.jpeg)
In recent months, the Reserve Bank of India (RBI) has implemented several stringent measures affecting non-banking financial companies (NBFCs). These measures include restrictions on important business areas such as gold loans and securities financing. According to a report by a major credit rating agency, the days of high profitability for NBFCs might be coming to an end, primarily due to increased funding costs. While loans are projected to grow by about 15% in the coming year, profits are expected to decrease. NBFCs do not have banking licenses, which means they cannot accept traditional deposits from the public. However, they play a significant role in lending money, providing investment services, and offering various financial products. As of March 2023, there were approximately 9,400 NBFCs registered with the RBI. They are essential in driving access to credit, especially for underserved segments that banks might consider riskier.
One of the critical challenges facing NBFCs is the increasing cost of funding. Banks provide over 40% of NBFC funding. Recently, the RBI has increased risk weights for banks, leading them to raise rates on loans to NBFCs. For instance, for every ₹100 given for unsecured consumer loans, such as for jewelry, NBFCs now need to set aside an additional 25%. Coupled with the higher interest rate environment, this increase in risk weights and capital requirements has significantly raised borrowing costs. According to estimates, the NBFC sector's assets under management growth is expected to slow to 14-17% in FY25, compared to the projected 16-18% for FY24. Regulatory actions could also contribute to near-term business volatility, making financial supervision more challenging and potentially leading to compliance and governance lapses.
Despite these challenges, NBFCs are not without recourse. To mitigate the impact of the increased cost of capital, many NBFCs have begun altering their mix of fundraising sources to reduce expenses. Moreover, strong credit demand backed by robust economic growth is expected to drive more borrowers towards NBFCs.
NBFCs continue to play a crucial role in promoting financial inclusion. There is an increasing demand for financial products in rural markets, fueled by internet penetration and a growing entrepreneurial mindset. By utilizing technology and existing initiatives, NBFCs can educate and collaborate to reach the grassroots level. Microfinance loans have the potential to boost local businesses, and agricultural loans can enhance farm productivity, thereby positioning NBFCs as key players in hyperlocal economic development.
The fintech sector is also experiencing heightened regulatory scrutiny. The RBI has strengthened measures to ensure statutory and regulatory compliance, posing a challenge for fintech firms striving to innovate. The key for fintechs is to be prepared for regulation and to anticipate regulatory changes to avoid sudden disruptions. Fintech firms need to balance their innovative efforts with compliance. Adapting to a regulated environment requires fintechs to integrate compliance into their business models from the outset. This approach not only helps in sustaining growth but also in avoiding potential penalties associated with non-compliance.
The financial landscape in India is undergoing significant changes, with both NBFCs and fintech firms facing increased regulatory challenges. For NBFCs, strategic adjustments in fundraising and a focus on financial inclusion can help navigate the tougher regulatory environment. For fintech firms, balancing innovation with regulatory compliance is crucial for long-term success. Staying informed and prepared for regulatory changes will enable these financial entities to continue contributing to India's economic growth and development.