July 01, 2023
Introduction
When it comes to financial needs and services, it is important to know about Microfinance. Microfinance Companies play a key role in providing basic financial services to underserved and unbanked populations. These microfinance institutions empower people who are below the poverty line and improve their livelihood.
Non-Banking Financial Companies are among these institutions that commit themselves to ensuring responsible lending practices. Responsible lending practices are nothing but practices to ensure affordability, and transparency in terms & conditions and provide all sorts of support to a borrower if they experience any difficulties during repayment.
In this blog, we discuss how NBFC-MFI is maintaining a balance between financial incorporation and responsible lending.
Understanding NBFC-MFIs and Microfinance
NBFC-MFIs are financial institutions that support poor and vulnerable sections of society. They offer small loans, savings, and other financial products that could be of help to the people. Microfinance on the other hand benefits people who do not have access to traditional banking services. These services help small vendors who wish to expand their business using microloans or savings products to promote financial resilience.
The Positive Impact of NBFC MFI on Responsible Lending
NBFC-MFIs (Non-Banking Financial Company-Microfinance Institutions) play a crucial role in promoting responsible lending practices.
Here are some of the benefits of NBFC-MFIs in responsible lending:
Easy Access to Financial Services
NBFC-MFIs enable easy access to finances by providing microfinance services to individuals and communities who have limited or no access to formal banking channels. The main goal of NBFC-MFIs is to offer small loans, savings facilities, and other financial products, to empower marginalized populations to participate in the formal financial system, fostering economic growth and poverty alleviation.
Focuses on Underprivileged
The main agenda of NBFC-MFIs is to focus on people who have low earnings, belong to rural backgrounds, and are women. Using the Responsible lending process, these factors are addressed and most vulnerable groups will be able to receive accessible financial services based on their need.
Client-Centric Approach:
NBFC-MFIs place utmost importance on prioritizing the needs of their clients in their lending operations. They dedicate substantial resources to comprehend the financial needs, capabilities, and aspirations of borrowers. Through comprehensive due diligence, evaluating repayment capabilities, and tailoring loan terms to align with borrowers’ income-generating activities, NBFC-MFIs ensure responsible lending that effectively fulfills the borrowers’ financial objectives.
Credit Risk Mitigation
No finances take a risk with their funding. NBFC-MFIs make comprehensive credit assessments before lending. They consider various factors to invest in it. Income stability, cash flow, collateral availability, and credit history play a key role to determine loan eligibility and repayment capacity.
Enhance Financial Education and Knowledge
NBFC-MFIs not only provide credits but also actively participate in financial literacy programs. Their initiatives aim at enhancing the financial knowledge and skills of borrowers. Through these efforts, NBFC-MFIs empower borrowers by educating them about effective financial management, savings strategies, and responsible borrowing practices. By equipping borrowers with this valuable financial knowledge, NBFC-MFIs enable them to make informed decisions, steer clear of excessive debt, and enhance their overall financial well-being.
Transparent and Fair Practices:
Responsible lending by NBFC-MFIs is characterized by transparent and fair practices. They make sure the borrowers have enough information regarding the loan terms and conditions, interest rates, fees, and penalties. Through this practice, borrowers will make a fair judgment of loan options and make informed choices, promoting a fair lending environment.
Emphasize Social Imprint
NBFC-MFIs always emphasize social impact and financial sustainability. They make sure to concentrate their efforts on sectors like agriculture, small businesses, and rural development as well. These sectors play a vital role in generating employment and reducing poverty. Through responsible financing to these sectors, NBFC-MFIs actively contribute to fostering inclusive economic growth, enhancing livelihoods, and promoting overall social development.
Data-Related Impact on Responsible Lending
The effective use of data by NBFC-MFIs has significantly impacted responsible lending practices in microfinance. Through data-driven lending, the lender considers all the data related to the borrower’s profile and associated risks.
Decrease in Default Rates:
Data-driven risk assessment has led to more informed lending decisions, resulting in reduced default rates for NBFC-MFIs. That is, it reduced the loan rates that NBFC-MFIs had marked not paid by the borrowers’ missed payments for a longer period.
Improves Financial Inclusion:
With the help of digital technologies and with the help of data, NBFC-MFIs have expanded their outreach to remote areas. It has outreached its financial services to most underserved populations in society.
Improved Borrower Fortification
Having access to borrowers’ digital financial footprints assists NBFC-MFIs in identifying susceptible borrowers and providing appropriate assistance and support. NBFC-MFIs also help people by providing financial education, preventing them from falling into a debt trap.
Avoidance of Over-Indebtedness:
NBFC-MFIs can prevent multiple borrowing through the use of biometric identification. Also ensures borrowers’ debts remain manageable and reduces the risk of over-indebtedness.
Conclusion
NBFC-MFIs have always made sure to promote responsible lending practices in microfinance. It not only enables financial inclusion but also plays a key role in safeguarding the interests of susceptible borrowers. Also, by data-driven approaches, NBFC-MFIs can also overcome the challenges that are faced by microfinance and reach more underserved populations. The data-driven approach not only helps in credit risk assessment, multiple borrowing, and lack of financial literacy but also empowers borrower’s protection. Therefore, it can clearly be seen that NBFC-MFI ensures responsible lending practices in microfinance.
