Indian NBFCs must adopt new tech-based biz models to attract PE funding: ASSOCHAM-PwC Study

“NBFCs must challenge the status quo in their business and find funds to invest into operating models with the potential to disrupt the industry,” said the study titled, ‘Fuelling NBFCs through private capital,’ jointly conducted by ASSOCHAM and professional services firm PwC.

It added that in wake of digital advance of policy initiatives such as India Stack, Aadhaar Pay and Direct Benefit Transfer (DBT) and exponential increase in smartphone/internet access, NBFCs need to think hard about tweaking their current business models to grow in a hybrid world (digital + physical).

The ASSOCHAM-PwC joint report also said that in order to ride the wave of increasing formal credit penetration in a growing economy, NBFCs will need to invest in new technologies to lower the cost of acquiring new segments (including thin files), servicing existing customers and de-risking the portfolio.

Besides, in order to fulfil demands of the new-age customer in terms of credit facilities, NBFCs will have to invest in analytics and AI (artificial intelligence) capabilities to be able to connect to the customer in a hyper-personalised manner.

“New tech-based business models have the potential to crunch the learning period substantially and re-balance the strategic advantage of information access by inserting themselves into the value chain with technology,” further said the study.

Highlighting as to what makes NBFCs attractive for investors, the paper noted that state-run and some private sector banks have been grappling with bad loans for the past three years, which in turn has given a tremendous opportunity for NBFCs to ramp up their scale. “In fact, in the last two years, they have doubled their market share in SMEs (small and medium enterprises) and wholesale loans and have made substantial inroads in other consumer loan categories.”

Coupled with lower cost, a focused approach on limited credit products and strong underlying risk management capabilities help NBFCs to not only underwrite credit to a targeted set of customers but also to control bad debts, making them one of the attractive sectors for PE funding.

Noting the importance of PE investment for growth of Indian NBFC sector, the report stated that private equity firms can provide the necessary capital and financial muscle to undertake strategic decisions—right from expanding existing markets, building newer capabilities, improving efficiency or even to refinancing existing high cost debt.

It however, said that PE firms look to invest in NBFCs which can build scale which provides cost reduction opportunities, market access and operational efficiencies which then give PE firms higher returns when they monetise their stakes.

Consolidation of smaller NBFCs will therefore become an attractive target for PE firms in the future as they will have the opportunity to demonstrate a successful exit with substantial multiples.