Indian banks’ struggles with bad loans over the past three years have opened an opportunity to ramp up lending for so-called non-banking financial companies (NBFCs), which are not as strictly regulated as banks.With their share of total credit rising, new players and new investors have piled into the NBFC market.
The latest such player is Incred. Backed by Deutsche Bank’s former co-CEO Anshu Jain, it lends to individuals and small- and medium-sized enterprises (SMEs) including start-ups. Saurabh Jhalaria, who heads Incred’s SME division, says the company aims to disburse $234 million in new credit by next March. As much as 60 percent would be lent to SMEs, he said.
“There is great demand for credit from small entrepreneurs, but supply is very limited,” Jhalaria told Reuters, referring to the reluctance to lend among state banks. Public sector lenders led by State Bank of India and Punjab National Bank, which as a group account for two third of banking assets, are saddled with bulk of India’s $150 billion in stressed loans.
Criminal investigations into some loan defaults have made bankers extremely cautious of extending new credit. The process of approving loans has become lengthier and requires lots of paperwork. Banks are also reluctant to lend without matching collateral. In some cases, they even demand collateral twice the value of the loan.
As a result, bank credit to industry shrank by 1.9 percent in the fiscal year that ended in March. In contrast, NBFCs have posted double-digit rates of lending growth. A study by research firm Crisil shows NBFCs have doubled their market share in SME loans and wholesale finance in the past five years. The Indian unit of rating agency Standard and Poor’s expects their share in overall loans to rise by 3 percentage points to nearly 18 percent over the next two years.
Since its launch in February, Incred has lent nearly $16 million to 1,000 borrowers. It offers loans to SMEs of up to 100 million rupees ($1.56 million) and charges interest of between 13-19 percent. While the loans are costlier than those offered by banks, which charge around 12 percent on average, they are processed more quickly and require little paperwork.
“Our target is ambitious but achievable,” said Jhalaria. “There is a demand that is not being met by banks. We are filling in that gap.”