By IE&M Research
According to PwC India by 2020, credit lending by Indian non-banking finance companies (NBFCs) is expected to account for anywhere between 18.2% and 20.9% of the total credit off-take in the country. And this report says a lot about the growing importance of NBFCs. It is more important at a time when banks have tightened their purse strings to tackle bad loans. Two months back the central government approved foreign direct investment (FDI) under the automatic route in regulated NBFCs. But private equity investors have been lapping on to NBFCs even before that. Although NBFCs are still small in terms of outstanding credit, at an annualised growth rate of over 15%, they are slowly making their way into the balance sheet of companies, especially those in the small and medium size category and in the real estate business irrespective of size. Data compiled by RBI also shows that NBFCs have started moving at twice the pace of the banks. An inflection point was reached around September 2014, when, for the first time in recent times, NBFCs surpassed scheduled commercial banks in terms of year-on-year credit growth.
Earlier, the Ministry of Commerce and Industry had notified 100% FDI in ‘other financial services’ carried out by non-banking finance companies (NBFCs). Other financial services consist of activities which are under the regulation of any financial sector regulator such as RBI, IRDA, SEBI, National Housing Bank, Pension Fund Regulatory and Development Authority, or any other regulator in the financial sector as may be notified in this regard by the government. However, these types of foreign investment would be subject to some conditionalities, such as minimum capitalisation norms, as mentioned by the concerned regulatory body or government agency. In his Budget speech 2016-17, Finance Minister Arun Jaitley had stated about this relaxation. Presently, 100% FDI via automatic route is allowed in 18 NBFC activities that include merchant banking, portfolio management services, underwriting, stock broking and financial consultancy. In the last fiscal, FDI in India rose by 29% year-on-year to $40 billion.