Given the liquidity crunch witnessed by the NBFC’s due to several external factors, the ASSOCHAM (Associated Chambers of Commerce and Industry) has suggested the Government create a refinance window for the NBFC’s while adding them to the priority sector lending of banks in the budget of 2022-23 financial year. The funding support will not just ensure liquidity in the sector but will also play a significant role in financial inclusion while providing affordable financial services to those who lack access to banking services.
While the Parliamentary Standing Committee on Finance had recommended the setting up of a new refinance system for NBFCs back in June 2003, a dedicated refinance window for NBFCs from the central bank directly, and on the lines of NHB (National Housing Bank) continues to be a long-standing demand for the NBFC sector.
The Covid-19 pandemic had severely impacted the rural population due to the inadequacy of banking services. Following this, the RBI had mandated banks to provide lending to NBFC’S for on-lending to the priority sector, including housing, education, and agriculture. However, ASSOCHAM suggests that this lending window, which was open till 30th September 2021, should remain open permanently or be made available regularly. However, ASSOCHAM suggests certain limits, such as reserving 10 percent of the priority sector lending by banks for NBFCs. Such an initiative can help extend the reach of priority sector lending.
The industry body has also recommended that the Government begin an alternative investment fund for NBFCs, an on-tap facility for the issuance of secured bonds, setting up a refinance mechanism with financial institutions to decrease over-reliance on banks easy to function and less expensive procedure. However, the industry body said that such facilities should be accompanied by proper governance to ensure investor protection and comfort. ASSOCHAM also recommends expanding the role of the National Housing Bank, where NHB extends its services to NBFCs rather than limiting their services to the Housing Finance Companies.
ASSOCHAM also recommends permission for subsidiaries of financial service companies to fulfill its customers’ insurance needs by promoting the insurance business. It also expects amendments to be made in the Insurance Acts to allow the subsidiary companies to endorse insurance businesses that are at present restricted from offering insurance services. The industry body also suggests establishing a Special Purpose Vehicle (SPV) where the Government infuses the initial capital. Then the body becomes eligible to raise funds on its own through bonds. The body also suggested that a minimum of four times leverage must be permitted to provide NBFCs with access to funds worth 5000 crores.
Finally, to prevent inexperienced small investors from falling into the suspicious schemes, the body recommends that NBFCs be allowed to receive recurring deposits to extend their financial inclusion services while promoting a culture of savings in rural India.
The suggestions provided by ASSOCHAM, if applied by the Government, will help attain financial inclusion goals, give the NBFCs the much-required authority, raise funds from the market independently, and provide the required insurance services to the customers. However, RBI should bring in place a robust framework to protect the interest of the investors while making processes easier for NBFCs.