Failed, But Yet Being Tested: NBFC

We call them NBFC (Non-Banking Finance Companies), well, they call it Peer to Peer lending, but essentially both form a large portion of the credit flow in this stagnant and stringent market place. Do we learn from this thinly surviving financial experiment of China, or we rewrite the phenomena to be a boon to the economy?

In this low interest rate environment, banks are barely left with any net Interest margins, akin to revenue, further these stringent and painstaking Basel banking norms worsen business to infeasibility. In such an environment, finance companies find a soft ground in the lending business. Though mobile payments constitute one aspect of China’s Fintech story, Peer to Peer lending has catalyzed the credit market to an extent that the size of China’s P2P industry is larger than that of the rest of the world combined, with outstanding loans of US$217.96BN.

As the consumers and SMEs were under-served in China, these peer lenders sought to fill the gap with attractive rates, and soon grew at wildfire pace to outnumber regular scheduled banks. As they grew at an abnormal rate, it made the regulator skeptic of their operations, and one scam brewed trouble for another and the whole ponzi scheme was revealed to extinction. It was the fraudulent practices that deepened the crackdowns, and left a handful of them breathe thin air. As the market is sparsely populated with smaller players, it opens an arena for the surviving companies to spread across their pitch.

Though, shadow banking is one of the riskiest and least regulated slices of the financial industry, India has shown great support to prosper and enhance its role in the financial ecosystem. We have seen some devastating NBFC collapse, but they have been instrumental in microfinancing entrepreneurial ideas. As the size of the SME industry is expected to increase manifold, microfinancing will lay the financial pathway to success.

NBFC can aid to tremendous growth in a country like ours, where SMEs form a major pie of the employment. They need to be cautiously monitored and flexibly adjusted to the market requirements. It should be clubbed with the private equity investment space to streamline the investor category who want to park their money betting at risky ventures.