Home / Industry / Banking /  RBI might enlist NGOs to push financial inclusion

MUMBAI : The Reserve Bank of India (RBI) and microfinance industry associations plan to enlist non-profits to help extend credit to vulnerable populations in backward districts and boost financial inclusion, a person aware of the discussions said.

The idea is to develop some of these non-governmental organizations (NGOs) as microlenders. They could receive funding from the Small Industries Development Bank of India (SIDBI) and operate as financial intermediaries. Initially, 112 districts were identified by the government in 2018. Now the number has grown to 117, he added.

Financing the masses
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Financing the masses

“Bandhan Bank had started as an NGO, then went on to become a non-bank financier, and finally a bank. Sidbi supported Bandhan in its journey, and we are looking at such small NGOs who could transform lending in these under-served pockets," the person said, seeking anonymity.

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RBI will discuss the proposal, which is still at an early stage, with the government, he added. Identified NGOs will require training in financial intermediation and fair recovery practices but may not be directly regulated by the RBI as NGOs are either registered as trusts or societies under different acts. They can also be registered as a Section 8 company under the Companies Act.

“Even if they can lend in small quantities, say, 5,000, many people in these districts would benefit, furthering RBI’s financial inclusion programme," the person said. Email queries to RBI and Sidbi did not elicit any response.

In January 2018, 112 aspirational districts were identified by the government think tank NITI Aayog to enhance the human development index of the areas based on composite indicators such as health and nutrition, education, agriculture and water resources, financial inclusion, skill development and basic infrastructure.

According to data released in May by Sidbi and credit bureau Equifax, financial inclusion indicators are already showing some improvement in the districts. The microfinance portfolio outstanding in the districts stood at 31,918 crore as on 31 December, as against 28,737 crore on 30 June 2021, the data showed. Active customer penetration increased from 8.1 million to 8.6 million during the six-month period.

As on 31 December, banks had the highest portfolio share in these districts at 12,441 crore, followed by the non-banking financial company-microfinance institution at 12,420 crore. Not-for-profit institutions’ share in the portfolio was at 430 crore, the data showed.

Meanwhile, RBI has made changes to its microfinance regulations. In January 2000, RBI granted exemption from registration requirements and minimum net-owned funds, among other regulatory requirements, for non-profit companies registered under a specific section of the Companies Act. This was a blanket exemption, irrespective of the size of the companies.

However, earlier this year, it withdrew the exemptions for non-profit companies with assets of 100 crore and above operating in the microfinance space. These entities have now been asked to get registered as NBFC-MFI, a category of microfinance lenders regulated by the RBI.

“With Sidbi funding, some not-for-profit entities can transition to become NBFC-MFIs, giving them a wider reach and a larger microfinance kitty," the person said.

The idea of supporting these NGOs for microfinance operations is not new. In 1994, Sidbi started disbursing microcredit via NGOs, using them as financial intermediaries to issue loans to the underserved sections, especially women. It was later scaled up to serve the huge unmet demand for microfinance across India.

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Shayan Ghosh

Shayan Ghosh is a national writer at Mint reporting on traditional banks and shadow banks. He has over a decade of experience in financial journalism. Based in Mint’s Mumbai bureau since 2018, he tracks interest rate movements and its impact on companies and the broader economy. His interests also include the distressed debt market, especially as India’s bankruptcy law attempts recoveries of billions worth of toxic assets.
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