Role of NBFCs in accelerating financial inclusion

Swetha Dhinesh

15 May, 2023

Non-Banking Financial Companies are a supplement to the traditional banking system. Larger Banks and Financial institutions naturally view the market that NBFCs serve as having a higher risk due to the nature of business strategies (cost of borrowing). Customers contact NBFCs due to their quick decision-making, lack of paperwork, prompt services, and flexibility. 

Non-Banking Financial Companies have been at the forefront of financial inclusion in India by lending to undeserving groups such as rural households and small companies. They have been essential in fostering inclusive growth and expanding access to formal credit.

By introducing additional goods, reducing transaction costs, and developing an integrated ecosystem, government agencies and financial institutions have played a crucial role in raising awareness across the country and accelerating the adoption of digital payments. Even in the nation’s most rural areas, consumers now demand bank branches and financial services be delivered right to their doorsteps.

Financial Inclusion

The process of providing banking and financial services to every member of society without any kind of discrimination is known as financial inclusion. Without taking into account a person’s income or savings, it essentially involves everyone in society by providing them with basic financial services. 

Financial inclusion is primarily concerned with giving trustworthy financial assistance to those in the economically disadvantaged parts of society without discrimination. It is also dedicated to transparency while providing financial support without any additional fees or unexpected charges. Financial inclusion is crucial to secure, effective, and quick access to the country’s public.

Financial Inclusion schemes from the Government of India

The Indian Government has been adopting a number of unique programmes to promote financial inclusion. The Pradhan Mantri Jan Dhan Yojana (PMJDY) plan^[1], which aims to give every household in India access to a bank account and other financial services, is one of the actions the Indian Government has taken to encourage financial inclusion in the nation. The Government has also encouraged the use of technology to reach isolated and underprivileged communities, which includes mobile banking and digital transactions. These projects hope to increase people’s economic security and well-being by bringing the unbanked into the established financial system.

Below are the programmes introduced at various times over the years. Here is a list of the national financial inclusion initiatives:

• Pradhan Mantri Jan Dhan Yojana (PMJDY)
• Atal Pension Yojana (APY)
• Stand Up India Scheme
• Pradhan Mantri Mudra Yojana (PMMY)
• Pradhan Mantri Suraksha BimaYojana (PMSBY)
• SukanyaSamriddhiYojana
• Jeevan Suraksha Bandhan Yojana
• Venture Capital Fund for Scheduled Castes under the social sector initiatives
• Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)
• Varishtha Pension BimaYojana (VPBY).

Role of Non-Banking Financial Companies in Financial Inclusion

To serve our nation’s unbanked and underserved people, Non-Banking Financial Companies have, throughout the years, developed a solid ecosystem. Non-Banking Financial Companies

have been instrumental in resolving some of the major obstacles to financial inclusion. The following are the main factors that have supported financial inclusion in India:

Facilitating through digital technology 

• By providing services to diverse and underserved people across the nation, technology-led NBFCs have generated opportunities. Aadhaar is the main pillar of the digital banking system. 
• As a result, digital finance is replacing or complementing traditional finance to increase financial inclusion. Consider a small-scale business that can now instantaneously apply for a working capital loan through a mobile device. 
• Digital financial services have been shown to be more rapid, effective and economical. Also, covid-19 has accelerated digital financial inclusion as contactless transactions and cashless payments were preferred over traditional modes.

Simple and Easy Financial Solutions Access

• India has a sizable and diversified population. Maintaining a simple product design and customising it to match the complicated demands of a low-income individual or family are the best ways to promote financial inclusion. 
• The lending structure is intended to be simple, quick, and hassle-free. Insurance is another important area, and it is now also easily accessible. 
• For instance, NBFCs collaborate with neighbourhood panchayats to offer specialised health insurance plans, such as those that exclusively cover dengue or shield farmers from crop or livestock losses. 
• In order to provide easy access to credit in the most isolated regions of the nation, NBFCs have, over the years, invested in creative distribution networks and products.

Expertise and Innovative solutions

• The expertise that NBFC offers is in risk underwriting, with the ability to finely evaluate income and repayment capacity over the loan. 
• Digital partner options that enable innovative solutions further aid in their development. As the total number of companies or people that qualify for credit grows, this strategy enables widespread credit availability and raises financial penetration. 
• With the expertise and innovative solutions, NBFCs have reached out to rural, metro areas, and semi-urban areas where access to formal credit is often limited. It has increased the depth and width of the availability to a great extent. 

Increase in Credit Facility

• Due to the Government’s emphasis on financial inclusion and the rising demand for credit from various societal segments, NBFCs have played a larger role in financial inclusion over the past several years. 
• They offer all types of credit, including personal loans, consumer loans, mortgage loans, auto loans, gold loans, etc. The new credit customer represents one of the major potentials for NBFCs. 
• There are individuals who have never before borrowed money. Banks are worried about these consumers’ creditworthiness. Due to their difficulties with financial literacy, this group turns to the unorganised informal sector for their borrowing requirements. 
• The informal sector typically fills the time gap for this section more quickly. The NBFCs are closing this gap by using sophisticated underwriting algorithms and digital technologies. 

Collaborating with fintech Companies

• Non-Banking Financial Companies are having trouble reaching the unbanked. Nearly 25% of the assets in the banking sector are currently held by Non-Banking Financial Companies. 
• However, as financial inclusion is a team effort, Non-Banking Financial Companies collaborate with new fintech firms to increase efficiencies and develop products and services that are more intelligent. 
• Non-Banking Financial Companies’ market penetration will expand, and their bottom line will rise as a result of their collaboration with the fintech. It is seen from the rising desire among participants in both segments to provide simple and affordable financing options. 

Conclusion

In conclusion, Non-Banking Financial Companies have a huge potential to help people who need financial solutions the most. Non-Banking Financial Companies’ involvement will contribute to greater financial inclusion across the country. Their expertise in reaching out to remote areas and larger community reach is undoubtedly crucial in resolving challenges with rural families’ lack of working capital. Although the business model may have changed from earlier times, Non-Banking Financial Companies will still play a significant role in the financial sector.

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