Empowered NBFCs, differentiated banks
Banks need to respond to the ferocity of impending competitive headwinds from NBFCs, including fintech companies
The Reserve Bank of India (RBI) in its first monetary policy in 2021-22, apart from keeping the benchmark repo rates intact, has instilled confidence in the struggling economy that the stance of the policy will continue to be accommodative till the prospects of sustained recovery are well secured. In line with the central banks across the globe, the RBI too has been handholding the economy to help navigate the pandemic-induced stress, and, among many, is focused on twin pillars – low lending rates and abundant liquidity.
The current edition of the policy too continued the stream of liquidity flow and voted to pursue growth objectives by balancing inflationary trajectory within the upper edge of the glide path – 4% +/- 2%. The outlook on GDP is pegged at 10.5% during 2021-22.
Continuing Relief
Keeping in view the threat to the revival of the economy due to the fierier second wave of the coronavirus forcing local disruptions and partial lockdowns, the RBI extended on tap Targeted Long Term Repo Operations (TLTRO) — introduced in October 2020 and open till March 2021 — for six months till September 30. Banks can invest these resources in corporate bonds/commercial papers/non-convertible debentures issued by stressed entities, including NBFCs.
An additional dose of special refinance facility of Rs 50,000 crore to all India financial institutions – Nabard, Exim Bank, Sidbi, NHB to ensure the continued flow of credit to real, agriculture and allied, MSMEs, NBFC-microfinance activities, is a well-thought move to bail out the sectors. These funds are made available to them at repo rate for one year.
Recognising that banks have so far lent Rs 37,000 crore to NBFCs for on-lending to entrepreneurs at the bottom of the pyramid, the RBI permitted classification of these advances of banks under priority sector up to 5% of total priority sector lending till March 31, 2021. The facility is further extended till September 30, 2021, to continue the flow of funds to these critical sectors.
Policy Shift
The RBI has been shifting its reform gear to involve non-banks and differentiated banks in a more prominent manner. Significant competitive threat comes to commercial banks from the move to:
• Increase maximum balance at the end of the day permitted for payments banks from Rs 1 lakh to Rs 2 lakh
• Opening up remittances facilities through RTGS/NEFT to entities other than banks
• While making the interoperability among Prepaid Payment Instruments (PPIs) mandatory for full-KYC, the limit of outstanding balance in such PPIs has been raised from Rs 1 lakh to Rs 2 lakh
• Inducing greater interoperability and full-KYC, cash withdrawal subject to a limit will be allowed against PPIs through ATMs/PoS terminals. The digital thrust through these measures will fine-tune not only quality and efficiency of financial services but also open up stiff competition for banks for float funds and cross-selling of products.
Beginning with the RBI allowing co-origination of loans by banks and NBFCs in September 2018 under priority sector, the role of NBFCs is enhanced. The peer to peer lenders are now under the RBI regulations since October 2017. Housing finance companies were brought under the RBI regulations in February 2021.
Growth of NBFCs
The asset size of NBFCs measured as a percentage of the total bank’s balance sheet has almost doubled during the decade. (See infographics). The number of NBFCs currently regulated by the RBI is close to 10,000 and their scope of inundation in the hinterland is clearly on rise.
Moreover, about 1,200 fintech companies, forming part of NBFCs, are set to expand their operations with remittance facilities opened up now through RTGS/NEFT. The RBI has already set up a framework for a regulatory sandbox in August 2019 that allows fintechs to test their products without any regulatory requirements. It will help existing and upcoming fintechs to build solid products that can enable them to earn bigger space in financial intermediation. Fintechs, engaged in digital lending may assume an aggressive tone once they adopt the RBI regulations. The RBI had issued regulatory guidance last June directing fintechs engaged in digital lending to strictly adhere to fair practices.
Road Ahead for Banks
Despite liberal access to liquidity and deposit growth rising at 12.1%, bank credit continues to be sluggish at 6.5% as on March 12, 2021. This is despite banks and NBFCs sanctioning loans under the Emergency Credit Line Guarantee Scheme (ECLGS 2.0) to the tune of Rs 2.46 lakh crore with disbursements standing at Rs 1.66 lakh crore as of January 8, 2021.
Banks are having comfortable capital-to-risk weighted assets, rising from 14.3% in March 2019 to 14.7% in March 2020 to 15.8% in September 2020 as against a minimum need of 10.875%. Moreover, the implementation of Basel-III has been postponed until October 1, 2021. Banks have enough cushion to expand credit during 2021-22 to support the ailing sectors and continue to stay relevant in times of crisis.
With the gradual expansion of activities of NBFCs with well-diversified, newly permitted products, banks will find it difficult to retain their strong proven foothold in the financial sector. Hence, banks need to realise the ferocity of impending competitive headwinds from NBFCs, including fintech companies. With the RBI empowering NBFCs, banks will have to act fast to retain their towering presence in the financial sector, unleashing their strengths.
(The author is former General Manager – Strategic Planning, Bank of Baroda. Views are personal)
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