NBFC & MFI in India

Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs) play a crucial role in the Indian financial system by providing credit and other financial services to underserved segments of the population. These institutions operate alongside traditional banks and have been instrumental in promoting financial inclusion and economic growth in the country.

Overview of NBFCs

NBFCs are financial institutions that provide banking services without meeting the legal definition of a bank. They are registered under the Companies Act, 1956, and are regulated by the Reserve Bank of India (RBI). NBFCs offer a wide range of financial services, including loans, investments, and insurance products.

There are several types of NBFCs in India, such as:

• Asset Finance Companies
• Investment Companies
• Loan Companies
• Infrastructure Finance Companies
• Systemically Important Core Investment Companies

As of March 2021, there were 9,618 NBFCs registered with the RBI, with assets worth over Rs. 54 lakh crore.

Overview of MFIs

MFIs are financial institutions that provide small loans and other financial services to low-income individuals and households. These institutions aim to promote financial inclusion by serving clients who are typically excluded from the formal banking system.

MFIs in India are categorized into two main types:

• NBFC-MFIs: These are non-banking financial companies that specialize in microfinance and are regulated by the RBI.
• Non-profit MFIs: These are organizations registered under the Societies Registration Act, 1860, or the Indian Trusts Act, 1882, and are not regulated by the RBI.

As of March 2021, there were 197 NBFC-MFIs registered with the RBI, with a gross loan portfolio of over Rs. 93,000 crore.

Regulatory Framework

The RBI is the primary regulator for both NBFCs and NBFC-MFIs in India. The central bank has issued various guidelines and regulations to ensure the stability and integrity of these institutions.

Some of the key regulations for NBFCs include:

• Prudential Norms: NBFCs are required to maintain a minimum capital adequacy ratio and adhere to asset classification and provisioning norms.
• Corporate Governance: NBFCs must have a board of directors and comply with disclosure and transparency requirements.
• Fair Practices Code: NBFCs must follow guidelines on fair lending practices and customer protection.

NBFC-MFIs are subject to additional regulations, such as caps on loan amounts, interest rates, and processing fees, to ensure responsible lending practices and protect borrowers.

Impact on Financial Inclusion

NBFCs and MFIs have played a significant role in promoting financial inclusion in India. These institutions have helped expand credit access to underserved segments, such as small businesses, low-income households, and rural communities.

According to a report by the RBI, NBFCs and MFIs accounted for nearly 20% of the total credit outstanding in the country as of March 2021. These institutions have also been instrumental in driving the growth of the microfinance sector, which has reached over 5.8 crore borrowers as of March 2021.

Challenges and Way Forward

Despite their contributions to financial inclusion, NBFCs and MFIs in India face several challenges. These include:

• Asset Quality Concerns: The economic slowdown and the impact of the COVID-19 pandemic have led to a deterioration in the asset quality of many NBFCs and MFIs.
• Liquidity Challenges: NBFCs, in particular, have faced liquidity constraints due to the reduced availability of funding from banks and mutual funds.
• Regulatory Challenges: The evolving regulatory landscape and increased scrutiny from the RBI have posed compliance challenges for NBFCs and MFIs.

To address these challenges, the RBI has taken various measures, such as providing liquidity support, introducing resolution frameworks for stressed assets, and strengthening the supervisory framework for NBFCs.

Going forward, NBFCs and MFIs will need to focus on improving their risk management practices, diversifying their funding sources, and leveraging technology to enhance operational efficiency and customer service. Collaboration between these institutions and traditional banks can also help improve access to credit and promote greater financial inclusion in the country.