In the dynamic landscape of the NBFC sector in India, the quest for sustainable growth and profitability is paramount. ROA stands out as a crucial metric, reflecting the efficiency with which an NBFC utilizes its assets to generate earnings. In this blog, let’s have a look at strategic approaches aimed at enhancing ROA for NBFCs.
Understanding ROA
ROA or Return on Assets is a key performance indicator that measures the efficiency of an NBFC in utilizing its assets to generate profits. It is calculated by dividing the net income by the average total assets. A higher ROA indicates better asset utilization and, consequently, enhanced profitability.
Strategies For Improving ROA
1. Effective Asset Management
Asset management is a critical component of financial strategy, encompassing the systematic and strategic handling of a company’s resources to maximize returns and minimize risks. In the context of NBFCs, effective asset management involves the allocation of funds across diverse financial instruments and sectors to optimize the balance between risk and reward. By employing sophisticated tools and methodologies, asset managers in NBFCs aim to enhance portfolio performance. Asset management plays a pivotal role in shaping an NBFC’s overall financial health, influencing key metrics such as ROA and contributing to the sustained growth and stability of the institution.
2. Diversification Of Loan Portfolio
Achieving a well-diversified loan portfolio is instrumental in mitigating risk and minimizing the impact of economic downturns in specific sectors for NBFCs. By venturing into various segments such as retail, microfinance, or SME lending, these institutions can establish a balanced portfolio. Diversification serves as a safeguard for financial portfolios, with secured loans providing stability through collateral, and unsecured loans introducing an element of risk based solely on creditworthiness. Abhay Bhutada, Poonawalla Fincorp’s MD, emphasizes their strategic approach of maintaining a balanced mix of secured and unsecured loans, adhering to a 40:60 ratio, as a prudent method to navigate the complexities of the lending landscape.
3. Focus On Operational Efficiency
Continued commitment to operational efficiency is pivotal for NBFCs aiming to boost their Return on Assets. Investing in modern technology facilitates the implementation of advanced systems, such as robust fintech solutions and automated workflows, streamlining operations and reducing manual errors. Furthermore, ongoing training programs for personnel ensure that employees are well-equipped to navigate and maximize the potential of these technological advancements. Regular reviews and refinements of internal processes are essential for maintaining adaptability and responsiveness to evolving market dynamics, thereby sustaining and augmenting the gains in operational efficiency over time.
4. Customer-Centric Approach
Customer satisfaction is a pivotal driver for elevating ROA in NBFCs. Beyond risk reduction, a customer-centric strategy, featuring personalized services and effective grievance redressal, creates a positive ripple effect. Efficient grievance redressal mechanisms not only prevent escalations but also offer insights for continuous process improvement. Emphasizing the proactive approach, Dinesh Gangwani, Chief Technology Officer at Mahindra Finance, pointed out that the current capability allows for engaging with customers proactively, surpassing expectations in terms of service delivery. This dynamic interplay between customer satisfaction and ROA creates a symbiotic cycle, driving ongoing investments in customer-centric initiatives and positioning NBFCs for resilience and growth.
5. Adoption Of Technology
Embracing technology is imperative for NBFCs to streamline operations and enhance efficiency. Implementing digital lending platforms, AI-driven credit scoring, and robust fintech solutions can automate processes, reduce costs, and expedite decision-making, leading to improved ROA. Abhay Bhutada says that their organization is prioritizing a digital and employee-lite model, with a strong emphasis on technology-driven lending.
6. Liquidity Management
Prudent liquidity management is crucial for NBFCs. It involves the careful balancing of short-term and long-term assets, maintaining adequate cash reserves, and aligning the maturity profile of assets and liabilities to ensure effective liquidity management. All of this also positively influences ROA. Integrating data analytics, machine learning, and digital platforms can significantly elevate risk assessment, streamline operations, and ultimately propel ROA to new heights. The strategic combination of sound liquidity practices and technological integration helps NBFCs strive for sustained success in a competitive financial environment.
Conclusion
In the fiercely competitive world of NBFCs in India, the pursuit of a higher ROA demands a strategic and multifaceted approach. From effective asset management to embracing technology and maintaining a customer-centric focus, the key lies in optimizing operations and resources. By implementing these strategies, NBFCs can not only weather uncertainties but also position themselves for sustained growth and profitability, contributing to the overall resilience of the financial sector in India.
