Exploring the Benefits of Starting an NBFC in the Current Fintech Landscape

  • October 05, 2023
  • Registrationwala
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The NBFCs have created a strong buzz across the Indian fintech space. They become a major part of the government’s financial inclusion because of their vast potential to disrupt the current and traditional banking system. In the following areas, the NBFC is gaining more attraction:

  • Lending
  • Asset Management
  • Deposits and Credit System

The technology of FinTech companies is creating products and services to overcome challenges such as fraud detection, regulatory compliance, automation of accounting, treasury and reconciliation for traditional NBFCs. The benefits of starting an NBFC in the current fintech industry are stated below.

Role and Features of NBFCs

The role of NBFC is more than providing lending services in undeveloped areas. They contribute to employment generation, wealth creation and the development of core infrastructure and transportation. These are the important pillars of economic growth, and which work on financial innovation. 

 

A Financial Stability Report of RBI states that NBFCs have continued to perform better than the banks. The total net profit as a percentage of total income remained at 15.3% from March 2015 to 2016. The significance of the NBFC industry is growing and promoting India’s economic growth. The following are the points in which NBFC offers unique solutions that resonate with a diverse range of people:

  1. Inclusive Lending: The NBFCs help those individuals for those the traditional banks do not provide loans because they don’t meet general criteria.
  2. Versatile Portfolio: The different operations of NBFC allow the investors to invest in different financial instruments such as money, market instruments, stocks and shares for higher returns.
  3. Diversified Services: To cater for the needs of different income streams people, NBFCs provide tailored portfolio and wealth management services.
  4. Operational Efficiency: NBFCs can streamline their operations because of less bureaucracy and compliance overhead, resulting in faster processes and cost-effective loan offerings.
  5. Growth in Unexpected Territories: The NBFC finds untapped opportunities to grow and work on the gaps left by the traditional banks, especially in rural India where access to financial services is limited.

Why Start an NBFC in the Fintech Industry?

The share of the fintech market was $194 billion in 2022, and it is expected that it grow by 16.8 CAGR between 2023-2028. The early-age startups taking this opportunity. As the need for lower-cost services is increasing, it is replacing traditional banks with a more disruptive and data-driven banking culture.

 

NBFCs are a vital cornerstone of the Indian financial ecosystem, especially for the small-scale and retail sectors as well as underserved areas by the traditional banks. Providing services in the unbanked sector of the Indian economy is a primary objective of NBFCs. So, for providing these services NBFC registration is important.

 

However, the NBFCs become a way for the growth of entrepreneurship which is backed by the government scheme including Pradhan Mantri Jan-Dhan Yojana. And through this, a significant increase has been seen in the increase in the number of bank accounts. The Registered NBFCs manage the risks during financial duress and are now recognised as complementary services to banks. 

 

The NBFCs become important for loans and credit facilities, retirement planning, money markets, underwriting and merger activities. Also, they provide credit to the unorganized sector and small borrowers at the local level. Hire-purchase finance is the largest activity of NBFCs, and their rapid growth has blurred the lines between banks and NBFCs, although commercial banks still retain their importance.

 

NBFCs also facilitate long-term investment and financing, which can be challenging for the banking sector. The benefits of starting an NBFC have gradually widened the range of products available for individuals and institutions with resources to invest. 

Different Opportunities for NBFCs

The Public Sector Banks (PSUs) are going through stress because of increased bad debt, and lending in rural areas. This provides an opportunity for NBFCs to increase their presence. The success of NBFCs vs. PSUs can be seen in the following:

  • Product lines
  • Lower cost
  • Wider and effective reach
  • Strong risk management capabilities
  • Control bad debts

Other than this, the NBFC has seen success in passenger and commercial vehicle finance segments and growing AUM in the personal loan and housing finance sector. However, other factors of influenced NBFC growth are improved macroeconomic conditions, higher credit penetrations, consumption themes and disruptive digital trends. 

 

People are switching to NBFCs from traditional banks because of stress in public sector units (PSUs). Underlying credit demand, digital disruption for MSMEs and SMEs as well as increased consumption and distribution access and sectors where traditional banks do not lend are major reasons for the switch. To provide these services NBFC registration process is important and obtaining an NBFC license is a must.

Growth of NBFC Sectors

In the year 2019-20, Microfinance Institutions (MFIs) have registered a credit growth of 80%, and housing loans have seen a growth of 37%. Similarly, NBFC-IDFs and NBFC-MFIs have also seen strong growth in loans and advances, registering 46% and 8% growth respectively. This trend has continued from the previous year 2018-19.

 

However, the NBFCs have played a significant role in financing the Micro, Small and Medium Enterprises (MSMEs). Especially in the rural, small-scale, and unbanked sectors. The growth in NBFCs is due to the startup and entrepreneurial ecosystem in the country, which has created a demand for NBFCs. Along with this, government policies like Pradhan Mantri Yojana and the National Rural Financial Plan have also contributed to the growth of NBFC.

 

The Indian economy's diversified financial needs, such as lending, credit, and vehicle financing, have further driven the growth of NBFCs. Also, NBFCs have witnessed an increase in their balance sheets and public funds. The profitability ratios of NBFCs have also improved, especially for NBFC-ND-SIs, with impressive returns observed in metrics like ROA, ROE, and NIMs between 2019 and 2020.

Final Takeaway

To conclude, the NBFC sector is set to see more growth in the upcoming years. Also, NBFCs are more profitable because of their lower costs of operations, registering an NBFC is easier as compared to banks. Navigating the risks and management of these will help in better growth. If you make up your mind to start an NBFC, reach out to Registrationwala for NBFC registration and obtain a license.


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