BFSI Summit: Industry experts discuss future growth paths for NBFCs, MFIs

Business Standard BFSI Insight Summit 2024: Industry experts share insights into reach, regulatory pressures, growth opportunities for non-banking financial companies, microfinance institutions

In India’s evolving financial landscape, non-banking financial companies (NBFCs) and microfinance institutions (MFIs) are also adapting to reach the last mile, said industry experts on Thursday at the Business Standard BFSI Insight Summit 2024, India’s biggest banking, financial services, and insurance (BFSI) event. Speaking to Business Standard’s Manojit Saha, Shachindra Nath, vice chairman and managing director of U GRO Capital, a tech-driven NBFC, and Venkatesh N, founder and managing director of IIFL Samasta, a financial institution committed to women’s economic empowerment, highlighted that despite the adaptability of NBFCs and MFIs, their market reach cannot rival the extensive networks of banks. They underscored the need for partnerships with banks through co-lending models and stressed the need for specialised financial institutions to serve India’s micro, small, and medium enterprises (MSMEs) effectively. 

 

 

For us, co-lending has played a big role: Nath

 

According to Nath, partnerships with banks through co-lending models help NBFCs leverage both innovation and stability. He said, “We (NBFCs) are better equipped to adapt to newer things. NBFCs as institutions have more power to innovate. But there are challenges too. For instance, unlike a marketplace like Amazon, where there is only a product and customers, financial institutions have an additional element—the regulators. Thus, NBFCs face more oversight. Between a bank and an NBFC, NBFCs have an added layer of supervision. Banks are supervised by the RBI, while NBFCs also have other regulators ensuring NBFCs lend responsibly.”

 

He added that after reaching a particular size in terms of customers and lending growth, NBFCs should consider converting to banks. However, before that, partnering with banks for co-lending is essential to effectively serve MSMEs and smaller borrowers. Emphasising the dynamic between speed and tradition—fintechs and traditional banks—he said, “We are still a few years from becoming a bank. We are like a Ferrari attached to a bullock cart. There’s no choice but to be as traditional as banks while exploring tech innovations so that we can jointly offer the benefits of banking to customers. These benefits do not necessarily require becoming a bank; they can be realised through partnerships with banks.”

 

However, he noted that NBFCs could not match the banking sector's reach and cautioned that rapid growth in NBFCs could introduce potential systemic risks. “Large NBFCs might create inter-linkages and could weigh on the financial system. NBFCs often borrow from multiple banks, and if any issues arise, the banks could also be affected,” he said.

 

Discussing the impact of Covid-19 on lending institutions, he said, “Covid hit the microfinance industry hard. Retail trade in Tier-II, III, and IV areas is improving but has not yet reached pre-Covid levels.”

 

India lacks large MSME financial institutions: Venkatesh N

 

Elaborating further on the impact of Covid-19, Venkatesh N said the microfinance sector is still grappling with post-pandemic recovery and faces regulatory and operational challenges, affecting return on equity.

 

He highlighted the need for specialised financial institutions to serve MSMEs in the country, suggesting that in the future, MFIs may seek small finance bank licences to meet their customers’ evolving needs. “NBFCs, especially MFIs, are reaching remote, underserved regions but face income assessment challenges due to undocumented earnings. MFIs continue to support lower-income households, with many customers relying on informal income sources, with some customers staying with us for 5-6 years,” he said.

 

“If you look at our operations, we have remote branches in areas where banks are not present. The way NBFCs are used is quite remarkable; we’ve managed to reach inner pockets. We rely on customers’ word for income assessment, as it’s often undocumented, which poses a challenge,” he added, noting, “The stress in the microfinance sector should recalibrate within a few months.”

 

He further stated that MFIs need help with high borrowing costs and slow fund deployment due to new regulations. “Despite no liquidity crunch, operational costs remain high, affecting return on equity,” he said.