Mumbai: Non-banking finance companies (NBFCs) are giving tough competition to banks in India, especially public sector banks (PSBs), eating up their market share, according to a report released by the Boston Consulting Group (BCG) on Monday. The report also warns of over-leveraging in the retail customer segment as banks and NBFCs grow their loan books through their existing customers.

Between calendar years 2014 and 2017, the share of NBFCs in total loans is estimated to have increased from 21% to 44%, whereas, for public sector banks, it fell from 49% to 28%. “NBFCs have expanded their share rapidly, particularly in the number of loans disbursed—primarily driven by their aggressive push to expand and capture market share in certificate of deposits and gold," the report stated.

Moreover, NBFCs are becoming the go-to lenders for youngsters in India. According to the report, of the total loans given by financial institutions in India to persons aged between 21 and 35 years, NBFCs had the maximum market share of 49%. “NBFCs, with their focus on lower ticket and early credit lifestage products, have gained close to 50% share of loans in the youth segment," BCG said.

The consulting firm has also indicated that there could be likely over-leverage in the retail segment as the banks and NBFCs tap their existing customers to grow their loans books instead of tapping first-time borrowers.

The report shows that between calendar years 2013 and 2017, the share of first-time borrowers in overall loans accounts opened fell from 34% to 20%. “This poses a risk of over-leverage," said Yash Erande, partner and director at BCG India. Erande further said lending institutions must consider setting up early warning systems so that the risk of defaults is curtailed.

Further, according to BCG, micro and small enterprises will be the key growth drivers for banks and NBFCs in the coming years as the segment is highly under-served and has managed to maintain its creditworthiness. As per the report, the micro enterprises, on an average, reported a delinquency rate of 7.4%-8.1% as against large corporates where the delinquency rates shot up sharply from 12.25% to 22.3% between September 2015 and June 2017. 

Erande of BCG also said there is a need to tap the data on micro and small enterprises to assess the funding gap and to tap the “hidden" potential of the segment. The report shows that there are about 51 million micro, small and medium enterprises in India, of which nearly 4 crore have current accounts. The number of borrowers in the segment, however, is only 4.5 million. “This shows the funding gap. The gap between the number of current accounts and number of borrowers shows the business potential," said Erande, adding that many NBFCs are now innovating their business models to serve this segment better.

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