NBFCS are key to reaching underserved segments

Non-banking financial companies (NBFCS) are a significant contributor to credit growth, having captured over 20 per cent of the credit pie. Given their reach in the underserved and underbanked sectors, they play a pivotal role in achieving the objective of financial inclusion. Both the government and regulators have recognised their importance, and have been coming up with a number of measures to support credit flow.

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 the twin benefits of lower cost and better reach arising from the partnerships between banks and NBFCS. But more needs to be done to further improve NBFCS’ ability to deliver credit flow to the underbanked segments.

Electronic know-your-customer (E-KYC) authentication should be allowed for NBFCS, as is permitted for banks, to enable faster and seamless processing of credit. Most small borrowers don't have other standard KYC documents and hence Aadhaar authentication becomes critical.

NBFCS need longterm liquidity at fair interest rates to grow loans to small borrowers, including new-to-credit borrowers. While banks have the Reserve Bank of India (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 from RBI at a prefixed rate, having regard to their businessmix and ratings. This would aid NBFCS to better their asset-liability management 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 and credit penetration by the small to mid-sized among them — including fintechs — which may not have direct access to the bond markets, or limited medium to longterm credit lines from banks. The arrangement of treating bank lending to NBFCS for onlending to the priority sector as priority sector loans for banks, should be made permanent, as this lends stability to building a core strategy of NBFCS partnering with banks.

During the last Budget, the threshold of debt recovery by NBFCS under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (Sarfaesi Act, 2002) was reduced from ~50 lakh to ~20 lakh. However, this still continues to be above the threshold of ~1 lakh for banks. The government should expeditiously bring NBFCS on a par with banks under the Sarfaesi Act, especially for long-term loans to small borrowers.

I also feel the gap between banks and NBFCS needs to be closed. For example, why can’t NBFCS access borrowers’ credit history from the Central Repository of Information on Large Credits, which banks can access? Why are nonsystematically important NBFCS denied access to DRTS for recovery of unsecured loans, while systemically important NBFCS can do so?

And, finally, the need is not necessarily for further rounds of Covid-induced moratoriums or restructurings via banks and NBFCS. The moratorium acted as a cushion to borrowers, providing them interim relief, in dampening cash outflows from borrowers. However, it was never going to be a long-term solution. Followon initiatives like the Emergency Line of Credit for MSMES provided significant subsequent relief. What is needed currently is focus on cash inflows for borrowers by keeping trade and the economy open. Deferrals on tax payments for select priority sectors will help. Of course, there should also be strong enforcement of discipline among the public to arrest the spread of Covid-19.

NBFCS are going through a significant transformation while fostering financial inclusion. It is imperative that the government and regulators continue to support them, especially for credit delivery to small borrowers, those who are new to credit, and to MSMES.

Shadow banks need long-term liquidity at fair interest rates to increase loans to small borrowers. Unlike commercial banks, which have the Reserve Bank of India as a lender of last resort, they have no such facility