Non-Banking Financial Companies or NBFC plays a vital role in India’s financial system. Howev...
The Associated Chambers of Commerce and Industry (ASSOCHAM) which voices the interests of trade and commerce has recommended to the government to make a permanent refinance window for the Non-Banking Financial Companies (NBFCs) and add the NBFCs in the priority sector lending of banks in the upcoming budget of the financial year of 2022-23.
The ASSOCHAM said that the external funding support to the NBFCs will help in ensuring liquidity in the sector and further help in providing affordable financial services to the ones who are deprived of banking services. This will ultimately help and achieve the lofty goals of financial inclusion.
The Priority Sector Lending is an initiative of the RBI to direct banks to provide loans to certain sectors which require investment, credit and financial assistance as opposed to those sectors which are profitable and do not require credit. Here the lending institution is asked to dedicate a portion of its loanable funds into certain priority sectors such as agriculture, education, housing etc.
In PSL, only those sectors are included which are in need of investment and if financial assistance is not provided, then these sectors may suffer huge losses.
The industry body has made the recommendations to the government in the wake of upcoming budget for the financial year of 2022-23 on 1st February, 2022.
The ASSOCHAM believes that because of certain uncontrollable factors, the NBFC sector has been undergoing liquidity crunch for the past few years. This made it very difficult for the NBFCs to borrow funds at rational rates.
A dedicated Refinance window on the lines of NHB
Fazed with liquidity crunch, the ASSOCHAM demands that the government introduces a dedicated refinance window for the NBFCs from the central bank itself on the similar lines of National Housing Bank (NHB), which is entrusted with the task of providing refinance services to the Housing Finance Companies (HFCs).
It is not that this issue has been raised for the first before the government. In the year of 2003, recommendations had been made by the Parliamentary Standing Committee on Finance to set up a new refinance institution for the sector of Non-Banking Financial Companies.
When the rural population suffered the harsh impacts of COVID 19 due to insufficiency of banking services, the RBI had mandated the NBFCs to on-lend agriculture, housing and finance sectors and make them part of priority sector lending. This window remained opened till the date of 30th September, 2021. The ASSOCHAM suggests that this window of priority sector lending by banks to NBFCs should be made permanent.
Since, NBFCs play a crucial role in the financial inclusion and providing affordable banking services to the people not within the fold of banking services, this window should be made available on an ongoing basis. However, certain limits can be imposed such as 10 percent of the of the priority sector lending of banks should be reserved for NBFCs. This step by the RBI can help extend the reach of priority sector lending initiatives.
Creation of separate AIF for NBFCs
Some other suggestions have been given by the RBI in the form of establishment of Alternate Investment Fund (AIF) for the NBFCs, the on-tap facility for the issuance of secured bonds and establishment of a mechanism for refinance with the financial institutions with the objective of reducing dependence over the banks for financial services.
Currently, the NBFCs have been allowed to raise funds by issuing Non-convertible debentures (NCDs) or bonds having flexible rates and tenures either through private placement or public issue. The industry body finds that the methods adopted for raising funds through NCDs and Private Placement do not serve the purpose of tackling liquidity crunch due to the fact that the process of private placement is fraught with restrictions on the number of investors and frequency of issue whereas on the other hand the process of public issue is expensive, laborious and inflexible.
The recommendation made by the industry body is to allow the on-tap facility (a facility provided by RBI where it receives applications and grants licenses throughout the year having fulfilled certain conditions) for the issuance of NCDs in the retail market with a flexible and an inexpensive procedure. At the same time, ASSOCHAM said that such facilities must be accompanied with proper governance protecting investors’ interests at the same time.
Another recommendation made by the ASSOCHAM is broadening the role of National Housing Bank where it extends the refinance services to NBFCs as well instead of limiting refinance services to the Housing Finance Companies.
Allowing NBFCs to diversify their services
The ASSOCHAM pointed out that a financial services company who is a subsidiary of another company is restricted to diversify its services in the insurance sector. This prevents the financial service company to meet the insurance needs of its customers.
It further recommends permission for the subsidiary companies of the NBFCs to be allowed to promote insurance business. It wants that amendments in the Insurance Acts must also be done simultaneously to allow the subsidiary companies to promote insurance business which are currently restricted from providing insurance services.
Government to set up SPV
The ASSOCHAM has also suggested the government to set up a Special Purpose Vehicle (SPV) where the initial capital is infused by the government itself and this body then becomes eligible to raise funds through bonds which can be used for funding the small and mid sixed NBFCs. The body further suggested that minimum four times leverage must be allowed for these NBFCs to raise the capital to the tune of Rs 5000 crore.
Permission to receive recurring deposits
Last but not the least in order to prevent the naive small investors falling prey to the dubious schemes of the unorganised sector, the body further recommended that the deposit taking NBFCs must be allowed to accept recurring deposits to extend the services of financial inclusion and indirectly promote savings culture in India.
The suggestions are indeed great from the side of ASSOCHAM to include NBFCs into the permanent list of PSL so that banks can lend credit support to these liquidity lacking entities. The recommendations if applied by the government will certainly help in achieving the lofty goals of financial inclusion, provide these NBFCs with the much required leverage, allow them to independently raise funds from the market and finally be able to provide the much needed insurance services to their customers. However, it is important that the RBI while making processes easier for these NBFCs should also put in place a framework which does not in any way harm the interests of the investors.
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