Dawn of New Strategies
Mul t i - pronged a s s e t s t r a t e gy, diversified liability approach, and a fresh technology design and blueprint in place, NBFCs have redefined their strategy to take on the competitions concluded the panel discussion held as part of the NBFC’s TOMORROW series by Banking Frontiers. Moderated by Manoj Agrawal, Group Editor, Banking Frontiers, eminent personalities like Shachindra Nath, Executive Chairman & MD of U GRO Capital, Sabyasachi Rath, CEO, Karvy Financial Services, Sanjay Sharma, MD & CEO, AYE Finance, Nehal Mehta, Head of Business Development, Financial Services Industry at Amazon Web Services and Arun Nayyar, CEO, NEO Growth Credit, deep-dived into the set theme of discussion ‘ Re-thinking strategies for the new world.’
NBFCs, long considered a second cousin to banks, are slowly fighting their way up the recognition pyramid. They are putting themselves on the map, like in the case of UGRO Capital which recently tied up with Bank of Baroda. What has led to this turn around?
One of the ways that NBFCs have assuaged this is through a change in the leadership mindset. The Executive Chairman and & MD of UGRO Capital, Shachindra Nath believes: “What this segment needs are the innovators and problem-solvers because if you’re not solving a problem of a segment of the market, there is no value proposition available to you.”
The under penetration of India credit market is vast and the possibilities for newer financial institutions are endless. The concerns and roadblocks these institutions could face will also be challenging because of the very dynamic nature of technology. Shachindra Nath says: “Technology is not really the constraint, but our ability to keep enhancing it is one. And for the financial services industry, especially for lending, it is a constraint of mindset.”
According to him, the entire liability spectrum rating agency is over weighted towards the big names and high-rated companies. They are rated highly not due to a solid underlying business model, but due to their name-weightage in the industry. This tends to hamper the newer NBFCs’ ability to innovate, grow and serve the market. Despite excellent business models and innovation, they have to compete with a name, and that is a big constraint. But in the last 2 decades in India, multiple financial institutions have overcome this problem.
According to Sabyasachi Rath, NBFCs also face the constraint of funding as earlier sources like banks and mutual funds have changed their approach to funding NBFCs. COVID has been one more factor which has led to collection efficiencies dipping significantly, impacting the bottom-line of NBFCs.
Sanjay Sharma holds another opinion on constraints, not having seen funding as a problem, per se. He says: “Funding is not really a big concern for mid-sized NBFCs, because there’s a reasonable amount of money available.” But for him, the major challenge is maintaining an agile team, to keep pace with the markets moving quickly. He believes that NBFCs have done well by responding quickly to emerging opportunities and being agile. “A good team that can look at opportunities and leverage those opportunities and go in areas where others have never bothered to go, that’s the difference in the DNA of NBFCs as compared to large established banks.”
The other thing that Sanjay Sharma thinks that poses a challenge, is the ability of these institutions to continue to improve their credit or underwriting skill in the marginalized customers. “NBFCs typically cater to customers, that in banks, are marginal. They have always done well in capturing this marginalized customer. And I think the ability to underwrite it well, is a constraint. It’s not a very struc-tured market. But NBFCs have normally overcome these constraints well, and dif-ferent institutions have different models. And if you don’t have that, it can be a huge constraint in this market.”
But have traditional NBFCs been able to overcome these challenges? All the major successful companies have deployed tools and technologies and modeled their
businesses on fully understanding the customer. Customer insights have become the holy grail in the business world.
Nehal Mehta says: “Many traditional NBFCs have not been able to really move with the customers’ demands and I feel it’s important to know what your customers want. I think understanding the customer and moving with the customers’ expectations is something that NBFCs need to adopt in a big way.”
Moving on to another issue: that of integrating technology and business in such a way that technology is embedded in long-term strategy as opposed to a trend in business where technology is just a small part of the business, not affecting the whole.
“From the NBFC standpoint, it is essential to use technology across the value chain, starting from customer acquisition. A modular system of digitizing each and every element of the value chain can be created. My view is that you need to have a bigger picture of the entire value chain, but approach it in a modular fashion. And that really helps you respond to the market needs,” says Arun Nayyar.
Instead of using technology to solve only certain problems, it should be integrated into the system, but to get there, businesses can take the piecemeal approach.
Sanjay Sharma believes: “Technology firms are becoming lenders, and the lenders are moving towards technology. This differentiation is fast merging into the mainstream. So that’s why it’s not that technology is used as a flavor to add to the fi-nancial offerings, technology itself has become the point of competition.”
Models that bridge business and technology strategies together are now
the need of the financial industry. The technology has to be aligned with the business goals of a company. “Essentially, the underpinning theme of being technology driven is to be a data-driven enterprise, where you are actually leveraging all possible data. What you have, what you don’t have, what you’re trying to get, what your partners have and making actionable decisions based on that, which is an enabler for business. The core element of enabling is the data. I think it’s really important to institutionalize knowledge that you have today, so that your employees and customers also get something out of that institutionalization,” says Nehal Mehta of AWS.
Warren Buffett once said: ‘Culture eats strategy for lunch’. In simpler words, culture is much more powerful than strategy as an organizational tool. Cultural objectives bind the organization and strengthen it.
As cultural objectives go, Arun Nayyar believes the sense of ownership in the or-ganization creates a culture of pride and responsibility and leads to everyone thinking like an owner. While Sabyasachi Rath wants to lead with emotion and empathy. “I think an emotional leader is the call of the day. Specially covid has taught us this. At my company, we keep track of all who have got vaccines, who haven’t. Which people and their families have been affected by covid. Because we spend so much of our time in the office with colleagues,
that they become your extended family. And covid has brought people closer. And as a leader, you have to be empathetic towards their needs, apart from the need of the work. So, it is an empathetic culture, which needs to level up in an organization.”
On organization culture Nehal Mehta, is of the opinion that the business and the technology teams within an organization need to be aligned together. “They should work together as a team, because if both sets understand each other and work with each other towards a common vision, it can take a business to greater heights.” Sanjay Sharma is of a similar view: “Culture is extremely crucial if you want to create an institution and it is the sharing of a vision together. If people share that vision and have a common value system, that builds the culture. It’s a synergy that works and helps the business. It includes many things like ownership, transparency, excitement, emotions.”
According to Shachindra Nath: “Culture is important and I’m only driving one culture, which is culture of unlearning. In the financial services industry, we need the most experienced people, which actually turns out to be the bottleneck. Because the learning of past is not relevant for today. So first unlearn what you have learned, so that you can innovate here. And that’s very, very hard.”
As learning begins at home, the culture of unlearning is sorely needed at this hour. All the knowledge that we have acquired is insufficient for dealing with the new world that we are in. Similarly, re-thinking strategies for the future of the financial industry requires us to unlearn and re-learn as we progress in to the 21st century.