Microfinance, the extension of small loans to underserved communities, has long been a crucial tool for financial inclusion in India. Traditionally, banks held the dominant position in this sector. However, the recent years have witnessed a significant shift, with Non-Banking Financial Companies (NBFCs) specializing in microfinance (NBFC-MFIs) taking the lead.
NBFCs Surge Ahead
As of December 2023, NBFC-MFIs boast a remarkable 39.1% share of the microfinance industry’s loan portfolio, with a staggering Rs 1.56 lakh crore outstanding. This surpasses banks, which now hold the second spot with Rs 1.34 lakh crore. This dominance is attributed to several factors.
Tailored Approach and Technological Edge
NBFC-MFIs have a reputation for their agility and focus on specific demographics. Unlike banks with standardized processes, NBFC-MFIs cater to the unique needs of micro-entrepreneurs and individuals in rural and underserved areas. They often employ flexible loan structures, smaller ticket sizes, and quicker turnaround times. Additionally, NBFC-MFIs have embraced technology for loan disbursement and collection, making the process faster and more accessible for borrowers in remote locations.
Shifting Priorities of Banks
Banks, facing a rising credit deposit ratio, have shifted their focus towards retail credit. This has opened up space for NBFC-MFIs to cater to the unbanked population. With a wider reach and a more client-centric approach, NBFC-MFIs have effectively filled the gap.
Growth and Resilience
The microfinance industry itself has shown impressive growth. The gross loan portfolio stands at Rs 3.99 lakh crore, serving a staggering 7.4 crore borrowers. The average loan size has nearly doubled in the past five years, reflecting the growing needs of micro-entrepreneurs. This growth is commendable, especially considering a slight decrease in the number of loans disbursed.
Challenges and the Road Ahead
Despite the positive outlook, challenges remain. Ensuring responsible lending practices and preventing over-indebtedness is crucial. Additionally, NBFC-MFIs need to manage their asset quality, as a significant portion of their portfolio comes from borrowers with limited credit history.
Regulatory Framework and Future Outlook
The introduction of the Structured Regulatory Framework for NBFCs (SBR) in 2022 aims to bring greater stability to the sector. By categorizing NBFCs based on their size and risk profile, the SBR is expected to enhance regulatory oversight and consumer protection.
The rise of NBFC-MFIs signifies a positive development for financial inclusion in India. As they continue to innovate and adapt, NBFC-MFIs are well-positioned to empower millions by providing access to credit and fostering financial independence.
