NBFCs have shown a significant growth rate and now account for around 25% market share in loans and advances.
India is on track to achieve its goal of becoming the world’s third largest economy with a GDP of over $5 trillion in the coming years. With an expected growth rate of over 7% in the current financial year, a steady trend has been exhibited towards this desired path. However, this requires resilient development of the financial sector to support the economy with robust credit growth.
Commercial banks, as well as non-banking financial companies (NBFCs), play a crucial role in this regard. While banks have been contributing to credit activities for over two centuries, NBFCs, as refiners of credit, came into existence in the 1960s under RBI regulations.
Over the years, NBFCs have shown significant growth and now account for approximately 25% market share in loans and advances, leveraging their deep reach, better use of technology, flexibility in approach and last-mile connectivity. Here, we further examine the broad features, factors influencing market share and the way forward for banks and NBFCs.
During 2023-24, bank credit growth remains robust at around 19%, driven mainly by personal loans and credit to the service sector. As of March 2024, banks have a credit portfolio divided into various segments: 13.1% for agriculture, 23.5% for industry, 29.2% for services, 32.9% for personal loans and 1.3% for others (Source: RBI Financial Stability, Old Report 2024). Commercial banks are also required to lend to the priority sector with a target of 40%; Therefore, a part of their market share is earmarked for agriculture sector, micro, small and medium enterprises, weaker sections, etc., which are included in the priority sector. Over time, banks have also contributed significantly to export finance and infrastructure finance.
During the year 2023-24, NBFCs maintained a strong credit growth of 17.9%, despite a slight softening in the second half of the year. Growth in personal loans has slowed, while growth in credit to industry and services has accelerated. The relative share of credit portfolio of NBFCs as of March 2024 indicates a wide spread across various segments: agriculture 2.1%, industry 36.8%, services 14.9%, personal loans 33.5% and others 12.7%. Differences in market share movements were seen between banks and NBFCs in certain segments.
Major factors influencing market share
1. As per market structure, while most banks lend to various sectors, company/entity wise lending by individual NBFCs is determined by the type and classification of each type/category of NBFCs registered with RBI. This often significantly influences market share dynamics. Broadly, based on the types of liabilities, NBFCs are divided into deposit accepting and non-deposit accepting NBFCs. Further, based on size and activity, the RBI has classified NBFCs into four tiers under the Scale-Based Regulation (SBR) framework: base layer, middle layer, upper layer and top layer. The SBR framework considers capital requirements, governance norms, prudential regulation and other aspects of NBFCs.
2. Considering the nature/category of activities, we have different types of NBFCs catering to different market segments, which affects their respective market share.
3. NBFC-MFIs (Microfinance Institutions) lend 85% or more of their assets to rural households in the form of collateral-free small loans. With a better than expected monsoon, the business share of NBFC-MFIs is expected to improve.
4. Infrastructure Finance Companies (IFCs) are a category of NBFCs that invest at least 75% of their total assets in infrastructure loans. These typically include large-scale loans used to finance sectors such as roads, ports and energy. With the government’s continued thrust on infrastructure development, the business share of such NBFCs is likely to grow at a rapid pace.
5. Availability of resources for NBFCs is crucial for their growth and market share. The RBI has signaled a preference for NBFCs to reduce their reliance on bank finance as a source, encouraging them to borrow more through capital market instruments such as NCDs, ECBs and commercial paper. This shift will affect borrowing costs and consequently, their maneuvering in market share.
6. Increase in risk weight on personal loans will also affect the volume of such loans extended by NBFCs.
7. The Co-Lending Model (CLM), introduced by RBI in 2020, is based on a collaborative approach between banks and NBFCs to meet the growing market demand. This model has the potential to increase market share for both entities.
Both banks and NBFCs have their comparative advantages in the credit sector. Banks have strong risk management skills, while NBFCs offer deeper reach, flexibility and greater use of technology. Each should leverage its respective strengths and establish robust mechanisms to serve the expanding credit market in a fast-growing economy, creating a win-win situation for both.