What prevents a Hindustan Unilever-style ecosystem from succeeding in the financial services industry for the unbanked and underbanked populations?

Insights from Assocham’s National Summit on NBFCs & Infrastructure Financing: The Ecosystem of Banks, NBFCs, and Fintechs in Reaching the Underbanked and Unbanked

The recent Assocham’s National Summit on NBFCs & Infrastructure Financing held in Mumbai shed light on the intricate ecosystem of banks, NBFCs, and fintechs in reaching out to the underbanked and unbanked population. Abizer Diwanji, the financial services head at EY India, drew an interesting analogy between Hindustan Unilever’s distribution system and the banking sector, emphasizing the importance of understanding the customer for successful lending practices.

Diwanji explained that just like Hindustan Unilever doesn’t sell soap directly to customers but relies on a network of distributors and retailers, banks and NBFCs need to work closely with fintechs to reach out to customers effectively. However, recent regulatory measures by the RBI have put a check on malpractices in the lending business, especially in personal and unsecured loans.

The RBI’s guidelines, such as capping the first loss default guarantee mechanism and increasing risk weight requirements for banks lending to NBFCs, have impacted the operations of many fintech NBFCs. Diwanji highlighted the need for a collaborative approach between banks, NBFCs, and fintechs to ensure responsible lending practices and mitigate risks.

R. Lakshmi Kanth Rao, Executive Director at the RBI, emphasized the importance of stricter compliance requirements for NBFCs as they grow in size. RBI Governor Shaktikanta Das also stressed the need for regulated entities and supervisors to be vigilant to risks in business models to ensure the long-term success and resilience of the financial system.

Overall, the summit highlighted the evolving landscape of the banking sector and the need for a balanced approach towards business growth, prudence, and compliance to ensure a resilient and crisis-resistant financial system.

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