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Business News/ Companies / Govt explores steps to boost affordable NBFC loans
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Govt explores steps to boost affordable NBFC loans

Besides agriculture, MSMEs are a cornerstone of the Indian economy, contributing 30% to gross domestic product, 45% to manufacturing output, and 48% to exports

Notably, 39% of the 63.4 million small businesses have not availed loans through any formal channel. (Mint)Premium
Notably, 39% of the 63.4 million small businesses have not availed loans through any formal channel. (Mint)

NEW DELHI : The Centre is exploring options such as increasing the deposit acceptance limit for eligible non-banking finance companies (NBFCs), introducing deposit insurance and creating a specific liquidity window for NBFCs, according to two officials. The goal is to lower funding costs, enabling NBFCs to offer loans to crucial sectors such as agriculture and micro, small, and medium enterprises, at more affordable interest rates, they added.

Besides agriculture, MSMEs are a cornerstone of the Indian economy, contributing 30% to gross domestic product, 45% to manufacturing output, and 48% to exports. But agriculture and MSME sectors are facing huge credit gaps. Notably, 39% of the 63.4 million small businesses have not availed loans through any formal channel.

Consequently, the government feels there is urgent need to expand formal and affordable credit facilities via NBFCs if India has to become the third-largest economy by 2030, one of the two officials said, seeking anonymity. “Interest rates charged by NBFCs, however, are high, and may go up to 26%, depending on the nature of loans. Interest rates are high because the cost of funds for NBFCs are high compared with commercial banks. So, various proposals are under consideration to reduce costs," he said.

The FY25 Union budget might enhance MSMEs, aligning them with global markets, offering digital support for competitiveness, simplifying goods and services tax compliance, and ensuring access to low-cost credit, HT reported on 14 November.

Unlike commercial banks, many NBFCs can not accept low-cost deposit from the general public. Their funding sources are relatively expensive, as they typically lend after securing funds from banks and markets, or external commercial borrowings. It’s worth noting that most new NBFCs, categorized as NBFCs-ND, do not accept deposits. The registration of deposit-taking NBFCs (NBFCs-D) has been virtually frozen since 1998.

Cost of funds are soaring for NBFCs as central banks of major economies have raised interest rates to tame inflation.

Under these circumstances some proposals are under discussion to reduce the cost burden of NBFCs by diversifying their source of funding, particularly for priority sector lending, a second official said. “Deposit acceptance limit of NBFCs-D could be raised, besides deposits could be provided with an insurance cover similar to deposits in commercial bank (to minimize risks and reduce costs)," he added.

“We might consider a dedicated liquidity window for the NBFCs for short-term liquidity requirements and may allow upper layer NBFCs to take public deposits under strict regulations. By reducing risk weight of loans under priority sector and by making all bank lending to NBFCs for on-lending to the priority sector could also reduce the borrowing cost for NBFCs," he said. Reserve Bank of India designates NBFCs-UL for heightened regulatory requirements. Typically, the top 10 eligible NBFCs, based on asset size, fall under the category. Currently, there are 15 NBFCs-UL.

“Allowing NBFCs to take deposits would require them to strictly observe regulatory norms such as commercial banks, which will mar the nimbleness of NBFCs and may lead to loss of inherent flexibility they currently enjoy," an expert said, seeking anonymity. Banks are concentrated in urban and semi-urban areas, leaving large credit gaps in remaining parts of the country, which is partly met by NBFCs, he added.

Of 63.4 million MSMEs, only 25 million have access to formal credit, official data shows. Loan disbursal to MSMEs in FY21 was over 9.5 trillion, up from 6.8 trillion a year ago, mainly due to the Aatmanirbhar Bharat Abiyan’s Emergency Credit Line Guarantee Scheme, which provided 100% credit guarantee to lenders.

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Published: 19 Nov 2023, 11:35 PM IST
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