Where angels fear to tread devils rush in, the famous saying is totally applicable for Non-Banking Financial Companies (NBFCs) as they are ready to take the risk where the commercial banks fear to enter, to provide financial services to the needy, says P Satish, Executive Director, Sa-Dhan.
What was expected of a financial setup like banks was not really achieved because of which a space was created with the banks who were not venturing into difficult areas. That is when the NBFCs came into existence and henceforth plays a vital role in the financial sector, Satish said.
On working as a part of the NBFC institutional framework, he said, in early 90’s, when initial seed of micro-finances were laid , most of the microfinance institutions were NGO’s, societies and some of them were cooperatives. At certain point of time all these institutions realised that if they want to expand and give more services to their clientele they need to have a greater capital base in terms of equity to attract more funding both at National and International level. So, very appropriate vehicle, as far as the institutional framework was concerned, for the microfinance sector, was NBFC sector in India.
Referring to the Reserve bank of India (RBI) and the regulatory framework it has imposed on NBFC and Microfinance Institutions (MFIs), he said, a good regulatory system provides the strength to the sector helping them to grow further.
In year 2000, RBI came up with a circular in which it allowed all the financial institutions to provide micro financial services to the people in need. Whatever credit they were financing was qualified as priority sector lending for the banks, so the banks were also interested to fund the microfinance banks. That was a revolutionary circular as it allowed any type of financial institutions to enter into the lending space as far as people below the poverty line are concerned.
Adding further, he said, by 2006-07, the micro-finances were playing big role in the country as they were able to get funding from banks as well as institutions like Small Industries Development Bank of India (SIDBI) and National Bank for Agriculture and Rural Development (NABARD).
Between 2003-06, most of these institutions and MFIs converted themselves into NBFC and started attracting lot of venture capitals from abroad and excel in commercial borrowing as well as internal credit flow.
NBFC sector is the one which is well regulated and systematically overseen by the banking regulator in the country, Satish added.
Talking about the success of the microfinance sector he said, the sector is doing well and the biggest example is the Bandhan bank which was started in 2001 as a not-for-profit enterprise and a few years later, turned into a microfinance NBFC to further the core objective of financial inclusion. In 2015, it became the first microfinance entity to be transformed into a universal bank in India.