The Non-Banking Financial Company (NBFC) segment is expected to gain positive momentum in 2021 as the sector builds on the massive recovery efforts of the last few months.
Overall loan disbursement and business have improved of late, with the same momentum expected to continue into 2021. The growth of many NBFCs in India had been driven by higher than expected investment banking revenues and interest income.
In 2021, NBFCs can expect growth in the vehicle-financing space as collection efficiency continued to show improvement. Overall, loan defaults have also reduced and are expected to drop further as the economy shows positive recovery. Many gold loan NBFCs had seen healthy growth as gold loans were being preferred by customers. NBFCs had also mobilised their on-ground recovery staff to ramp up their collection efforts.
NBFCs with a niche presence and strong pricing power are likely to witness margin expansion in 2021.
According to a recent Motilal Oswal report, NBFCs have reduced their dependence on market borrowings since the IL&FS crisis. The report says that on an average the share of market borrowings had fallen by 1,500bp over the past two years. The report also pointed out that vehicle financiers are likely to benefit in the NBFC market as they have a shorter borrowing profile and they are likely to benefit from savings on refinancing as 40-62 per cent of their market borrowings are maturing in the next six quarters.
The report anticipates that NBFCs will bring down the liquidity on their balance sheet which in turn is expected to help in the margin expansion of the players in the segment. In the past two years, NBFCs increased liquidity on their balance sheet to over 10 per cent which has now come down to an average of 3-4 per cent. Many NBFCs still have nearly 20 per cent. However, this is expected to reduce by 300-400bp in FY22. Interestingly the report also points out that housing financing companies have a lower share of bank borrowings, while vehicle and gold financiers have a higher share of bank borrowings.
In another recent report on the NBFCs by CRISIL Ratings, pointed out that due to the revival in economic activities cash flows in the segment have improved and borrowers have started repaying their loan instalments. This is expected to continue in 2021. CRISIL observed that median collection ratios for November 2020 payouts for commercial vehicle loan pools jumped up to 93 per cent from a paltry 24 per cent in May 2020. At the same time collection efficiency for mortgage-backed loans, comprising largely home loans and loans against property, was around 96 per cent in October-November 2020.
Many innovations by NBFC players will help in the growth of the segment in 2021 as well. Collection efforts by NBFCs will further intensify their collection efforts and will improve further. CRISIL says that previously, digital modes were considered secondary to the traditional, physical cash collection process. However, that has changed since the last six months and players have leveraged technology and redoubled efforts on the digital side. Many NBFCs are now offering both the options to their borrowers for repayments.
In 2021, many NBFCs will continue to see growth in rural product loans, especially agricultural products and primary services. Besides this, gold loans NBFCs will continue to do well in the NBFC segment as unlike other asset classes, gold loans had not faced any major issues in collection and disbursement, or re-pledge of loans.