NBFCs and financial inclusion- Bridging the gap in underserved markets

NBFCs and financial inclusion: Bridging the gap in underserved markets

– By Jyoti Prakash Gadia

For the resilience and growth trajectory witnessed by the Indian Economy, the financial sector has played a critical role in the last few years. The commercial banks and the NBFCs have contributed towards the revival and development with an objective of inclusive growth. The financial inclusion strategy adopted by the country is paying rich dividends. The role of NBFCs in this respect provides new opportunities and challenges for bridging the gap in underserved markets.

The RBI had brought out an approach paper on the National Strategy for Financial Inclusion 2019-2024, which sets forth the vision and key objectives of the financial inclusion policies in India to help expand and sustain the financial inclusion process at the national level through a broad convergence of action involving all the stakeholders in the financial sector. Providing a basic bouquet of financial services and access to livelihood and skill development form the primary aspects of the vision statement. Financial Inclusion essentially implies providing individuals and businesses access to useful and affordable financial products and services that meet their respective needs. This entails identification of the populace who are not already a part of the formal financial system and reaching out to them cost-effectively and efficiently with the availability of basic services and credit facilities as per their requirement.

The major causes of financial exclusion were inter alia identified as a) lack of awareness about the products b) high transaction costs and c) remoteness of service provider. The apparent lack of trust in the system and non -non-availability of the products specifically meeting the requirements of the people were also observed as major issues. Timely and adequate credit to vulnerable groups such as weaker sections and low-income groups at affordable cost is the very essence of the strategy required. A need was felt, to target specific sectors like, MSME, Agriculture, and microfinance, and specific regions like aspirational districts to remove regional disparities, focus on the underserved and put out specific action plans.

Growing Role of NBFCs

RBI and the Government authorities adopted a comprehensive and holistic approach to achieve the coveted goals of financial inclusion. This included widening the network of branches and setting up small banks. However, considering the vast geographical area and the population spread across the country, there are still unbanked and underbanked areas and sectors that deserve to be attended to.

NBFCs have pitched in and contributed in a big way towards bridging the gap in the underserved markets. The growing importance of the NBFC sector in the Financial system of the country is exhibited in the consistent rise of the share of NBFC credit as a percentage of GDP as well as in the total credit extended by scheduled commercial banks. As per the economic survey 2022-23, the total credit portfolio of NBFCs crossed 31 lakh crores last year, rising from around 2 per cent of GDP in 2013 to around 5.5 per cent of GDP. Loans to the service sector and personal loan segments have shown double-digit growth. Various policy initiatives have been taken to support the NBFC sector as a whole.

Opportunities for NBFCs

Bridging the gap in the underserved markets brings in new opportunities for NBFCs The opportunities for NBFCs are evident in the MSME sector, agriculture, microfinance, small personal loans etc. Despite concerted efforts by commercial banks, the MSME sector still needs to be adequately funded as per their specific requirements and tailor-made flexible solutions are required. New initiatives by state governments in the shape of the development of markets, with schemes like ODOP create fresh opportunities for NBFCs. Meeting the specific requirements of the customers such as those earning erratic and uncertain cash flow from their occupation/enterprise, is called for. Similarly more active participation in platforms like TReDs for MSME and co-lending opportunities with commercial banks are available avenues.

The NBFCs, with their wider and deeper reach, adaptability, Local area orientation and flexibility are in a better position to cater to the requirements of the underserved and those who are still out of the formal financial system.

Challenges

The major challenge faced by NBFCs for lending at affordable rates is the need to obtain cheaper funds to gain a level playing field. On account of socio-cultural barriers, some sections of the population still rely on traditional money lenders for funding for this

NBFCs need to put in extra effort.

The importance and relevance of financial inclusion in India has been well recognised. The NBFCs are playing a crucial role in this respect, hand in hand with the commercial banks. However, to gain a competitive edge in underserved markets, NBFCs need to adopt a more innovative approach with the latest technology to ensure convenience, outreach, connectivity and more effective and efficient participation to achieve the cherished goal of financial inclusion.

(Jyoti Prakash Gadia is the managing director at Resurgent India.)

(Disclaimer: Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited.)