As of the end of March 2024, NBFCs had a CRAR of 26.6%, a GNPA ratio of 4.0% and a return on assets (RoA) of 3.3%. (Representational image only)

Ahead of the upcoming Union Budget scheduled to be presented on July 23, the Non-Banking Financial Company (NBFC) sector is expecting enhanced financial inclusion and reinforcing digitalisation efforts to sustain the sector’s growth.

Finance Industry Development Council (FIDC), which represents the industry, has suggested establishing a special refinancing body, just as the government has created National Housing Bank (NHB) for housing finance companies.

On the other hand, the sector this year has seen stringent regulatory action from the Reserve Bank of India (RBI). Additionally, speaking at an event in May this year, RBI Deputy governor J. Swaminathan cautioned the NBFCs not to be overly reliant on algo-based credit models. However, the apex bank, in its 29th Financial Stability Report (FSR) said that the NBFCs are well capitalised, giving an edge to the financial sector in the country.

As of the end of March 2024, NBFCs had a CRAR of 26.6%, a GNPA ratio of 4.0% and a return on assets (RoA) of 3.3%.

“The growth of the Indian NBFC industry is significantly influenced by robust financial inclusion, consumer demand and improving trade balances. The upcoming Union Budget should emphasise enhancing financial inclusion across the country, implementing policy reforms, and reinforcing digitalisation efforts to sustain the sector’s growth.

Financial and digital inclusion will enhance credit access by increasing convenience and reducing turnaround times,” said Rakesh Kaul, CEO, Clix Capital.

“The government must consider incentivising and promoting such measures so that NBFCs can carefully take advantage of global integration, ensuring sustainable growth and financial inclusion across India’s diverse economic landscape,” said Jitendra Tanwar, Managing Director & CEO of Namdev Finvest Private Limited.

He further added that the government must consider incentivising and promoting such measures so that NBFCs can carefully take advantage of global integration, ensuring sustainable growth and financial inclusion across India’s diverse economic landscape.

Expressing his confidence in the Budget this year, Krishan Gopal, CFO, Aye Finance, said, “I believe this Budget will lay the groundwork for India’s vision of development by 2047. We expect the Government to recognise the efforts of NBFC lenders that are transforming micro-enterprise lending in India by providing customised credit lines, announcing schemes and subsidies and even considering classifying them as Priority Sector Lenders.”

“Despite strong competition from banks, non-banking financial companies (NBFCs) have shown remarkable resilience in retaining a significant market share. To drive further growth, we seek policies that promote responsible credit utilisation, enhance access to credit for underserved communities, and foster financial literacy among customers,” said Mathew Muthoottu, MD Muthoottu Mini Financiers Limited.

”NBFCs are expecting the Budget to carry provisions that spur consumption, such as via tax relief etc.; implement initiatives that enable growth of NBFCs serving priority sector clients; and undertake widespread campaigns aimed at inculcating good credit behaviour amongst the country’s growing borrower base,” opined Neha Juneja, Co-founder and CEO, IndiaP2P, on her Budget expectations.

Anticipating the allocation of additional funds for the sector, Pavitra Walvekar, the CEO of Kudos Finance, which is based out of Pune, said, “Key initiatives should include the allocation of additional funds to improve liquidity for NBFCs and the introduction of regulatory reforms to streamline operations and enhance transparency. These steps will bolster credit availability, particularly for underserved segments like MSMEs, and promote financial stability in the long run.”

The logo of the Reserve Bank of India. File
| Photo Credit: Reuters

The lobby group for Indian non-banking lenders on June 11 asked for a review of a recent proposal from the Reserve Bank of India (RBI) calling for an increase in the provisions that lenders have to set aside against infrastructure project loans.

Last month, the RBI proposed that banks and non-banking financial companies set aside a provision of 5% of the total loan amount of infrastructure projects at the construction phase, a sharp jump from the 0.4% required currently.

In a letter to the RBI, the Finance Industry Development Council (FIDC), which represents NBFCs, has opposed the move, suggesting the provision be retained at the current level, without citing a reason. A copy of the letter has been reviewed by Reuters.

The required provision can be increased in the face of project delays, the letter, addressed to the RBI’s department of regulation, said. “This will ensure better project selection by the lenders.”

Reuters previously reported that the rules, if implemented in the current form, could lead to a 1-1.5 percentage point increase in interest rates for project finance loans.

The FIDC has also opposed the RBI’s suggestion that a minimum limit be imposed on lenders giving out loans to a project, as a way to ensure accountability for those joining a lending consortium. Such decisions should be left to the commercial agreement between the parties, the FIDC said, instead suggesting lenders can be asked to join an agreement with debtors as a way to ensure that rights and duties of parties will be “clear, un-ambiguous and protected.”

The NBFC body has also requested the RBI to clarify whether the draft framework will be applicable to loans which were extended prior to such guidelines where there is no common agreement between debtor and the lender.

The Indian Banks Association (IBA) is also expected to write to the central bank, opposing the imposition of higher provisions for under-construction projects, Reuters had reported last month.