Q. State the current state of NBFCs in India. What was the impact of the on-going downturn in the economy on your business operations?

A. After the shakeout in the NBFC industry in the late 1990s, the handful of NBFCs that remained have continued to largely hold their own leading up to the present times. The close supervision of the industry by Reserve Bank of India has also helped in preventing major meltdowns. However, the current economic scenario presents medium-term challenges in terms of asset quality, uncertain liquidity and higher capital requirements. Speaking for ourselves, though, the recent slowdown in several sectors of the economy did not result in Shriram City experiencing any perceptible difficulties in continuing to do business, this was mainly on account of the fact that we finance “necessities” rather than “luxuries”. (our presence in the semi – urban locations) We have in fact been the only available source of finance for certain products in recent months.

Q. Most of the industries have been affected by the current downturn and also the default rate has been rising. In such a scenario, what kind of recovery mechanism has been deployed by your company?

A. While it is true that the recent difficulties experienced by certain industries have had a ripple effect on other businesses leading to higher defaults in some types of loans, the strength of Shriram City (as indeed that of other NBFCs of the Shriram Group) has for long been its ability to keep delinquencies well in check. The low levels of NPLs is a combination of sensible credit calls, rigorous post-disbursal checks, the presence of local personnel for both credit and collections, enrolment of the borrowers in the idea of mutual benefit etc. In effect, we did not do anything different from our regular efforts in recent months vis-à-vis recoveries, and yet continue to register low delinquencies.

Q. Would you agree that NBFCs’ share in the overall retail credit disbursements has reduced over the years and that banks have achieved dominance in the retail segment? In your opinion, what were the factors which led to the demotion of NBFCs’ share?

A. We at Shriram City have a slightly differing opinion on this – we believe that banks and NBFCs complement each others’ efforts at bringing affordable finance to the borrower. In some cases, NBFCs provide the “last mile” connectivity to such finance. We also believe that both banks and NBFCs have the necessary credit appraisal expertise, and if either of them have exited certain segments of lending over time, such decisions would have been more to do with profitability on account of rising expenses incurred in credit delivery and asset quality maintenance. Having said this, there is no denying the fact that banks have in their favor certain crucial variables such as access to cheaper funds

Q. Though NBFCs face tough competition from banks, which are the features of NBFCs which provide them an edge over banks?

A. The quick turnaround time, reduced paperwork, and most importantly, the personal approach with a prospective borrower are some factors that enable NBFCs to attract customers. Added to the above, it is a fact that the NBFCs maintain their delivery cost and have enough margin, to ensure quality of asset is not compromised and customers are reached for collections/recoveries till last due. This ensures continuous availability of credit and better customer behaviour

Q. The gloomy economic scenario has made banks reluctant in lending to NBFCs which has further dried up the sources of funds for NBFCs. What steps or changes in regulations are you expecting the government to make in order to increase the liquidity condition?

A. Shriram City has had the good fortune of being associated with banks and financial institutions who have always supported the Company and thus helped it minimize its dependence for liquidity on sources such as Mutual Funds or other money market instruments. The company has had the additional advantage of the faith reposed in it by its retail depositors/lenders who have stayed with it over two decades. However, for those NBFCs who however require liquidity support, the RBI’s Stressed Assets Stabilisation Fund which was, in concept, a good idea, could be made more effective with some key modifications in its stipulations.

Q. What are the challenges faced by NBFCs? In your opinion, what steps should be taken by the Government and RBI in order to provide sustained development of NBFCs in India?

A. We believe that efficient outfits in the NBFC space will continue to prosper. A case could be made for more relaxed supervision norms, but we feel that the current level of regulation keeps everybody honest without unduly hampering the ability of competent NBFCs to grow. At the end, however, market dynamics would dictate the fortunes of all players.

Q. In your opinion, what would be the factors which would lead to the sustained growth of NBFCs in the long term? Do you think in the long term, there would be some change in the business model of NBFCs due to strong competition of banks?

A. There are enough opportunities even in the current economic scenario for forward-looking NBFCs to seize. Ultimately however, the fortunes of the industry would be affected by the attitude of the apex regulator towards it. As concerns any change in business model of NBFCs prompted by competition from banks,we have already expressed our opinion that the two classes of lenders can co-exist, the bottomline for NBFCs in their business model being efficiency.

Q. State your outlook on NBFCs for the next two years. Which of the industries would provide sustained and lucrative returns in the long term?

A. We expect the accumulated effects of the current slowdown to dissipate gradually over the next two years, and this would continue to post challenges of asset quality in the medium term. NBFCs will therefore have to pay particular attention to this area of their operations. The infrastructure financing space may see some sustained activity over the next couple of years, as also the development of the tiny and small industries and their requirement of finance.