top of page

Navigating the Shifting Landscape of Bank Lending to NBFC-MFIs in India

rajbanerjee

Over the years, India’s financial ecosystem has evolved dramatically, with Non-Banking Financial Companies (NBFCs) stepping up to fill crucial credit gaps. Among these, NBFC-Microfinance Institutions (MFIs) have been pivotal in driving financial inclusion, reaching underserved communities in ways that traditional banks often cannot. However, as bank lending to NBFCs undergoes significant shifts, NBFC-MFIs now face a maze of challenges and opportunities.


The Changing Dynamics of Bank Lending to NBFCs

Bank lending has long been a crucial lifeline for NBFCs, including NBFC-MFIs. In many cases, banks' lending to NBFC-MFIs was driven by the need to meet Priority Sector Lending (PSL) targets, with these institutions specializing in serving underserved populations. However, this once straightforward relationship has become more complex due to:

  1. Regulatory Changes:

    • The Reserve Bank of India (RBI) has introduced stricter norms on asset quality, capital adequacy, and risk management.

    • In October 2024, the RBI barred four NBFCs from issuing new loans due to violations in pricing and lending practices. These institutions had been charging excessively high interest rates and inadequately assessing borrowers' repayment capabilities. Such regulatory actions underscore the RBI’s commitment to ensuring responsible lending practices in the sector.

    • While PSL guidelines continue to encourage banks to lend to NBFC-MFIs, they also come with increased due diligence requirements.

  2. Risk Perception:

    • The fallout from the IL&FS and DHFL crisis, along with subsequent defaults, has made banks more cautious, focusing on balance sheet strength and governance.

  3. Increased Competition:

    • Larger NBFCs and fintech players, often with stronger ratings, are outcompeting smaller NBFC-MFIs.

    • The rise of co-lending models has altered traditional bank-NBFC relationships, further shifting the funding landscape.


Impact on NBFC-MFIs

NBFC-MFIs, deeply engaged in high-touch, high-risk operations, face unique hurdles as they navigate this evolving landscape:

  1. Liquidity Challenges:

    • Tighter bank lending norms are leading to liquidity crunches for smaller NBFC-MFIs.

    • Their heavy reliance on banks makes them vulnerable to disruptions in the credit supply.

  2. Cost of Borrowing:

    • Banks are charging risk premiums, which raises borrowing costs and squeezes margins for NBFC-MFIs.

  3. Operational Pressures:

    • Limited liquidity hampers their ability to meet the growing credit demand in rural and semi-urban areas.

Anecdotal Insights: Securitization in the Early 2000s

Reflecting on the early 2000s, I recall a pivotal moment when securitization emerged as a game-changer for NBFCs grappling with liquidity issues. I distinctly remember an NBFC specializing in vehicle and equipment financing that structured a securitization deal with a leading public sector bank. This collaboration proved transformative. The NBFC pooled high-quality assets, and the bank’s confidence grew through transparent reporting and governance. Not only did this transaction free up much-needed capital, but it also paved the way for a lasting relationship. That experience reinforced the power of trust, innovation, and strong underwriting standards—principles that remain crucial for NBFC-MFIs today.


Strategies for Managing Liquidity and Meeting Demand

To overcome the current challenges, NBFC-MFIs must adopt strategic approaches:

  1. Diversify Funding Sources:

    • Explore capital markets, securitization, and external commercial borrowings (ECBs).

    • Seek partnerships with impact investors and development finance institutions (DFIs).

  2. Strengthen Co-Lending Partnerships:

    • Collaborate with banks under co-lending models to mitigate risks and share resources.

    • Invest in technology to ensure seamless integration and transparency with banking partners.

  3. Enhance Risk Management:

    • Strengthen governance frameworks and refine credit risk assessment tools.

    • Leverage data analytics to monitor portfolio quality and proactively manage risks.

  4. Digitize for Operational Efficiency:

    • Adopt digital platforms to reduce costs and improve customer engagement.

    • Use digital lending tools to scale outreach without compromising efficiency.

  5. Build Stronger Bank Relationships:

    • Foster transparent communication with banks, demonstrating resilience through robust performance metrics.

    • Highlight a commitment to governance and compliance standards.


The Road Ahead

The challenges of bank lending present an opportunity for NBFC-MFIs to innovate and evolve. By diversifying funding sources, leveraging technology, and strengthening governance frameworks, NBFC-MFIs can continue to drive financial inclusion in a rapidly changing environment.

Having witnessed the highs and lows of NBFC-bank collaborations, I firmly believe that resilience, adaptability, and a focus on sustainable growth are essential. NBFC-MFI leaders have the opportunity—and responsibility—to ensure their organizations remain impactful, no matter what challenges the future may bring.


Call to Action

To my fellow NBFC-MFI executives, your insights and leadership are crucial as we navigate this shifting landscape. Let’s share experiences, exchange ideas, and work together to build a more inclusive and resilient financial ecosystem. What strategies have worked for your organization? Let’s spark a dialogue and shape the future together.

1 view1 comment

1 Comment


Ethical Hacking Training Institute in Pune is a premier destination for learning cybersecurity and ethical hacking. The institute offers comprehensive training programs designed to equip students with the skills needed to identify and mitigate security vulnerabilities. With a curriculum with hands-on practice and real-world scenarios, students gain practical experience in network security, penetration testing, and cyber defense strategies.


Like
Post: Blog2 Post
  • LinkedIn
bottom of page