NBFCs and MFIs are as critical as Banks for Indian Economy

   By Power Corridors ,  17-Jun-2019
NBFCs and MFIs are as critical as Banks for Indian Economy

NITI Aayog vice chairman, Rajiv Kumar, has his task sheet ready for the next government. “We need to get the NBFC and the Housing Finance sector back on its feet,” he said in a recent interview.

Little doubt, Kumar had set the priorities right. The trouble in the NBFC sector had a serious impact on the economy over the last few months.

NBFC is not alone. The performance of the entire financial sector needs a review. Bad assets are still a problem for banks. Electricity distribution companies are creating a huge hole in the system due to the widening gap between earnings and expenditure and inaction on the part of the State regulatory commissions to order tariff hike.

The end result is felt in the market. Liquidity is definitely a concern and the recent slowdown in demand growth may have a strong link to that.

If that’s the situation in the organized sector, what is the status of unorganized and especially in the rural sector, that serves millions of India’s poor? Fortunately for them, the MFI sector grew faster at 28 per cent 2018-19 than in 2017-18.

According to an ICRA report, MFI grew by 28 per cent during April-December 2018, as against 26 per cent in 2017-18. As of December 31, 2018, the overall microloan market size (including SHG Bank linkage programme) was ₹2.37-lakh crore.

The growth could have been faster without the NBFC fiasco in September 2018. And, ICRA believes despite the credit squeeze, MFIs will grow at 20-22 per cent in this fiscal. On the flipside, MFIs are suffering from a huge concern over the source of funds, or low-cost funds to be precise.

It is a pity that despite the stupendous success of MFIs in empowering the poor, the access to cheap funds is still a concern.

Considering the high cost of delivery of micro-credit, high cost of funds to the MFI is a major hurdle in reducing the cost of the loan to the rural poor.  This, in turn, limits the potential of income and employment generation from non-farm activities. I am hopeful that the next government will pay attention to the issue.

Cost of funds is not the only issue MFIs are plagued with. The recent spate of farm loan waivers by different States impacted the loan culture of the country and added to the risk of the micro-finance business.

Allowing the MFI sector to give finances to the SME sector was a welcome step. It widened the growth potential. Further mapping of the demand potential in areas like education, house repairing might help the sector to grow at a faster rate.

To ensure equitable growth, the country has to ensure easy access to finance at all levels. While strengthening of the NBFC sector is important to improve the overall health of the financial sector; MFIs hold the key to serve the growing aspirations of the poor.

As a growing economy, India has a myriad of issues to settle towards sustainable growth. Over the last couple of years, the government has taken many steps in this direction. I am sure the new government will be more innovative in addressing the problems before the economy.