Banking Frontiers organized its annual NBFC Conclave titled NBFC’s Tomorrow in August 2024 at Mumbai. Highlights of the first panel discussion:
Panelists
- KV Srinivasan, Executive Director & CEO, Profectus Capital
- Umesh Revankar, Executive Vice Chairman, Shriram Finance
- Dr. Ravi Modani, CEO, 121 Finance
- Purvi Bhavsar, MD, Pahal Financial Services
- Prabhat Chaturvedi, Chief Executive Officer, Netafim Agricultural Financing Agency
- Manoj Agrwal, Banking Frontiers (Moderator)
Manoj: What do you see connecting traditional wisdom and modern intelligence in today’s and tomorrow’s ecosystem?
Purvi: We are a country full of traditions and lot of wisdom gathered over so many years. Earlier, we used to visit customer and we evaluated at least 50 different businesses and we gathered so much of wisdom. Unfortunately, most of our wisdom stayed with us. The problem with traditional wisdom is that most of it you cannot pass on to the next deserving person because you are not capable of documenting everything. Then comes the technology and data and artificial intelligence and more. So, we started capturing lot of data and started refreshing it at certain intervals and many of our decisions started coming based on data. We could create templates which helped us spread out. Over a period of time, we kept on adding more layers to it. Earlier our wisdom was limited to what we could see with our own eyes. Now there is a lot of external data like weather data, rain data, etc. So, we can now top up traditional wisdom with lot of external intelligence as well.
Prabhat: Traditional wisdom is ancient traditional wisdom that has withstood test of time. That doesn’t change from generation to generation. Modern intelligence is how you can analyze data better, how you can predict more data-driven insights. We have Vedas, Puranas, Shastras, your Ramayana, Gita, Mahabharata, etc. It has wisdom such as – if you trouble your employees, if you trouble your customers, you will face trouble in some form or the other. We have seen large banks where people were not treated well and you can see how their share prices have moved. So, traditional wisdom is something which has withstood test of time. We need to combine that with how we can make employees’ life easier. How can we help with more targeted customer relationship management tools and personalized service using technology? Technology should either save you cost, giving you competitive advantage or making life easier for your employees and customers. Otherwise, there is no point in investing in technology.
Ravi: My belief is that culture drives economies. It’s not the economy which drives culture. The basic principles which we have got from traditional wisdom is trust, empathy and relationship. In business, we need a blend of traditional wisdom and see what role technology can play. Wisdom is subjective; you can’t quantify wisdom in terms of any parameter.
Manoj: As NBFCs evolve into modern enterprises, definitely they will need new kinds of talent. Chances are that there’s going to be a lot of competition for this talent from tech companies, GCCs, Indian MNC, start-ups, etc. What kind of talent will NBFCs needs in the future, and how can they make themselves attractive for such talent?
KV: NBFC business has 2 key elements – capital and people. The quality, the quantity, as well as the longevity of the people – these are the 3 factors which are very critical in the current environment. Obviously, you need quantity in order to grow. Quality brings in the additional X factor which determines your valuation vis-à-vis your book. The consistency and the predictability of the business, which is one more factor into your valuation, comes from the longevity of the people. If you have too much of churn in your people, the business practices, the logic, the culture, everything changes. People today have a wide choice of various industries. So, how you attract people to your entity and hold them is very important. You can do poaching, but that might bring non- alignment with your culture, your focus and your ways of working. When you take experienced people from the market, the process of unlearning and relearning becomes much more difficult and painful.
The other extreme of starting afresh and taking only college kids is a very long-term process and not many shareholders really have the patience for that. So, you need mix of both to get the quantity and the quality right. Now, how to hold them is a big problem. There are horror stories of many NBFCs which have over 100% plus churn in their front line. So, we need to bring in the culture factors. One way is to develop a good work culture where people feel respected and feel a family-like bonding. It’s a tough challenge.
Manoj: How do you see the NBFC sector becoming a magnet for tomorrow’s women employees?
Purvi: I have been working in this sector for 30 years. Women always prefer an office kind of a job and not the front line where you have to go out. So, you will find more women in customer service or operations or compliance or accounts, and not too many in jobs where there is a pressure of targets. Even in my own organization, we have lot of women in the head office. The challenge is to attract people at a field level. Nobody wants to work in the field. In spite of you trying to make policies which are very woman friendly, when you are dealing with customers and when you are working in rural areas, you cannot have very defined timings.
Prabhat: Between banks and NBFCs, what I have observed that when the economy is doing well, when the industry is growing very fast, people want to grow, but in the banks probably at some level they feel stuck. They are more open to come to NBFCs who reward better and they get the career growth, higher designations and all. But when there is a looming recession or economy is not doing well, there is a slowdown of sort, there is a flight to safety, to banks.
Manoj: What are likely to be the new sources of funds for NBFCs as they grow? What kind of branding or rating or visibility will the sector need to attract funds from India and abroad?
KV: The NBFC sector has been seen as a poor cousin of banks. Through their conduct, NBFCs should establish that the sector is something to reckon with. Today, 20% of the MSME funding in this country comes from NBFCs; and in overall market itself, NBFCs are about 17-18%. NBFCs are a significant player in the market and this needs to be propagated a lot more – that the sector has come of age and therefore is really looking at a next phase of maturity and development. That itself will create a good funding environment for the NBFCs. Second factor is that RBI has been pushing NBFCs to diversify beyond banks for funding. Today, 80-85% of the NBFC funding comes from banks alone. The bond market, securitization market, PTC market – all these need to be further developed. A good rated entity (AA+ and above) will have a ready market for bonds, CPs, ECBs, etc. But most of the NBFCs are rated below AA, and find it difficult to attract funds from anyone other than banks. So, one way in the future is the securitization market, which takes out the entity risk from the security. Over a period of time, it will become very important for NBFCs, in terms of PTCs, direct assignment, etc.
Next, we at FIDC, have been looking for, and lobbying with the government and RBI, for creating a refinance kind of a network, whereby just like HFCs, the NBFCs also get some kind of a refinancing from a refinancing agency, whether SIDBI or someone else, so that NBFCs can diversify their risks away from the banks. The struggle and the competition for funds will remain. An entity that wants to get good funding, needs to be very strong on governance, risk management, people management practices and customer orientation. If an NBFC shortcuts something and doesn’t look at a 5-7 year horizon to build the entity, it will face a problem at some stage or the other.
Umesh: There has to be a clear plan how you are going to leverage, because the entire business model is on leveraging. How much will you leverage and what are the likely sources for you – that is something you need to plan. If your plan is that you will totally be dependent on banks, then your model itself is wrong. Refinance, etc, is something the industry will keep doing to widen the overall supply of resources. Older companies (Sriram is more than nearly 50 years old) have a deposit taking franchise. That has really helped them. There is also the capital market, international ECB market, bank refinancing market and the bank lending. So, these are the 5 broad categories of funds. Capital market in India is something to give attention to. There is a need for a body to put it together – learning from AMFI which has popularized mutual funds among retail investors. FIDC or industry bodies should do this – then only it will get attention from investors.
Corporate bonds need to be popularized and that’s where I think industry has to play a role because most of the future requirement of the NBFC will come or should come through capital market. We need to help different rated companies go to the capital market and get investor participation. Somewhere down the line, both RBI and government will realize that NBFCs are playing very important role in the economy and then a refinancing window would be provided.
Manoj: What kind of risks do you expect to become critical in the days ahead? What kind of wisdom or intelligence is required to have a holistic approach to known and unknown risks?
Prabhat: I think all kind of risks that can go up, are already going up. We have geopolitical tensions and economic instability, in India and in other countries. We’re talking about ECBs, but those countries are not stable, currencies are not stable. You have to hedge your bets. Credit risk is going up. Interest rates have gone up and borrowers are unable to repay.
Both FM and foreign minister said that risks are yet to pan out. So, looking at domestic, international, and what is happening in our neighborhood – it is a very uncertain kind of scenario that we are living in right now. We have had covid like black swan events, but the NBFC industry thankfully has withstood that challenge. We are resilient and we have that confidence having withstood Lehman, covid, etc. But what is going to hit next? I don’t think you can prepare for it. I don’t think risk is a function that can be left only to chief risk offers. It is too important a thing. All the leadership team, all the management committee members, all the senior leadership should be geared towards potential risk. One has to be constantly paranoid as a leader on assessing what is going to happen and how to cope with it. That doesn’t change. Good practices is what is traditional wisdom.
Jeff Bezos said that he is looking for things that don’t change – like a customer will always look for the cheapest product with best possible quality. That will never change. Likewise, NBFCs have to think about things that will never change. Those who keep doing that may be resilient enough to survive the next crisis.
KV: There are 2 types of risk – what you can plan for and what you cannot plan for. What you can plan for, you can use intelligence, data analytics and stuff like that, all the modern tools that are available today. What you cannot predict, you have to provide for it, in the sense that you need to have additional dollops of capital. So gone are those days when NBFCs used to leverage 6 times on their capital. Today, if you leverage 4 times, rating agencies will start getting worried about it. Safety capital is the only way you can manage uncertainties that you cannot plan for.
Manoj: The thing that even regulators are less sure about today is data and how AI would deal with data. How do you see regulation shaping up? What kind of steps will regulators be taking to deal with what is known to them and what is unknown to them?
Umesh: Globally, most of the regulators are now grappling with the current situation. They don’t have a solution right now, because the development on the technology and the usage of various tools are increasing so fast. Probably, regulators feel that they are behind the curve. Most regulators have a challenge that they are also a developmental institute alongside being a regulator, which creates confusion. If the economy needs a certain credit growth and certain kind of the opportunity being created through the credit supply, then the regulator also has to encourage the NBFCs and banks in the system to participate in the economic activity of economic growth. Now, regulators tend to have a zero tolerance for failure. That is where I think a regulator may get a little confused and try to bring a regulation to prevent a failure, rather than encouraging the use of tools and the technology to see that there is a progress in the particular industry.
Regulator need to open to ideas. They have created enough sandbox kind of a situations They are trying to see if technology is being used or misused. By and large, I feel that Indian regulators have done a good job and maybe they have been a little more overcautious in some times, but that’s how any regulator worldwide will do it.
Purvi: In the last few years, we are seeing the involvement of regulator at a very different level. The quality of people has improved. Earlier, we always felt that they didn’t know. Now, the people that you deal with are coming from some very good institutes. They are very well aware and I am amazed when I meet them. I got an opportunity to meet up with the Deputy Governor sometime back – his deputies were so well aware of every little thing in the market. So, I’m seeing a greater involvement also from the regulator, which I have not seen before.
Manoj: What should be the technology strategy for NBFCs, given that so many technologies are available as a service – cloud, public digital infrastructure, AI, etc?
Ravi: Let’s ask – which is the biggest fintech? I think a bank is the biggest fintech – because today the bank is totally virtual. Look at the kind of data and risks they manage. A lot of the fintechs are truly technology companies doing financial services. Now, technology is becoming a commodity – it’s getting cheaper and cheaper, and there’s no value in a typical commodity. Today, there are so many readymade technology solutions available. Once you get an NBFC license from RBI, you’ll get 20 technology companies providing you LOS, LMS, etc. What is important here is, how you leverage the data which is available. We have been talking about AA and now, it’s a digital public infrastructure.
NBFC also have to look at regulation and risk. With the DPDP Act coming into play, NBFCs have to be very careful how they use technology with respect to the personal data of people (PII). We have to make sure that whatever technology, whatever public infrastructure, cloud, wherever we are using, is compliant with the DPDP Act. You don’t need mobile number or email address to underwrite the person. So, those are areas which we have to work upon. Secondly, the public infrastructure is available so you don’t have to repeat things. Classic example is UPI – it was successful because it was a public infrastructure created by NPCI.
Blockchain was the new buzzword a few years ago, now it’s AI. If there’s a flood or some natural calamity, AI can only be reactive, it cannot be proactive. So, we have to make sure that all our technology is robust.
Manoj: What do you think is the most important technology initiative for the NBFC sector?
Ravi: I think digital public infrastructure with account aggregator.
Umesh: I think it is some of everything. Digital transformation has narrowed the gap of credit access to many of the entrepreneurs and individuals, who otherwise would never have access to formal credit system.
Purvi: eKYC has really opened up the possibility of funding more and more people. It was one big bottleneck earlier.
Prabhat: KYC, verifications, credit scoring and all, can be clubbed into one box and the NBFC can ping it and they get the report – this brings the cost down at a scale. The thing that I am more worried about is cyberattacks. So, maybe a digital public infrastructure for protecting the BFSI industry, a sort of cyber security umbrella, is something that we should work on.
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