Credit Where Credit’s Due

Context: An analysis of significance and scope of MFIs (not corporate houses) as the banks of the future.

Why Microfinance institutions (MFIs) and not corporate houses should be the banks of the future?

• Fundamental conflict of interest in Industrial houses: Favouring any industrial group, limit their exposure to any single borrower and write off loans to favoured clients.
  • In order to curb the malpractices and favouritism, when private banks were once again allowed in the1990s, the Reserve Bank of India (RBI) kept out industrial houses.
    • Financial institutions like HDFC, ICICI and UTI had the large capital stock needed to qualify for a bank licence.
    • Several non-banking financial companies (NBFCs) also got bank licences.
    • However, Public sector banks (PSBs) continued to control 70% of bank credit, despite the rapid growth of a few private sector banks.
• Push for reforms: Urgent need for sectoral reforms and more private banks as inefficiency and corruption of PSBs is pulling down India’s economic potential.
• Significance of MFIs
  • Rural and semi-urban presence: Catering women, small businesses etc.
  • Scope and capacity for expansion: MFIs have grown so fast and attracted so many new investors that they have raised enough capital to become universal banks. For e.g. -
    • Bandhan MFI started with Rs.2 lakh in 2001 reached a market capitalisation of Rs.1,00,000 crore during pre-Covid days.
    • In the 2000s, India’s biggest MFI was SKS. It later merged with IndusInd Bank, which then soared to become one of India’s top 30 companies comprising the Sensex.
    • RBI also licences small finance banks (SFBs), which require a lower capital of Rs 200 crore. Such banks must funnel at least 75% of their loans to government-mandated priority sectors, and half their loans should be below Rs25 lakh, serving small business. Several MFIs have become SFBs, such as Equitas, Ujjivan and Janalakshmi.
  • Fewer regulatory hassles: Many MFIs prefer to remain NBFCs, which have less financial scope than regular banks, but also fewer regulatory hassles.
  • Lower deposits rate: Banks have the advantage of being able to raise deposits at very low rates from millions of customers, whereas NBFCs have to borrow wholesale at high rates.

Conclusion: NBFCs and MFIs have proved that they can raise enormous sums from investors, more than enough to create a hundred new banks and thus, they shall be the banks of the future.