFCs which can build scale which provides cost reduction opportunities, market access and operational efficiencies, which then give PE firms higher returns when they monetise their stakes.
Consolidation of smaller NBFCs will therefore become an attractive target for PE firms in the future as they will have the opportunity to demonstrate a successful exit with substantial multiples, the study concluded.