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NBFCs’ Budget Wishlist
1. Diversification of Funding Sources
- Refinance Window for NBFCs: FIDC has called for the establishment of a dedicated refinance mechanism, similar to the National Housing Bank model, to provide NBFCs with steady and affordable access to funds. This facility would support lending to Micro, Small, and Medium Enterprises (MSMEs), the priority sector, and green initiatives like electric vehicles (EVs) and solar rooftops. “DFIs like SIDBI should provide refinance to NBFCs for on-lending to the MSME and the priority sector, with special fund allocation from the Govt. During our interaction, the management at SIDBI have conveyed their willingness to take up this role,” FIDC said in a note to the Finance Ministry, which CNBC-TV18 has reviewed.
- Bond Market Development: The council has urged reforms to deepen the corporate bond market, to reduce NBFCs’ reliance on bank funding. It suggested a “market-making” mechanism to enhance liquidity in primary and secondary bond markets. At present the primary as well as the secondary market for corporate bonds is limited largely to AAA and AA+ bonds, and even for such bonds there is no organised market-making mechanism so these bonds tend to be largely illiquid, the industry body said in its note to the Finance Ministry ahead of the meeting with capital market representatives.
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“We request that a suitable mechanism of market making (perhaps on the lines of the Primary Dealers with suitable modifications) be implemented to assist the corporate sector to access public funds in an organised manner with ready retail liquidity,” FIDC said in its note.
2. Tools for Loan Recovery
- Lowering SARFAESI Threshold: NBFCs have sought a reduction of the loan size threshold for invoking the SARFAESI Act from ₹20 lakh to ₹1 lakh, in order to bring NBFCs at par with HFCs, Banks, SFBs and other financial institutions. The same was also recommended by the Expert Committee on MSMEs set by RBI under the Chairmanship of UK Sinha.
3. Financing MSMEs
- Factoring Business Regulations: FIDC has sought harmonization of the Factoring Regulation Act, of 2021, to eliminate dual registration requirements for NBFCs engaging in factoring. It suggested allowing registered NBFCs to operate on the Trade Receivables Discounting System (TReDS) platform without additional approvals.
“For the existing registered NBFCs, factoring should be subsumed by the classification of NBFC (ICC) meaning thereby that the separate classification of NBFC (Factor) should be done away with. In such cases, all the registered NBFCs may be authorized to commence or carry on the business of factoring under the Factoring Regulation Act by registering itself on TReDS platform. The Certificate of Registration held by the applicant NBFC may also be considered as the certificate of registration under the provisions of Section 3 of The Factoring Regulation Act,” it said.
- Relaxing Priority Sector Lending Caps: The council urged an increase in the cap on banks’ lending to NBFCs for on-lending to priority sectors from 5% to 10% of total priority sector lending (PSL) in order to ensure a better flow of credit to the priority sector by ensuring a greater portion of bank funding to NBFCs going towards priority sector lending. Additionally, it recommended removing borrower-specific caps of ₹10 lakh for agricultural loans and ₹20 lakh for non-agricultural loans under PSL.
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“There is a cap of ₹10 lakh per borrower for agri loans and ₹20 lakhs per borrower for non-agri loans given to the priority sector. However, no such caps exist for direct lending by banks to these sectors. Further, RBI norms on Credit Concentration have prescribed limits on the total quantum that NBFCs can lend to any single borrower. Thus, these caps seem to have no relevance and simply restrict lending to the priority sector,” FIDC said.
4. Taxation Reforms
The NBFCs have also sought exemption from TDS Deduction u/s 194A in order to ensure harmonization and remove the ambiguity in Co-lending. “There is an urgent need to exempt NBFCs from TDS Deduction u/s 194A in order to ensure harmonization and remove the ambiguity in Co-lending,” the industry body said. It said that RBI has allowed banks and NBFCs to engage in co-lending to the priority sector. As per this, a single borrower may be co-funded by the bank and a NBFC in a pre-determined ratio.
“Both bank and NBFC may price the loan independently. However, the borrower shall be offered a single blended rate of interest. All the repayments made by the borrower (including the interest) by way of EMIs shall be made to an escrow account from where the amounts shall be credited to the bank and NBFC in respective proportion. In such a scenario, the borrower shall not be in a position to split the EMI and determine the exact interest component of the NBFC portion and hence TDS deduction shall be practically impossible. It is therefore important to bring both bank and NBFC at par on the TDS provisions,” it said.
