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NBFCs should adopt analytics, AI, ML for competing

Dr Krishnamurthy Subramanian, Chief Economic Adviser, Government of India, stresses that technology usage can be far wider in financial sector:

Dr. Krishnamurthy Subramanian, Chief Economic Adviser, Government of India

The Indian financial services sector has the potential to lead the economic growth, believes Dr Krishnamurthy Subramanian, Chief Economic Adviser, Government of India. He maintains that no country has been able to grow fast over a long period of time without the financial sector leading the growth and this sector should have growth rate of 1.5 times as compared to the country’s growth rate. “In India, the financial sector has to lead the growth,” he adds.

Addressing the virtual session of FICCI’s 1st NBFC Summit – ‘NBFC Sector in India: Preparing for the post covid world’ – recently, Dr Subramanian emphasized the need for NBFCs to use data analytics, AL and ML on a sustained basis in order to become globally competitive. “This is where the opportunity and disruption are happening, especially the way the economy is digitizing in India. Use of technology can be far higher in the financial sector. While these technologies are used extensively in the retail lending, they are not commonly used in large corporate lending,” he added.

Highlighting the importance of newer technologies, Dr Subramanian said tracking related party transactions, the pledged shareholding of the promoter, quality of financial statement, all of these can let NBFCs infer not only the ability of the borrower to repay but also assess the willingness to pay as well. “The need for relying on such data is very important,” he added.

RISK IN ZOMBIE LENDING

He insisted that every NBFC needs to monitor its rollover and inter-connectedness risks, take steps to contain risk in zombie lending and make financial inclusion happen at the bottom of pyramid. Forbearance is necessary during this time, he added, but hastened to add that zombie lending can come back to bite later. The proposed reforms in the agri and manufacturing sector would enable NBFCs to lend in a large way to primary and secondary sectors of the economy.

CREDIT TO GDP RATIO

Dr Subramanian stressed on the need for Indian banks to also become globally competitive. “The list of Global Top 100 Banks has 18 Chinese banks and India with the fifth largest economy in the world has only 1 bank (SBI at the 55th rank). The Indian financial sector is like the 1990s’ cricket team. One can write a lot about its domestic achievements, but not much when it goes outside. The Indian financial sector cannot be punching so below its weight,” he noted.

He also said that the ratio of credit to GDP in India is still around 52%, whereas the OECD average is 160%, and we are one-third of that average. This ratio in the North East is even less than 10%. “Especially for the financial sector in India, there are miles to go before we sleep,” he quipped.

DECOUPLING FROM BANKS

Rajiv Sabharwal, Chairman, MD & CEO, Tata Capital, said there is an imperative need to decouple NBFCs from banks on the liabilities side and broaden their options for raising money to support the growth. He added that while the industry was grappling with the issues of asset quality and liquidity over the past couple of years, after the pandemic, managing these issues has become more challenging.

Dinanath Dubhashi, MD & CEO, L&T Finance, said the NBFC sector needs capital, liquidity and credit quality to become globally competitive. Rashesh Shah, Past President, FICCI and Chairman & CEO, Edelweiss Group, mentioned that though there is enough liquidity in the system still we are not seeing this liquidity getting converted into credit flow. “We need availability of long-term credits for investments to happen,” he added.

NEED TO HAVE SCALE

Speaking about the future of NBFCs, C.S. Setty, Managing Director, State Bank of India, said other than the disruptions caused by the liquidity crisis, the pandemic crisis where the collection efficiency rock bottomed, and traditional NBFCs facing competition from new age fintech companies, NBFCs must also be mindful of another disruption that is going to come from large incumbent players like SBI. He urged the NBFC players to focus on 5 key factors – bringing down collection cost, scalability, reliability, security and flexibility, which will help them to grow in the challenging times. Observing that NBFCs have a much lower collection cost as compared to banks, this could be one of the main reasons why large banks like SBI would like to partner with NBFCs. This would help them increase their capital efficiency and reduce their dependence on market capital and it should be strengthened, said Mr Setty.

He felt that in order to have meaningful partnerships with players like the eCommerce firms for lending purposes, NBFCs should have scale.

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