India has shown dramatic improvement in terms of financial inclusion in the last few years with around 20 crore people having gained access to financial services as validated by a report by global consultancy firm BCG in 2016. According to a recent report by The Global Microscope 2016, India is firmly among the leaders in providing financial empowerment to the marginalised section of the society. Through financial inclusion policies such as Pradhan Mantri Jan Dhan Yojana, India’s effort in encouraging holistic economic development has shown considerable progress. To sustain the economic growth of 7-8%, the focus needs to shift towards broadening the scope of financial inclusion. Right now, the focus is more towards providing un-banked entities with banking products and tax benefits. It’s time to move beyond enablement to true empowerment. A survey conducted across 540 SMEs by the Firstbiz and Greyhound Knowledge Group last year reports, that over 500 SMEs in this country found ‘lack of easy finance and credit instruments’ to be their most critical challenge. The fact that money lenders continue to account for nearly 30% of total banking business reflects the dependence of credit starved SMEs toward informal means for raising money. This invariably results in exorbitantly higher interest rates for loans, which most of the SMEs find difficult to pay back.
The challenge of access to capital is compounded further for SMEs to curb bad debts, as banks have become increasingly reluctant to lend to small enterprises. Moreover, most of the SMEs, especially in the rural areas have limited or no access to formalised institution. A report prepared by PwC India in 2015 pointed out that India’s unbanked population that year was 233 million. In this scenario, , Indian Non-banking finance companies (NBFCs) are becoming one of the preferred option. According to a recent report released by Capital Trust, the total borrowing from NBFC sector had increased by 15.3% in March 2016. The fact that credit penetration of NBFCs in India is at 13% of GDP, which is significantly low compared to other emerging economies, reflects that there are still few challenges that need to be addressed immediately.
One of the key challenges that NBFCs currently face is that they are extremely dependant on competitors, banks and capital markets for raising funds. This can prove detrimental to the sustainability of their growth and can cause lot of distress, as funds from these sources can dry up without much notice. A strong regulatory framework from RBI which allows opening up of refinance windows and credit insurance support to NBFCs will help them raise low cost funds and increase their lending penetration. Another critical factor that forms a challenge for NBFCs is lack of flexibility in classification of loans. The assumption of “one-size fits all” doesn’t work for NBFCs. The regulations need to consider the borrowers’ profile and assets under classification to address this issue. Other challenges that need immediate support through efficient regulatory framework include withdrawal of priority sector status of bank lending to NBFCs, disparity in treatment in terms of taxation for NBFCs and Banks and minimum mandatory credit rating for deposit taking NBFCs.
Despite building a robust regulatory framework to empower NBFCs, the sector would still face challenges if it does not strive to become self-sufficient. As financial reach deepens, the traditional sources of advantage for NBFCs will start to diminish.
It is critical that NBFCs evolve by leveraging technology to build scalable models that would enable greater service to the credit starved SMEs. However, even if NBFCs continue to invest aggressively behind designing innovative products, they will still have to maintain the basic business synergies by reducing excess overhead costs.
For RBI, the endeavour should be to build a regulatory framework that addresses the concerns and uniqueness of the NBFC sector giving it a much-needed financial stability. An empowered NBFC will play a critical role in strengthening our SME ecosystem and contribute significantly in steering the country towards economic development.
CEO & co-Founder, Lendingkart Technologies.
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