This would be achieved through models like co-origination of loans, where banks would bring in much of the funds to be lent, while NBFCs would use their distribution capabilities to source the loans.
As non-banking finance companies (NBFC) grapple with the credit crunch that began with the Infrastructure Leasing & Financial Services (IL&FS) defaults last year, Edelweiss Group chairman and CEO Rashesh Shah told FE that they will have to come to terms with smaller balance-sheets, shorter-term liabilities and shrinking earnings.
“Every industry undergoes recalibration. I treat this as a cycle in the NBFC evolution,” Shah said in an interview with FE, adding that the reset will consist of a cyclical element and a structural change element. “Some things will change structurally for the NBFC business. NBFCs will not be asset-heavy and longer-tenure entities. The Rs 1 lakh-crore balance sheets will not be sustainable. Earlier, if you had an average tenure of four years (loans), now it will be two years,” he explained.
Further, non-banks will have to start collaborating with banks rather than competing with them. This would be achieved through models like co-origination of loans, where banks would bring in much of the funds to be lent, while NBFCs would use their distribution capabilities to source the loans. The latter will also be responsible for collections and servicing of the loan account.
So far, Edelweiss Financial Services’ ECL Finance has firmed up co-lending pacts with State Bank of India (SBI), Bank of Baroda (BoB) and Central Bank of India. It is expected to announce a partnership with a fourth bank soon.
NBFCs must also develop capabilities in cross-selling, Shah observed. “One thing NBFCs will also learn to do is a lot of cross-selling of other products because you own the customer. They will learn to be more asset-light, efficient, partner with banks. It will take maybe another year for all of this to stabilise,” he said.
At the same time, they will have to reduce leverage in order to secure debt and invest more in technology. “Earnings will be muted for a couple of quarters as the industry reinvents itself. Edelweiss has also brought down its gearing and invested significantly in technology as well,” he said.