ImpactAlpha, May 12 – Financial inclusion is the hottest sector for venture capital in emerging markets. Businesses in the sector are delivering credit and other financial services to first-time and underserved customers via innovative products, underwriting models and distribution channels.
In India, however, small and early-stage inclusive financial services firms face a financing gap of $7.7 billion in equity financing and $31 billion in debt over the next five years, according to research from India’s Impact Investor Council, Northern Arc Capital and TransUnion CIBIL.
Only 10% of small non-bank financial services companies, or NBFCs, have been able to raise the capital they need to build portfolios of 20 billion rupees ($260 million) or more. Just a quarter of India’s small NBFCs have managed to build five billion rupee-portfolios.
“A five-year analysis of all impact NBFCs reveals a stunting of sectoral performance,” found the report. “The lack of availability of equity and debt capital for small NBFCs is the most significant issue facing the sector.”
the rest focus on small businesses, affordable housing, vehicle loans and other products for underserved customers.
The IIC surveyed 100 of the more than 350 NBFCs. The research focused on non-microfinance NBFCs with portfolios of less than 50 billion rupees and which have 75% or more low-income customers. A third of the customers of such small non-banks are first time credit users. More than half are from semi-urban and rural areas, “many of whom have no prior credit histories, earn seasonal wages and are not digitally savvy,” states the IIC report.
“Innovation lies at the heart of Impact NBFCs’ efforts to cater to diverse segments of low-income customers,” the report states. Housing financier Aviom relies on village women “influencers” and mom-and-pop shops, or kiranas, to find new customers. Women-focused Kinara Capital offers tailored products with special rates that account for women’s lack of collateral. Scooter financing company Bike Bazaar’s lending focuses on vehicle safety and sustainable management of second-hand and end-of-life vehicles.
With the appropriate capital, it takes about 10 years for impact NBFCs to reach 50 billion rupees. “This further emphasizes the long-term support needed for growth of emerging NBFCs,” the report states.
Most can only access financing from other non-banks; 60% have struggled to tap public financing schemes designed for NBFCs.
The IIC and its partners call for regulations to open the flow of capital from public sector banks to small non-bank financial services companies. Also helpful: Blended-finance initiatives, including credit guarantees.
“Impact foundations and development organizations looking to amplify returns along with greater financial inclusion can mobilize a higher volume of investments” into smaller – and high-impact – NBFCs, the report said.