Also discussed here is the recent growth in FinTech lending and its interactions with NBFCs, challenges arising from third-party lending service providers and regulations for the protection of customers from unethical lending practices. Chapter 3 focuses on the opportunities created by digitization in the NBFC sector.
Non-banking financial companies (NBFCs) constitute an important link in the financial intermediation continuum. They perform multi-faceted roles – infusing diversity and competition among credit providers; expanding the ambit of formal financial inclusion to underserved segments of the economy and geographically far-flung regions; and innovating financial products and unconventional delivery mechanisms. They also enhance the resilience of the financial system by filling in gaps in bank intermediation. Accordingly, the NBFC ecosystem in India has evolved over the years in terms of operations, asset quality, heterogeneity, profitability and regulatory architecture. In response to disruptive shocks in 2018-19 and more recently, during the COVID-19 pandemic, prescient policies undertaken by the Reserve Bank of India (RBI) and the Government of India (GOI) have shored up the sector and helped it to emerge stronger and more resilient than before. It is apposite now to take stock of the sector and catalyse it for a bigger and more versatile role in financial intermediation as India shrugs off the drag of the pandemic and positions itself on a higher growth trajectory. For this purpose, it is crucial to understand the markets and borrowers targeted by NBFCs, the special role of NBFCs in the formal financial system and in credit markets, and the manner in which they are harnessing the recent growth in the FinTech space. Alongside these transformations, the NBFC sector is also going through changes in regulation and supervision that seek to bring in best practices; close out regulatory arbitrage; ensure the protection of customer interests; and leverage on technology. Exploiting the synergies between growth and technological change can lead to individual NBFCs becoming systemic. The challenge is to find the right balance of interventions, and the play of market forces. Looking ahead, the past can provide lessons for future policy responses. At the same time, we need to be ready to incubate new solutions to address the fast paced transformation of the sector. This involves all stakeholders. Together we must build the sector’s sophistication and resilience CAFRAL’s first flagship India Finance Report, with “Connecting the Last Mile: Non-Banking Financial Companies in India” as its theme, is a commendable step. The Report provides fresh insights into the non-banking financial sector in India that can aid all stakeholders, including regulators and policymakers, in securing a greater understanding of the sector and a wider appreciation of its niche strengths and opportunities. Structured into four chapters, the Report draws on rigorous empirical and theoretical research and exploits novel regulatory and proprietary datasets to fulfil this vision. I commend Team CAFRAL for this endeavour.