Empowering India’s marginalised the role of NBFCs in economic growth


Despite the numerous advancements that India has achieved over the last few decades and the significant strides that we as a country have made in the domain of financial services, a large portion of our country is still unbanked/underbanked, shared Lakshmipathy Deenadayalan, Chairman and Managing Director, Five Star Business Finance, in an exclusive interaction with Srajan Agarwal of Elets News Network (ENN).

Could you provide us an overview of the current state of the microfinance industry in India and the key challenges it faces?

In a developing country like ours, there is a need to support low-income families for their upliftment. And in order to ensure a better standard of living for them, there is a need for a more structured and effective way to support them financially. Here’s where ‘microfinance’ comes into the picture. Microfinance is very important for India to achieve financial inclusion for the unbanked and the financially underserved.

If lending to this population is handled in an effective manner, it can actually be a shot in the arm for the country’s development and to a great extent towards poverty alleviation.

Like in the case of any industry, the microfinance sector too has its own challenges. Some of the biggest challenges the industry poses are developing the ability to underwrite and provide individual loans to worthy candidates as opposed to resorting to JLG model as the only model to delivering credit; secondly, how do you achieve enduring quality and profitability across various cycles; and technology adoption is another piece on which the industry has scope to improve.

According to you, what strategies have you employed to foster financial inclusion in underserved regions of India, and what impact have these strategies had on local communities?

Despite the numerous advancements that India has achieved over the last few decades and the significant strides that we as a country have made in the domain of financial services, a large portion of our country is still unbanked/ underbanked. We passionately believe in the fact that ‘unbanked’ does not necessarily mean ‘unbankable’. In a country as large and as diverse as ours, it takes efforts to access, understand and extend appropriate and responsible credit services to this segment. Over the past two decades, Five Star has been working as a specialised financial services company in addressing the needs of this segment, funding the people who were perceived to be ‘unfundable’. The businesses that we work with can be touched and felt in our everyday lives. These are businesses that create real on-ground impact. Our customers include small shop owners, self employed individuals and many others who are wage-earners or cash salaried.

Over the last many years, we have been able to create a significant impact on the ground. Our branches are located largely between Tier 3 and Tier 7 cities. All our hirings are localised. Through this we are able to create significant employment opportunities in semi-urban and rural areas. More than 70% of our borrowers are from the low-income groups and more than 40% of the loans are to women as the primary applicant for the loan.

As the leader of a NBFC institution, how do you see the role of NBFCs evolving in the context of India’s economic growth, and what opportunities do you foresee for your company in this evolving landscape?

NBFCs are an important industry segment in the Indian economy, especially in terms of providing credit to the unbanked and underbanked segments of our population. These have today emerged as a major source of credit for MSMEs and the rural, small-scale, unbanked and informal sectors in India. They have filled the gap left by traditional financing organisations, which are generally reluctant to lend to these segments on account of the apparent risk.

We are one of the pioneers in the small business loans segment and have a successful track record of lending to this category for over 20 years. We see significant opportunities for us to leverage this experience and scale our company across India. The fulfilling part is that, through our journey of scale, we will be fulfilling millions of dreams, uplifting them economically and bringing them into the folds of formal finance.

Five Star Business Finance has a significant presence in South India. Could you share your expansion plans for reaching new geographies and communities, and how do you plan to adapt your services to suit the diverse markets you operate in?

The business of lending is in many ways a localised business. You need to develop deep knowledge and be locally focused. Each geography differs. We cannot randomly open and close branches. Expansions need to be carefully planned out. Over the last so many years, we have successfully and carefully expanded from just being in Tamil Nadu to all over South India. We have also been able to expand successfully in Central India, which today contributes about 6% of our portfolio. We will continue this journey where our focus would be to both penetrate deeper in our existing markets and slowly grow in the newer markets as well. This year we will be getting into Rajasthan, Gujarat and Uttar Pradesh as well.

Across these geographies, our core offering of providing financial assistance to small businesses and under banked individuals would have a huge appeal.

Looking ahead, what innovative financial products or technologies do you believe will be pivotal in driving Five Star Business Finance’s growth and enhancing the financial inclusion landscape in India?

Over the last many years we have been able to build a very successful small business loans franchise. Our immediate priority is to take it nationally and scale multi-fold. As we scale and reach closer towards a million customers, our endeavour would be to diversify and offer other relevant products to this segment in the secured lending space. We could look at products such as affordable housing and getting into financing affordable vehicles. We are investing quietly in improving our tech stack that would enable us to serve these segments better and faster. We would do it in such a way that technology augments human judgement and not actually replace it.

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