NBFCs: Building a More Inclusive Future

 Article By

V.P. Nandakumar,

MD & CEO, Manappuram Finance Ltd

Bringing the multitudes of unbanked population in rural India to the formal credit market remains a major policy challenge but the task of financial inclusion has been made easier by the accelerated pace of digitalisation

Providing last mile credit to consumers has been a shared concern of policy makers and financial intermediaries for long. In the current tightening cycle, this singular issue has been at the centre of attention of not just the central banks but the fiscal policy makers. This was amplified by the RBI Governor’s last monetary policy public statement in the current fiscal where he flagged the need for enhancing the last mile credit connectivity to perk up consumer spending to ensure durable growth above the threshold 7% mark while continuing to battle the increase in general price levels to align the headline inflation below the 4% mark.

NBFCs have played a seminal role in this process. These institutions have supplemented and complemented banks in more ways than one by serving the credit needs of the last mile through endevaours like micro finance and now we have specialised NBFCs in this segment. To put things in perspective, total credit extended by NBFCs in India as on December 2023 is approximately Rs 34 lakh crore, constituting 20% of bank credit. Credit by NBFCs grew at a CAGR of 12% in the past 5-year period outpacing bank credit growth of 10.5%. NBFCs have also done well in financial and profitable metrics, making the business a win-win for customers and lenders.

At Manappuram, we were one of the first in the country to leverage technology and pioneer online gold loans. We also undertake doorstep gold loans. Technology will further democratise lending and bring down cost of financial intermediation which could get passed on to customers by way of lower lending rates. New business models involving loan aggregators and loan service providers are becoming more entrenched which helps create a credit history for the excluded, entitling them to avail credit from financial institutions.     

We lay a big emphasis in fostering financial inclusion. While we have branches in far-flung areas spread across the country, our online gold loan channel continues to gain in popularity. Our dedicated microfinance subsidiary, Asirvad, has assets under management of more than Rs 11,500 crore now and at the same time this has turned out to be a profitable venture for us. As per Q3FY 24 figures, Asirvad has as many as 3.8 million customers.

Besides this, we have created several dedicated non-gold verticals to disburse small ticket loans in various segments like small traders, hotels and restaurants, women entrepreneurs, small-scale industries, teachers, etc. As the Indian economy grows, we are sure that these segments will greatly benefit from timely credit provided by non-banking financial institutions like Manappuram.

Bringing the multitudes of unbanked population in rural India to the formal credit market remains a major policy challenge. However, the task of financial inclusion has been made much easier and simpler by the accelerated pace of digitalisation. There is no contesting the fact that cash economy or to be precise, cash-in-circulation (CIC) remains high but the digital footprint has been expanding, aided by UPI apart from legacy digital payment modes and platforms like internet banking or debit/credit cards. Going by the latest RBI data, the incidence of CIC remains high at approximately 12% of the size of the economy. The digital footprint for the past three to four years has been growing at a steady pace of 45% and above (CAGR).

Yes, cash will continue to remain the dominant mode of transaction for a while and to say that printed notes no longer matter in the wake of digitalisation is foolhardy. However, a nuanced reading of the incoming economic data, as mentioned above, shows that the way forward for financial inclusion lies in seizing the digital moment and figuring out ways to take it forward at an accelerated pace.

Since a third of Indian households own either a smartphone or an internet connection, switching to digital mode at an accelerated pace will help financial intermediaries to push inclusion at a granular level at a faster clip. The cost of financial intermediation will also come down which might enable lenders to lower the interest rates charged to borrowers. Moreover, digitally on-boarding households to meet their financial requirement using tools such as e-KYC will help the institutions save significant costs. Switching to digital payback modes also save the financial intermediaries loan servicing cost in a big way. It will also go a long way in improving their asset quality by flagging potential slippages well in advance besides improving the credit risk assessment of customers. This is important since RBI is planning to introduce the concept of expected credit loss.

Digitalisation could also put an end to the practice of availing loans by individuals from multiple institutions for the same purpose. Moreover, the concept of loan service providers and account aggregator models will ensure a credit history for the unbanked. The I-Spirit (Indian Software Product Industry Roundtable) has already done pioneering work in this regard. In my view, such practices lie at the heart of the waves of household financial distress that sweeps rural India especially in the wake of extreme climate events leading to crop failures.

By passing on lower costs of intermediation to the consumer, financial institutions will be able to expand their loan book and balance sheets. Along with robust risk assessment practices and deft margin management, the institutions could also drive up the profitability as well while addressing the last mile credit needs of households in earnest. To sum up, digitalisation is the way forward for the financial intermediaries to expand the footprint of financial inclusion.

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