The financial sector has been crucial in supporting the resilience and growth trajectory of the Indian Economy in recent years. Both commercial banks and NBFCs have actively contributed to the revival and development, aiming for inclusive growth. The nation’s financial inclusion strategy has proven to be successful, yielding positive outcomes. The involvement of NBFCs in this endeavor presents fresh prospects and obstacles for addressing gaps in underserved markets.
The RBI introduced an approach paper outlining the National Strategy for Financial Inclusion 2019-2024, delineating the vision and key objectives of financial inclusion policies in India. The aim is to facilitate the expansion and sustainability of financial inclusion on a national scale, involving comprehensive collaboration among all stakeholders in the financial sector. The core elements of the vision statement revolve around providing a fundamental array of financial services, along with access to livelihood and skill development. Financial Inclusion, in essence, involves granting individuals and businesses access to valuable and affordable financial products and services that cater to their specific needs. This requires the identification of individuals not yet integrated into the formal financial system and reaching out to them in a cost-effective and efficient manner, offering basic services and credit facilities tailored to their requirements.
To achieve the ambitious objectives of financial inclusion, the RBI and government authorities have adopted a comprehensive approach, including the expansion of branch networks and the establishment of small banks. Despite these efforts, certain regions and sectors remain unbanked or underbanked, necessitating further attention. NBFCs have played a significant role in addressing these gaps in underserved markets. The increasing prominence of the NBFC sector in the country’s financial system is evident in the consistent growth of NBFC credit, both as a percentage of GDP and in the total credit extended by scheduled commercial banks. According to the economic survey of 2022-23, NBFCs’ total credit portfolio surpassed 31 lakh crores last year, marking an increase from around 2 percent of GDP in 2013 to approximately 5.5 percent of GDP. Notably, there has been double-digit growth in loans to the service sector and personal loan segments. Various policy initiatives have been implemented to provide support to the NBFC sector as a whole.
Creating avenues for NBFCs to capitalize on, addressing the gaps in underserved markets presents new opportunities. These opportunities are particularly evident in sectors like MSME, agriculture, microfinance, and small personal loans. Despite the efforts of commercial banks, the MSME sector still requires sufficient funding tailored to its specific needs, necessitating flexible and customized solutions. State governments’ initiatives, such as market development schemes like ODOP, introduce fresh possibilities for NBFCs. Addressing the unique needs of customers with erratic and uncertain cash flows from their occupations or enterprises is crucial. Actively participating in platforms like TReDs for MSME and exploring co-lending opportunities with commercial banks are viable options. NBFCs, with their extensive reach, adaptability, local orientation, and flexibility, are well-positioned to meet the requirements of the underserved population still outside the formal financial system.
One of the primary hurdles faced by NBFCs in providing affordable lending is the necessity to secure cost-effective funds for equitable competition. Due to socio-cultural barriers, certain segments of the population still resort to traditional moneylenders for financial support, posing an additional challenge for NBFCs. While the significance of financial inclusion in India is widely acknowledged, NBFCs play a pivotal role alongside commercial banks. However, to establish a competitive advantage in underserved markets, NBFCs must embrace a more innovative approach, incorporating the latest technology for enhanced convenience, expanded outreach, improved connectivity, and more efficient participation. This evolution aims to achieve the coveted goal of financial inclusion.
In conclusion, the collaboration between Non-Banking Financial Companies (NBFCs) and commercial banks has played a vital role in promoting financial inclusion in India. The concerted efforts to bridge gaps in underserved markets have led to significant achievements, as reflected in the growth of NBFC credit and the expansion of financial services to previously excluded individuals and businesses. The National Strategy for Financial Inclusion, as outlined by the RBI, has set a comprehensive vision, emphasizing the provision of essential financial services and access to livelihood and skill development.
The opportunities presented for NBFCs in sectors like MSME, agriculture, microfinance, and small personal loans underscore the importance of tailoring financial solutions to specific needs. While challenges persist, such as the need for affordable funding and competition from traditional moneylenders, the continued innovation and adoption of technology by NBFCs position them as key players in achieving the shared goal of financial inclusion.
As the financial landscape evolves, NBFCs must remain adaptable and forward-thinking, leveraging technological advancements for enhanced convenience and connectivity. By actively participating in initiatives like TReDs for MSME and exploring co-lending opportunities, NBFCs can further contribute to narrowing the financial inclusion gap. The ongoing support from policymakers reinforces the commitment to fostering an inclusive financial ecosystem, ultimately driving economic resilience and growth in India.
