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Growing Private Equity Investment in the Indian NBFC Sector
In the last few years, private equity investment in non-banking financial companies has increased considerably. Analysing the investment and deal patterns for the investments made between 1999 and 2020, it is evident that most of the target companies are unlisted and most of the investments are un-exited. Foreign private equity investors largely dominate in the Indian NBFC space. The typical private equity behaviour to buy assets at distress prices, working to drive their value up before exiting, is a serious risk, and the large private equity money flowing into the NBFC sector has the potential to cause damage to the financial system, and therefore requires strict regulation.
Anon-banking financial company (NBFC) is a company whose principal business is to conduct financial activities, including granting loans and advances, and acquiring shares/stocks/bonds/debentures/securities issued by the government or a local authority or other similar marketable securities. It also includes leasing, hire purchase, insurance business, and chit business. NBFCs are mandatorily required to register themselves with the Reserve Bank of India (RBI) and obtain a license to carry out business (RBI 2017). Currently, the NBFC sector is the second-most important source of credit in India after banks. NBFCs play a key role in financial intermediation and provide niche financing facilities while reaching less-banked areas of our country.
“Credit intensity, as measured by the ratio of NBFCs’ credit to Gross Domestic Product (GDP) has been consistently increasing, reaching its highest level in 2018–19 at a value of 12.2 before moderating in 2019–20 as an impact of the COVID-19” (RBI 2020: 114–15). NBFCs complement banks in financial intermediation and increase the extent of financial inclusion in our economy. While NBFCs are experiencing an upward trend in their credit growth, banks’ credit growth rate has been decelerating as a result of various factors that have been creating stress in the Indian banking sector. In 2020–21, while the credit growth rate of banks stood at 5.4%, the same rate for NBFCs was 8.8% (RBI 2021a: 2, 41).
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