Over the past decade, India’s Non-Banking Financial Company–Micro Finance Institutions (NBFC-MFIs) have become a driving force for financial inclusion. By offering small loans and essential financial services to low-income households, they’ve opened doors that traditional banks often leave closed. Behind every self-help group, micro-enterprise, or rural entrepreneur gaining access to credit, there’s usually an MFI working quietly in the background.
Yet, as these institutions expand rapidly, they face a familiar challenge — managing growth without compromising stability. Financial management, often the unsung hero of the MFI ecosystem, determines whether growth remains sustainable, responsible, and compliant.
The Balancing Act Behind Financial Inclusion
Financial management in NBFC-MFIs is far more than number crunching. It’s about planning, organizing, and optimizing resources to ensure that the twin objectives of financial inclusion and sustainability are met.
In an industry that deals with millions of small transactions, often in cash-driven rural economies, the room for error is minimal. Every funding decision, every loan disbursal, every pricing tweak — all must align with risk, regulation, and social impact.
1. Capital: The Engine That Fuels Growth
For NBFC-MFIs, capital is both the lifeblood and the speed limiter. Raising funds through equity, debentures, or borrowings from banks and development institutions is routine, but maintaining an optimal capital structure is where prudence kicks in.
The Capital Adequacy Ratio (CAR) — mandated by the RBI — acts as a guardrail, ensuring there’s enough buffer to absorb potential losses. Balancing this ratio while chasing growth targets can feel like tightrope walking. Equally important is the leverage ratio; too much debt can turbo-charge expansion, but it can also magnify risk.
2. Asset-Liability Management: Guarding Against Mismatches
If capital is the fuel, asset-liability management (ALM) is the navigation system. Through ALM frameworks, NBFCs monitor interest rate risk, liquidity gaps, and maturity mismatches.
When borrowing short-term funds to lend long-term — a common MFI practice — even a small liquidity crunch can snowball into crisis. The tools of the trade, such as duration analysis and liquidity coverage ratios, help maintain balance and avoid these pitfalls.
3. Liquidity: Learning from the Past
The 2018 IL&FS crisis was a wake-up call for the entire non-banking sector. It exposed how fragile liquidity management could destabilize even large institutions. Today, the RBI mandates a structured Liquidity Risk Management Framework, requiring NBFCs to hold a cushion of High-Quality Liquid Assets (HQLA).
For MFIs, which rely heavily on timely refinancing and repayments, liquidity planning isn't optional — it's existential.
4. Loan Portfolio: The Heartbeat of the Business
A healthy loan portfolio is the biggest determinant of an MFI’s success. Beyond disbursing microloans, many institutions now generate fee-based income through cross-selling insurance or savings products, which helps diversify revenue.
Credit risk, however, remains the elephant in the room. Lending to informal-sector borrowers carries inherent uncertainty. To manage this, MFIs increasingly use credit bureau data, credit-scoring algorithms, and AI-driven analytics. Continuous monitoring of Portfolio at Risk (PAR), Gross NPAs, and Net NPAs has become standard practice.
With loan pricing now deregulated, Boards play a key role in setting rates that reflect the true cost of funds, operating expenses, credit risk, and return expectations. The right pricing ensures sustainability without burdening borrowers.
5. Profitability and Cost Discipline
Microfinance is a high-touch, low-ticket business. Maintaining profitability means managing margins with surgical precision. The Net Interest Margin (NIM) — the difference between lending and borrowing rates — must stay healthy despite the small size of loans and the high cost of servicing them.
Operational efficiency, therefore, is crucial. Staff salaries, technology, and infrastructure together form the biggest cost heads. To stay competitive, many NBFC-MFIs are embracing digital transformation:
- • Core banking or MFI-specific tech platforms
- • Digital disbursement and collection via UPI, AEPS, or NACH
- • Mobile apps for field officers
- • Real-time portfolio dashboards
The more processes go digital, the leaner and more scalable the business becomes.
6. The Numbers That Matter
Financial ratios are the pulse check of any NBFC-MFI. Some key indicators include:
- • CRAR: measures solvency and resilience
- • PAR > 30: tracks overdue loans and credit risk
- • Debt-to-Equity: gauges leverage
- • Operating Self-Sufficiency: tests operational viability
- • ROA & ROE: measure profitability and investor returns
Together, these metrics reveal whether an institution is merely growing — or growing wisely.
7. Navigating Challenges with Foresight
NBFC-MFIs face a demanding environment. High operating costs from doorstep services, unsecured lending portfolios, rising compliance requirements, and periodic liquidity squeezes all add pressure. Natural disasters or political disruptions can also affect repayments.
To stay resilient, the best-run MFIs follow certain best practices:
- • Strengthen governance and internal controls
- • Diversify funding sources to avoid concentration risk
- • Regularly review ALM and liquidity positions
- • Use credit bureaus and advanced risk models
- • Adopt technology for data-driven decision-making
- • Continue digitization to cut costs and expand reach
Those that embed these principles into their culture tend to weather shocks better — and grow sustainably.
Looking Ahead
NBFC-MFIs are no longer fringe players; they’re integral to India’s inclusive growth story. But with opportunity comes responsibility. Financial management today is about much more than balance sheets — it’s about strategy, foresight, and trust.
As the sector becomes more digitized and data-driven, those institutions that blend innovation with prudence will define the next chapter of financial inclusion. They won’t just lend money — they’ll build confidence, resilience, and hope in communities that need it most.
KETAN AGRAWAL (CA, DISA)
(Mr. Agrawal is the Deputy Chief Financial Officer, Arohan Financial Services Limited, an Aavishkaar Group company – views expressed above are personal).