NBFC’s are a significant contributor to India’s credit growth having captured over 20% of the total credit pie. Given the reach of the NBFCs in the underserved and underbanked sectors, they play a pivotal role in achieving the objectives of financial inclusion. Both the government and regulators have recognized the importance of NBFCs; and have been coming up with a number of measures to support credit flow to such borrowers. The recently amended regulation, under the co-lending model in the priority sector, is one such measure which would help in achieving greater financial inclusion, with twin benefits of lower cost & better reach arising from the partnerships between banks and NBFCs.
Following would further improve the NBFC sectors’ ability to deliver credit flow to underbanked segments
- a. e-KYC authentication facility should be allowed for NBFCs, as permitted for banks, to enable faster & seamless processing of credit. Most small borrowers do not have other standard KYC documents and hence Aadhar authentication becomes critical.
- b. NBFCs need long-term liquidity and at fair interest rates to grow loans to small borrowers, including new-to-credit borrowers. While banks have RBI as a lender of last resort, NBFCs have no such facility. Therefore, there can be a separate direct long-term line of credit from a government-sponsored entity or RBI to NBFCs at a prefixed rate, having regard to business-mix and rating of the NBFC. This would aid NBFCs to manage their ALMs better and have the confidence to grow faster. Alongside reducing systemic risk from large NBFCs by migrating some of them to banks, RBI should further encourage innovation & credit penetration by small to mid-size NBFCs, including fintech’s, who may not have direct access to bond markets or limited medium to long term lines from banks.
- c. The arrangement of treating bank lending to NBFCs for on-lending to priority sector to be treated as PSL for banks, should be made permanent as it lends stability to building a core strategy of NBFCs partnering banks.
- d. During the last budget, the threshold of debt recovery by NBFCs under Sarfaesi Act was reduced from Rs. 50 Lacs to Rs. 20 lacs. However, this still continues to be above the threshold of Rs 1 lac available for banks. The government should expeditiously bring NBFCs to be at par with banks under the Sarfaesi Act,especially for long-term loans to small borrowers.
- e. Unlike banks, NBFCs do not have benefit of approaching DRTs for loan recovery. Hence allowing NBFCs to approach DRTs would help NBFCs in their loan recovery.
- f. Finally the need is not necessarily for further rounds of Covid-induced moratoriums or restructurings via banks and NBFCs. Instead need is for more direct & timely government assistance to the affected MSMEs, as has been happening to-date.
NBFC sector is going through a significant transformation while fostering financial inclusion. It is imperative that regulators & government continue to support NBFCs, especially for credit delivery to small borrowers, new to credit borrowers and borrowers which are in MSME sectors aligned to government priorities, including services sectors like retailers, healthcare & education.