NBFC Micro Finance Institutions
Customers for micro-entrepreneurs have dwindled. With this significant loss of demand coupled with the supply-side shock, most cannot ply their trades with any significant level of certainty and consistency. With overburdened banks and a substantial non-performing asset portfolio, the shadow financing industry’s inclination is to percolate downwards leading to a wider reach among the economically weaker sections of the society across India. In addition to this, the limited prudential regulation pertaining to NBFCs further attracted a high quantum of micro borrowers in India looking to pave their way out of the pandemic situation.
In the past, the interests of micro-borrowers were compromised in the single-minded pursuit of increased profits by lenders with a scarce focus on the well-being of borrowers. To address this problem the Reserve Bank of India (RBI), 2011, introduced comprehensive regulations on micro-credit with “master directions” for NBFC Micro Finance Institutions, which covered products, leverage limits, market segments, pricing, and the interface with customers.
However, the potential effect of similar such comprehensive regulations was wiped off with the onset of the pandemic hurling a substantial population of micro-borrowers into a fathomless abyss of debt and penal interests. In addition to this, the recent government-led relaxations have induced a lopsided effect of pushing the demand side upward while the industry continues to be plagued with disrupted supply chains and the unavailability of the labor force.
With the attainment of demand-supply equilibrium appearing as a distant reality, the resilience of the shadow financing industry will be put to a litmus test. Therefore, safeguarding customer interests is as critical as helping the shadow financing system stay afloat when depressionary forces are mightiest.
Adding to the woes of NBFCs is the lack of fund flow and evaporating liquidity which started from the IL&FS fiasco but continues to exacerbate under the pretext of the pandemic. For the lack of government support in this year’s Budget, the involvement of NBFCs in sensitive sectors such as real estate and infrastructure has led these shadow banking segments to gorge on public money. Evidently, the cash influx from the authorities is not sufficient to eliminate concerns among investors about NBFCs and raises concerns of rising bad debts in the coming quarters.
The past few years have severely impacted the financial well-being of the shadow financing industry; however, they have gained a position of prominence by assuming the role of banks on some occasions. This invariably raises an essential question of whether to bring NBFCs under similar scrutiny levels as banks to ensure the sustainability of NBFCs. The need for a strongly regulated shadow banking system was urgently felt to be addressed by the RBI to address the systemic risks inherent to NBFC in the country.
The proposal to place micro-borrowers under the least stringent regulations is likely to facilitate growth and promote the shadow financing industry which plays an integral role in lending support to micro borrowers in rural and urban areas. However, in doing so, the loss withstanding ability of various classes of NBFCs should be carefully assessed.
Since NBFCs attract a high quantum of borrowers, a robust system would enable the NBFCs to assign credit scores to individuals. Thus, propelling the existing framework towards a fool-proof one would mitigate default risks that caused the collapse of the sector in the past. As NBFCs operate more like banks and provide similar banking services at present, the current practice demands a stricter regulation on the NBFCs wherein checks and balances at regular intervals would ensure the overall financial health while securing the interests of micro-borrowers at large.
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