Banking on growth

For a developing economy such as India, access to financial resources is critical to foster the development of the economy. As a much-needed step in this direction, government’s push through the trinity of ‘JAM’ (Jan dhan, Aadhaar and Mobile) for direct benefit transfer has ushered a revolution by facilitating the reach of banking services to the traditionally unbanked population. However, certain segments in the country are still deprived of the access to financial resources, which hold the key to growth and generation of employment. As Banks looked the other way, these segments were trapped under the clutches of moneylenders for their funding needs. In such a situation, Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) have come in to the rescue of these deprived segments to cater to their funding requirements.

The flipside to the boon of India’s demographic dividend is the jobs conundrum. The solution to this situation lies in firing up the most critical pillar of the Indian economy such as the, growth of the Micro, Small and Medium Enterprises (MSME) sector which has the potential to employ large work force. The government’s MSME Annual Report 2017-18 pegs the contribution of MSMEs at about 45 per cent of manufacturing output and 40 per cent of total exports of the country in value terms. The finance minister Arun Jaitley in his union budget for FY19 primarily focused on revitalising the rural economy with strong sector focus on agriculture, MSMEs, health care amongst others. This was not surprising considering that these segments were in absolute need of a stimulus by the government.

It is beyond doubt that the most vibrant and resilient MSME sector shall act as a catalyst to the growth of the Indian economy. According to a report by BCG, there are about 51 million MSMEs in India, of which nearly 40 million have current accounts. The number of borrowers in the segment, however, is only 4.5 million. Furthermore, an ICRA estimate pegs the unmet credit demand of MSMEs at Rs 25 Trillion in FY 2017, which is expected to increase further going forward. These estimates clearly indicate that the MSME segment has been continuously underserved.

While the Banks had the first mover advantage and selectively funded the segment, off-late they have been saddled with their own issues such as high NPAs in the large ticket corporate and infrastructure lending and lack of focus on this segment. The NBFCs have come to the aid of MSMEs with their customised offerings, better market understanding and doorstep reach to the customers. This is evident by the fact that as per ICRA the share of NBFCs in the MSME lending pie is expected to increase up to 23 per cent by 2022 from 16 per cent in March 2017 with the annual growth rate of NBFCs in this space pegged at a CAGR of up to 21per cent.  

Another segment, which has rightly received the push from the government is the housing segment. To address the ballooning shortfall in urban housing, the government launched its ambitious Pradhan Mantri Awas Yojna (PMAY) with mission to provide housing for All by 2022. Majority of the demand in housing segment exists in the affordable segment (unit costs of sub Rs 25 lakh). The government has approved construction of over 4.2 Million affordable houses under the PMAY-Urban. Home loans have seen the highest growth over the last three years: 30 per cent of incremental system loans and half of incremental retail loans have been in the home segment, according to a report by Credit Suisse. A part of this growth can be attributed to the Credit Linked Subsidy Scheme (CLSS) under the PMAY. Despite this push, the home segment remains under-penetrated; only 17 million families, or 6 per cent of families in India, have a home loan, which is much lower than the global average, which exceeds over 50 per cent in most developed nations.

CRISIL estimates Home Loan disbursements to grow at a five year CAGR of 21 per cent to reach INR 8.3 Trillion in FY 2020, over 55 per cent of disbursements being expected in the affordable segment. Thus, the major demand driver of housing / home loans is the Lower and Middle Income (LMI) segment. While many consumers in this segment have not been able to obtain loans from the Banks, HFCs, with their customised underwriting processes and doorstep service have been able to help them realise these customers the dream of owning their own home. CRISIL pegs the market share of HFCs at 40 per cent and estimates the growth of HFCs at a CAGR of up to 18 per cent to  20 per cent over the next five years with the mid size HFCs focussing on affordable housing to grow at a CAGR of up to 22 per cent.

NBFCs and HFCs have become an integral part of the Indian financial system focusing on nation building and financial inclusion. They have not only complemented the banking sector but also filled in the void left by the banks.

There is a growing aspiration in urban as well as rural India and need of the hour is to channelise these aspirations and convert them into transformational growth. The needs and desires of the new age consumer are only growing, and rightfully so. In meeting the increasing financial needs of the underserved and unbanked areas in the corporate sector, unorganised sector and for the local borrowers, NBFCs and HFCs are expected to play an important role in providing that last mile service to its customers. Rather many more NBFCs and HFCs would be needed to cater to the humongous demand in these segments. Also, as PSU Banks are saddled with NPAs and lack adequate capital to cater to onward lending the NBFCs / HFCs are expected to play an increasingly important role.

The NBFC / HFC segment has definitely emerged as a catalyst in the economic development of the country and will play an increasingly important role in the times to come.

(The writer is director of Capri Global Capital)