In the last several days, the tumult in the market has driven down several stocks but stark among the lot are those of Non-Banking Financial Companies (NBFCs). The last two years have seen an unabated run-up of these stocks and several of them have given massive returns to shareholders.

Until a few days ago, Bajaj Finance was valued at ₹165,000 crore, up from a mere ₹50,000 crore two years ago, but has since fallen to ₹137,000 crore after the recent carnage. While, lesser known housing finance company DHFL's value increased four times to ₹20,000 crore, in the same period, before falling to ₹11,000 crore, with 43% of its value wiped in one trading session on Friday.

As the general sentiment on India's indebtedness, rising interest rates, increasing fuel prices and rupee's weakening spooked investors, the financial sector, banks and NBFCs bore a big brunt of the fall. The collapse of infrastructure lending firm IL&FS also added fuel to fire, creating panic in the market. If it was the lack of any clear resolution to the non-performing assets (NPAs) that did the banks in, the growing household debt (which grew at the highest ever rate of 18% last year) has cast a long shadow on the future prospects of NBFCs.

Given the uncertainty, it would seem like a good idea to scale down exposures on NBFCs and stick to good old private sector banks like HDFC and Kotak, which have multiplied wealth steadily over the years. But, consider one more fact: In the last decade, the market capitalisation of Bajaj Finance grew at a CAGR of 61% compared to HDFC Bank's 27%.

In a way, the story for Indian NBFC's has just about begun. As recently as 2012, a Reserve Bank of India (RBI) committee headed by its ex-deputy governor Usha Thorat had wanted strictures imposed on these firms as there seemed to be little regulatory oversight over them. Her draft report almost sounded the death knell to companies operating in the sector.

But, today, NBFCs have proven themselves to be an important cog in the wheel in India's finance sector, doing the work that banks haven't been able to do in decades– reaching out to people that banks cannot or don’t want to. For a long time, the household debt in India was in single digits compared to 40-60% of GDP in developed and about 20% among Asian countries. The reason partly was due to the high incidence of high interest loans from the unorganized sector like moneylenders and pawnshops, which was not reported in the formal system. Nearly 60% of the loans to the household sector came from non-institutional sources in 2016.

This is changing rapidly thanks to firms like Capital First and Bajaj Finance which have started doling out more personal loans without the onerous documentation banks demand. Banks largely gave out loans to their account or credit card holders but NBFCs lend to folks strictly on their own assessment. In the last count, Bajaj Finance had 28 million customers that have used its services.

More changes can be anticipated as technology driven payment companies start their lending operations. For example, though Delhi-based payment company MobiKwik makes little money on payment transactions, it has now started lending to its wallet users to ease their financial constraints. For example, if a regular user falls short of funds towards the month end to pay for taxi hire, MobiKwik will advance an instantaneous loan repayable over the next several days. To lure the customer, the first few days will even be interest free. To advance these loans, MobiKwik will borrow money from several people who are lining up to lend to it. MobiKwik’s CEO Bipin Preet Singh says that payment is no longer a money making proposition but the opportunity in lending is enough to keep his business afloat for now.

One may argue that Indians are not traditionally debt-oriented , given the high percentage of savings to GDP. But, the key lies in the incidence of informal credit to households, micro and small enterprise and sheer unavailability of finance options to a large section of population. In a RBI report of Committee on Comprehensive Financial Services for Small Business and Low Income Households, 2013, one of its key targets was to make available convenient access to formally regulated lenders by 2016. By that date, it wanted the credit to GDP ratio of this segment to reach 10% and eventually raise the ratio to 50% by 2020. The targets are nowhere in sight.

It’s true that banks like HDFC and SBI have risen to the occasion – making instantaneous loans available on their websites. For example, it will take less than two minutes for a loan approval by filling up just seven data fields in the HDFC Bank website. But, since the RBI’s oversight on banks is more stringent, there are still a few additional steps they have to take to ensure that their books read well. NBFC’s other hand have a better connect to consumers offering them services at a two-wheeler dealer or a consumer goods retailer.

Bajaj Finance has representatives stationed at large durable retailers, helping them collect data too. The new technology companies are disrupting even that by offering loans right at the time of payment for a durable from their website. All this gives them access to a lot more data than banks, which maintain a rather cursory relationship with their deposit holders. Bharat Financial (earlier SKS Microfinance) built a very profitable business by just catering to the unbanked, while Muthoot Finance built an entire franchise on gold-backed loans.

Of course, there is one lingering question. Can the unabated growth of household loans be the next bubble for the already beleaguered finance sector? It appears to be early days yet. Bajaj Finance, which clocked growth of over 40% in its assets under management (AUM), is still growing in the mid-30s post demonetization. The company’s own long-term guidance stands at 25-27%. The RBI has also tightened the norms for reporting starting April 1, 2018 by making them adopt the Ind-AS norms. As per the latest rules, NBFCs will have to set aside higher amount as provision impacting their bottom line. Their loan-loss provisioning will now have to be made on expected credit loss (ECL) model, based on past trends and judgement of individual entities.

Despite the latest sentiment against them, it appears that NBFCs have more business prospects compared to banks and every fall in their value should be considered as an opportunity to increase exposure to the sector. In the coming months, these opportunities will increase: interest rate spikes due to inflation and oil price increase is bound to dent their profitability. But with India’s consumption story intact, the current glitches will only help make their story stronger. Right now, I feel good NBFCs will represent India’s growth story better.

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