Current Scenario of NBFCs

Global credit crisis followed by increase in interest rates in October and November 2008 resulted in widespread crisis of confidence. Chain of events after the collapse of Lehman Brothers is still fresh in the minds of investors. Non-Banking Finance Companies (NBFCs) in India were severely impacted due to economic slowdown coupled with fall in demand for financing as several businesses deferred their expansion plan. Stock prices of NBFCs’ crashed on the back of rising non-performing assets and several companies closed their operations. International NBFCs’ still continue to close down or sell their back end operations in India.

The positive news however is that, this crisis has forced NBFCs to improve their operations and strategies. Industry experts opine that they are much more mature today than they where during the last decade. Timely intervention of RBI helped reduce the negative effect of credit crunch on banks and NBFCs. In fact, aggressive strategies helped LIC Housing Finance to grab new customers (including customers of other banks) and increase its market share in national mortgage market. Surprisingly it was able to maintain its profitability in 2009 (around 37%). HDFC, the largest NBFC in India, however experienced a slowdown in customer growth due to stiff competition, especially from LIC Housing Finance and tight

monetary conditions.

Other NBFCs that were stable during this period of credit crunch are Infrastructure Development Finance Company (IDFC) Power Finance Corporation (PFC) and Rural Electrification Corporation (REC). Growth prospects are strong for these companies given the acute shortage of power in the country and expected increase in demand for infrastructure projects.

The segment which was hit hardest was Vehicle Financing. Companies financing new vehicle purchases experienced a drastic reduction in new customer numbers. Fortunately, since vehicle finance is asset-based business, their asset quality did not suffer as against other consumer financing businesses. Contrary to this, Shriram Transport Finance, the only NBFC which deals in second-hand vehicle financing was able to maintain its growth primarily due to its business model which does not entirely depends on health of the auto industry.