Why shadow banks have a place despite HDFC, in 5 charts

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₹500 crore, which it considers ‘systemically important’. This category includes several large government-backed companies (such as Power Finance Corporation), which account for 45% of assets in this category. Their government-owned status means they can raise funds at a lower cost, thus pulling down the cost of funds for the NBFC sector as a whole.

In contrast, NBFCs allowed to raise public deposits account for 14% of the sector and their cost of funds is typically higher than that of banks.   The business case for NBFCs comes from margins. As a whole, margins of NBFCs tend to be much higher than that of banks.

This is because NBFCs are more focused on higher-margin retail loans such as gold loans, vehicle loans and microfinance. While the share of retail loans in total loans for both groups is roughly the same (around 28% in 2022-23), banks tend to have a much larger share of lower-margin home loans in their loan book. Excluding home loans, the share of retail loans in overall loans for NBFCs was 27.7% versus 13.8% for banks.

Thus, as a whole, the net interest margin for NBFCs was 2.2 percentage points higher than for banks in 2022-23. Among NBFC segments, infrastructure loan and gold loan companies had the highest margins. The exceptions in the NBFC sector were housing finance companies, the category to which HDFC belonged.

Due to intense competition from banks, margins for housing finance institutions were lower than for banks.   NBFCs that are more retail-oriented, especially in higher-margin segments, have done well on the growth front in the past few years. Thus, over a five-year period, share performance of the NBFC set has topped both private banks and public sector banks.