R Ravi is executive director of the Mumbai-based Alpic Finance, a major player in the Indian NBFC sector. His views on NBFCs and their business plans are refreshing at best. Here he talks to Mukta Malhotra of FE-Thinktank about what lies in store for the nation's beleaguered NBFCs. Excerpts:
What strategy should NBFCs adopt while sourcing and deploying funds?
NBFCs have certain disadvantages vis-a-vis banks when it comes to sourcing and deploying of funds. NBFCs do not have access to the short-term settlement mechanism and the liquidity management system. That is why NBFCs do not have access to the short-term money market which is similar to the call money market that exists for banks. NBFCs also need a friendly legislative environment for debt recovery.Considering these limitations, it is imperative for NBFCs to maintain a high degree of capital adequacy and completely do away with asset-liability mismatches. That is why NBFCs should have structures such as special purpose vehicles to ensure cooling of assets and liabilities with equivalent maturities and interest profiles in independent baskets. This is essential for NBFCs while planning their future sourcing and deployment of funds. Accordingly, micro-credit and asset reconstruction are other options before NBFCs.
As a winning strategy, should NBFCs serve the household, the farm and the small enterprise sectors on a sustained basis?
Indian NBFCs have played a meaningful role during the last decade in making high quality customer service available to a wide spectrum of retail customers. Meanwhile, nationalised banks too have been extending improved services to these sectors. We have been able to focus on the healthcare and the small enterprise sectors. Extending finance to semi-urban markets too has been successful. We see a significant role for NBFCs in these markets in future. With more than 60 per cent of disposable income coming from these segments, opportunities are plenty. Certainly, NBFCs have a major role to play in delivering quality financial services to the small enterprise segment and semi-urban India.
What will drive future growth in the NBFC sector?
The future belongs to strong financial service factories. Such factories can be created by NBFCs as joint-ventures with multinational corporations which have deep pockets and access to evolving technology. Only such companies which can complement such a partnership with a strong customer focus, service standards, efficient distribution infrastructure and a motivated team can make growth a reality in this sector.
What should be the ideal business model for NBFCs?
Each of the above joint-ventures should constitute factories producing financial products for a customer base. Alongside there should be an independent distribution infrastructure focussed on delivery of high-quality comprehensive financial solutions to meet customer needs.
NBFCs should endeavour to succeed through suitable partnerships and make the financial service factories deliver competitive products and services.
How does this business model aid an NBFC's growth strategy?
In the context of globalisation, it is essential to review alternate business models suitable in an open environment. Such a review should tell non-banking finance companies that segregation of the distribution function from financial services and the risk management function would become a necessary part of future architecture.