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Why is the rise of NBFCs (Non-Banking Financial Companies) and their increasing trend of going public becoming more prominent?

1.⁠ ⁠Liquidity Shortages: There is an increasing demand for funds, evidenced by the liquidity crunch in the market, even after several measures taken by the Reserve Bank of India (RBI).

2.⁠ ⁠Long-Term Investment Focus: Investors today and in the future are increasingly inclined toward long-term investments. They seek to hedge their portfolios with high-earning companies that have strong financials. Since banks act as money multipliers, NBFCs are actively participating in the public market to attract investment.

3.⁠ ⁠Green Energy Investment Trends: The growing need for investments in green energy and the relaxation of lending norms for such projects have encouraged greater participation from NBFCs.

4.⁠ ⁠Pre-LPG Era and Economic Liberalization: Before the LPG (Liberalization, Privatization, and Globalization) era of 1991, the license-quota raj was firmly in place, creating a balance of payments crisis. This led to the liberalization of policies, with the banking sector playing a crucial role in boosting the economy and addressing the current account deficit.

5.⁠ ⁠Evolution of Risk Management: The development of various risk management techniques, such as credit risk, liquidity risk, operational risk, and interest rate risk, became critical for understanding and managing the underlying causes in the banking sector.

6.⁠ ⁠IPO and Book Building Process: The Book Building process for forming IPOs, although straightforward, comes with high compliance requirements. This has motivated companies to go public in order to raise funds from the public.
Written-by: Kunal Bansal