NBFC chats ..

Non- Banking Financial Companies  are financial institutions which do not hold a banking license but partake in lending financial services. 

Intention here is not to provide an explanation on NBFCs rather it is to evaluate the opportunities to invest in NBFC sector. There are close to 190 odd NBFC listed in Indian Stock Exchanges . NBFCs are present in competing fields like housing loans , auto loans, power financier, infrastructure loans. With easier loan sanction procedures , low operating cost NBFCs have a stronger footing in the market , added to this they are not constrained by CRR ( Cash Reserve Ratio ) , SLR ( Statutory Liquidity Ratio), and priority sector lending norm ( 40%) . 

Major constraints faced by NBFCs are they do not have access to low-cost deposits, high loan to value ratio (LTV) , high rate of delinquencies. Subdued economic activity , high fuel rates, decelerating auto segment are all added concerns. But the bright side is there is a huge potential in the housing finance sector , and if the new government moves its infrastructure plans into execution the NBFC sector should definitely be in the investor radar. Another trigger is also the fact that RBI has announced, they would fine tune the process of granting new banking licenses.

Recently NBFCs have been in news as RBI has granted permission to NBFCs to act as Business Correspondents (BCs) [Retail agents providing banking services in locations other than banks/ATMs] to the banks. The move is to expand the process of financial inclusion, and of course some of the NBFCs are indeed well positioned to be bank correspondents in inaccessible areas where banks and banking services remain remote possibilities Central bank has issued some basic guidelines to  this newly introduced rule

• There should not be intermingling of bank and NBFC  funds when NBFC function as BCs

• Scope of activities which the NBFCs as BCs are expected to do are
• Identification of potential borrowers
• Pre-processing loans - Collecting applications , data verification 
• Promoting self-help groups
• Post loan disbursal monitoring 
• Recovery follow-up
• Creating awareness on savings products and money management
• small value money remittance

Advantage for NBFCs  is the commission from the banks for loan disbursal which is pretty much close to the margins they make by lending small loans.Operational expenses for the banks are also reduced as they can leverage the existing NBFC infrastructure, manpower, knowledge and skill. There is no major conflict of interest in functioning of NBFCs as BCs as currently they are not permitted to undertake such business.

Conflict of interest comes in for NBFCs which are currently allowed to take small deposits and for NBFC- MFIs  which currently lend loans at the rate of 20% - 35%, which is more than what banks charge for small loans.

The other issue that could probably be raised as a concern is if the same NBFC is allowed to partner with multiple banks. Solution would be to restrict one NBFC - one bank symbiosis in a territory.

Factors to look for in NBFCs

Whenever an investor is looking for Financial institution as prospective investment opportunities key points to keep in mind are

• Sound Valuation ratios ( P/E, P/B, EV/EBITDA etc  basic filter for stocks)
• Capital Adequacy Ratio which is measure of bank's capital as percentage of bank's risk weighted credit exposure 
• Net Interest Income = Interest on loans lent - Interest expenses on borrowed money
• Asset quality ( prime importance) has NBFCs have had high rate of delinquencies . 
• Operating income 
• Extra vigilance required if they are into gold financing business, government import/export curb on gold could impact NBFCs as well

      NBFCs is definitely a sector to look out for if the reader is keenly interested in investing in small and mid-cap stocks. With economy providing positive signals ( of course with inclination towards sloth) , there is a huge potential for long term investment in NBFC stocks. If claims of financial inclusion were to be taken seriously  then  NBFC is definitely some value investing .





Fyi..

How different is NBFC from MFI ?

NBFCs can do all the banking activities like lending, advances to businesses and farmers investing in equity market etc, but they cannot accept saving deposits ( of course there are some exceptions to this called NBFC- D, which accept public deposits) , even if they accept saving deposits there is no guarantee for these deposits like banks. They cannot engage in agricultural or industrial activities , cannot issue checks drawn on themselves.

But NBFCs do come under the supervision of banking regulations .

For more details on RBI guidelines refer to the below link

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/46344MN010713.pdf

MFI( Micro Financial Institutions ) run at a much smaller scale , opened with the intention of catering to the poor and underprivileged. ( Read about : Muhammad Yunus who founded Grameen bank ,pioneering concepts of micro-finance and micro-credits)