Banks use tech teeth to bite into NBFC pie in consumer credit space

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A bloodless coup is quietly taking place in India’s consumer credit space. Riding the technology wave, banks are marshalling the power of fintech firms to gain bigger and bigger marketshare of what is described as “consumption credit” which has been the traditional playground of NBFC companies and home finance companies, The Economic Times has reported.

The report has quoted broking major Nomura Securities to mention that banks have cornered an overwhelming 77% of the home loan market in June 2023, while that for NBFCs dipped to a mere 17%. The two shares stood at 74% and 22% respectively in FY20.

The data is revealing. In FY20, banks had a share of 65% in the auto loan market while NBFCs had 33% under their belt. At the end of Q1 in FY24, the shares for banks rose to 70%, while that for NBFCs eroded to 28%. In credit cards the share of banks went up from 66% to 80% in the same time period, while that of NBFCs climbed down from 34% to 20%. Only in the personal loan space, did the NBFCs gain in market share – it went up from 22% to 29% between FY20 and Q1 of FY24 while that for banks went down from 74% to 68%.

Among the reasons that kept on tilting the balance in favour of the banks were thought to be increasing interest rates and norms that have decelerated the flow of funds to NBFCs. Banks are now equipped with more cash for lending in what is valued as a high-margin but low-risk segment.

“This will continue for the next few quarters as banks increase their lending rates for NBFCs, and as a consequence, NBFCs increase the rates for their customers. Looking at the market share, the squeeze of credit supply will be more for NBFCs. They can think about entering into co-lending with banks where they can still continue to grow assets under management,” Anil Gupta, vice president, ICRA ratings told the newspaper.

Experts think the arrival of the fintech industry has powered the onward march of the banks, lending them the teeth of technology to spread themselves out everywhere in the vast country. Earlier the cost of reaching out to all parts of the country involved deterrent costs, a constraint that the fintech firms have substantially addressed for the banks.

The NBFCs that had to contend with less regulation used to reach pockets of the country that banks could not. But now with the muscle of technology and the easier access to lower-cost funds have favoured the banks in the credit game.