Although our banking sector itself is lagging behind its neighbouring peers, the story of the non-banking financial institution (NBFI) sector is rather much more precarious.

If we consider the stories of India, Philippines or even Indonesia, NBFIs continue to remain at the forefront in driving new investments, contributing to the economy by diversifying investments from lease financing to housing financing, merchant banking, venture capital and equity financing.

Despite recording reasonable growth, the NBFI market share in Bangladesh has been dominated by a few large players, while most others have struggled to scale up operations profitably. Moreover, the sector has recently taken a bad name with high rates of defaults, liquidity challenges and serious irregularities in several NBFIs, specifically related to one large NBFI.

Although the problem seems isolated, it has concerned regulators due to the risk of contagion effect and overall governance in the sector. Given the sector is reasonably large now to impact the overall economy, this certainly entails some potential implications, including new compliance measures by the regulator, lending slowdowns, etc.

Like in other peer countries, NBFIs should continue to seek opportunities to enhance their revenues by developing new revenue streams

Some of the key challenges identified, in addition to regulatory oversight are lack of internal governance and deficiency in risk management, absence of long-term sources of liquidity, high rate of loan defaults, low capital and reserve due to regulatory requirement as well as low profitability and uneven competition with banks.

To get out of the clouds, it is imperative for NBFIs to establish strong governance and risk management practices to restore stakeholder/investor confidence and reduce overall borrowing costs. To begin with, a quick disposal of the cases in the Artha Rin Adalat (Money Loan Court) and punishment for the defaulters, especially wilful ones, could start to reinstate the lost trust.

Investments in governance, risk and compliance (GRC) technologies integrated with enterprise resource planning (ERP) and analytics systems can offer a real-time view of organisational risks and alerts to senior stakeholders.

Additionally, the liquidity squeeze and perceived risk have led to an increase in the funding cost for NBFIs, which in turn is putting pressure on the margins. In the current environment, NBFIs need to focus on optimising costs to drive profitability where digitization and automation initiatives can be the biggest ally.

Reduction of cost cannot be at the price of compromising on the customer experience. Use of interactive voice recognition, chatbots and other self-service channels can enhance customer centricity while simultaneously helping businesses boost servicing agent productivity. By diverting simple queries (balance enquiries, payment status, account statements) to self-service channels, businesses can experience significant cost reductions, thereby improving the bottom line.

Like in other peer countries, NBFIs should continue to seek opportunities to enhance their revenues by developing new revenue streams, enhancing sales from their existing revenue streams, and leveraging alliances and partnerships to target new customer bases. The ability and agility of NBFIs to partner with e-commerce players, explore new market segments through asset diversification and leverage on digital to improve salesforce efficiency will determine the future of the industry.

The author is an economic analyst.