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While NBFCs have witnessed substantial growth over the years, there are few areas of

concern which need to be addressed. For instance, while NBFCs have enjoyed an edge over

banks in semi-urban & rural markets where banking network is not yet strong, they have

limited spread in urban markets. Nonetheless, in recent years, NBFCs have begun to create

niches for themselves that are often neglected by banks. These primarily include providing

finance to non-salaried individuals, traders, transporters, stock brokers, etc.

In the past few years, the increased competition from banks in the retail finance segment has

led to excess diversification by NBFCS from their core business activities. The sector has

witnessed introduction of various innovative products such as used vehicles financing, small

personal loans, three-wheeler financing, IPO financing, finance for tyres & fuel, asset

management, mutual fund distribution and insurance advisory, etc. Besides, NBFCs are

aspiring to emerge as a one-stop shop for all financial services.

NBFCs have also ventured into riskier segments such as unsecured loans, purchase finance

for used commercial vehicles, capital market lending, etc. Moreover, NBFCs customer

profile is concentrated on the self-employed segment. The earlier mentioned factors increase

their risk profile which could have adverse impact on the financial health of NBFCs.

Although some improvement has been witnessed in auto sales in last few months, the demand

for vehicle finance is likely to remain subdued. Besides, given the significant slowdown in

the Indian economy, NBFCs were encountering structural challenges such as increased

refinancing risk, short-term asset-liability mismatch leading to decelerating growth and

declining margins. This is expected to have a bearing on the profitability of NBFCs in the

medium term.

Given that growth in vehicle finance might remain low in the medium term, NBFCs are

expected to focus on rural and semi-urban markets. Credit requirements of rural population

are primarily met by banks from organised sector or local money lenders. Though, in recent

years there has been some penetration of NBFCs in this segment, the market still remains

largely untapped. There is a large section of rural population which does not have access to

21.Challenges & Future Outlook of NBFCs

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credit either because of their inability to meet the lending covenants of banks or due to high

interest rates of local money lenders. This provides a huge opportunity for NBFC sector to

spread their business in the rural & semi-urban markets.