More small and mid-sized non-banking financial companies (NBFCs) are expected to be of interest to private equity firms due to their strong loan growth and improved asset quality.
“We expect both strategic and private equity investors to invest in the NBFC sector, especially in emerging and mid-size NBFCs,” said Ajit Velonie, senior director, Crisil Ratings.
Velonie attributed this to the fact that NBFCs have focussed on bolstering liquidity, capital and provisioning buffers to reinforce their balance sheets in the recent year. This, in addition to a rebound in economic activity, has put the sector in a relatively stronger position now to capitalise on growth opportunities.
Non-bank lenders have seen higher private equity involvement in recent years. In July, TPG affiliate Perseus acquired a controlling stake in Poonawalla Housing Finance for Rs 3,004 crore. The housing finance company’s assets under management stood at around Rs 5,600 crore as of September 2022, when the deal was signed.
In recent years, the likes of TPG have also invested in companies like Five Star Business Finance, Kraybee Services, and Fibe.India.
The Reserve Bank of India (RBI) has imposed barriers to acquiring controlling stakes in banks, and this makes non-bank lenders a conducive investment bets for private equity firms, say experts. RBI has capped long-term non-promoter shareholding for banks at 10% for natural persons and non-financial entities whereas, the cap for financial entities stands at 15% of the paid-up voting equity share capital.
“Apart from regulatory issues, a key driver of investments in the sector is the organic growth and scale that the sector is showing across segments that it operates in,” Fali Hodiwalla, Partner – Financial Services Consulting, EY India said.
Further, Hodiwalla noted that the valuations of some of the largest NBFCs in India exceed several banks, and this is attractive to private equity investors. It also helps that these non-bank lenders have been able to manage liquidity in an efficient manner.
While private equity investors have typically preferred businesses that do secured lending, new-age lenders that operate in the unsecured space have also received a fair share of investments in recent times, say experts.
“When private equity comes in, the ball game changes to profitability. It is not venture capital money. As the money comes in, businesses are meant to focus on scale, very high growth, and profitability,” says Akshay Mehrotra, co-founder and chief executive officer, Fibe.India.
“This means that listing exits are going to be possible for these private equity firms and they have to be demonstrated in that manner,” he added.
Vivriti Capital chief risk officer Hemang Mehta stated that funds with a three-to-ten-year outlook are interested in profitable companies with sound management and a good track record.
While around 90 NBFCs have surrendered their licences in the first half of 2023, experts are confident that the segment will continue to see an inflow of private equity investments given that credit demand is expected to remain robust.
“While small and mid-sized NBFCs play a pivotal role in India’s financial inclusion initiatives and appeal to strategic investors looking for positive social impact, proper oversight and regulation are essential to maintain the sector’s stability and integrity,” Rohit Arora, chief executive and co-founder, Biz2Credit, said.
In fact, non-bank lenders that focus on strengthening their business models and upholding asset quality will be favoured by investors.