Reforms In Banking Sector And Role Played By NBFCs In Last Mile Banking

Over the past 78 years, India's banking sector has become the backbone of the nation's economy. As a bank-driven economy, India's growth potential is correlated to the sustained strength of its banks

By Ajeet Kumar Singh

India's financial landscape has seen a spectacular advancement since Independence, changing from an incipient banking framework dominated by foreign entities into a strong budgetary framework that presently serves over a billion individuals. At the core of this transformation lies banking sector reforms and initiatives, which have expanded both reach and administration capabilities.

Over the past 78 years, India's banking sector has become the backbone of the nation's economy. As a bank-driven economy, India's growth potential is closely correlated to the sustained strength of its banks. Recent developments, such as S&P upgrading India's outlook from ‘Stable’ to ‘Positive,’ have positioned the country for robust GDP growth, expected to average 7-8 per cent with inflation falling toward the 4 per cent mark.

Key to this growth has been the ability of banks to ensure adequate credit flow across all sectors, especially those underserved and unserved, thereby fostering inclusive entrepreneurship. Various types of banks—public sector banks (PSBs), private sector banks (PvBs), regional rural banks, and cooperative banks—have significantly expanded their reach. The implementation of the Jandhan, Aadhaar, and Mobile (JAM) Trinity has boosted financial inclusion, with the FI index rising from 43.4 in FY17 to 60.1 in FY23. Simultaneously, the digital payment index (DPI), driven by UPI and NPCI, surged to 418.77 by September 2023.

As the banking sector expanded, its asset size grew to Rs 243 trillion by FY23, with PSBs holding 58 per cent of this, and PvBs, 35 per cent. The sector also recorded substantial profits, with PSBs earning Rs 1.04 trillion and PvBs Rs 1.24 trillion. The performance metrics of PvBs showed a stronger NIM (3.9 per centas opposed to 2.7 per cent for PSBs). This sector has also gained from the Insolvency and Bankruptcy Code enacted in 2016 and the formation of National Asset Reconstruction Company Ltd which has increased efficiency in dealing with poor debts and risky assets.

With key reforms, digitization, and credit targeting, the Indian banking system is not what it was before. Today’s banking industry serves as a strong backbone for the overall economic development and financial growth of the country at large.

Financial inclusion remains an immense challenge, yet banks are only partially successful in meeting it. In order to address this issue, Non-Banking Financial Companies (NBFCs) emerged as key intermediaries. These companies particularly provide funds to Micro, Small, and Medium Enterprises (MSME) - roughly 64 million in numbers - which form an essential pillar of India's economy. In the financial year 2024, it was expected that retail loans would make up the biggest share of credit provided by non-banking financial companies (NBFC) in India. Following that, the services sector was anticipated to be the second-largest recipient of NBFC credit.

Microfinance loans introduced by non-bank financial companies (NBFCs) have had a profound effect on alleviating poverty and empowering women, with microlenders playing an essential role in reaching unbanked and underbanked populations. Microlending borrowers have grown exponentially while microfinance institutions (MFIs) such as NBFC-MFIs serve to reach these groups more directly.

The housing finance sector has also witnessed significant benefits from NBFCs, especially affordable housing markets that support the government's ambitious "Housing for All" initiative. Industry estimates indicate that NBFCs contribute around 30-35 per cent to the overall home loan market, further emphasising their significance.

Technology has proven an indispensable asset to NBFCs, helping them expand their reach and enhance operational efficiencies via digital platforms. Adopting such technologies has resulted in both an increase in customer acquisition as well as better service delivery, cementing their presence within the financial ecosystem.

The banking sector has undergone a remarkable change, from humble beginnings to becoming a vital element of the nation's financial infrastructure. Alongside this transformation have come NBFCs that play a crucial role in increasing financial inclusion and driving economic development. Both sectors must continue adapting and innovating with changing times to remain adaptive to meet the nation's ever-evolving needs.

The author is the MD & Co-founder, SAVE Solutions

[Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP News Network Pvt Ltd.]