Industry body Assocham has recommended setting up a refinance window for the NBFC sector and making banks' lending to non-banking financial companies under priority sector permanent for the upcoming Union Budget.
The funding support to the non-banking finance companies (NBFCs) will ensure liquidity in the sector, as they play a key role in financial inclusion and providing affordable financial services to the underbanked, Assocham said in its recommendations to the government through a pre-budget budget memorandum.
The government will present the Budget for fiscal 2022-23 on February 1.
The industry body said that in the past few years the NBFC sector has witnessed a liquidity crunch in the market due to external factors.
During such times, the ability to borrow funds at rational pricing became difficult, it added.
"A dedicated refinance window for NBFCs directly from the central bank, on the lines of National Housing Bank (which provides refinance to housing finance companies or HFCs) has been a long-standing demand for the NBFC sector," Assocham said.
The Parliamentary Standing Committee on Finance in June 2003 had recommended the setting up of a new refinance institution for NBFCs.
In the aftermath of the COVID-19 pandemic that impacted the rural underbanked adversely, the RBI had mandated lending by banks to NBFCs for on-lending to agriculture, MSME and housing to qualify as priority sector lending. The window was available till September 30, 2021.
Banks' lending to NBFC under priority sector should be made permanent, the industry body suggested.
"As NBFCs play a key role in financial inclusion and providing affordable financial services to the underbanked, we suggest that this window can be made available on an ongoing basis subject to certain limits such as 10 per cent of total priority sector lending of banks. This will enhance the reach of the PSL initiatives and add depth to the same," it said in the memorandum.
Among others, it has also recommended the government to establish an alternate investment fund for NBFCs; on-tap issuance of secured bonds; establishment of a refinance mechanism with financial institutions to reduce overdependence on banks.
NBFCs are allowed to raise funds by issuing non-convertible debentures (NCDs/bonds) having flexible tenures and rates, via private placement as well as through public issues.
"While private placements have severe restrictions on the number of investors, the frequency of issue etc, public issue of bonds tends to be very expensive, laborious and inflexible.
"It is proposed that NBFCs be allowed an on-tap facility for issuance of NCDs to the retail market by making the offering of NCDs through an easy to operate and less costly procedure," it demanded.
However, it should be allowed with proper governance to provide investor protection and comfort, the industry body said.
It has also urged the government to widen the role of the National Housing Bank to refinance all NBFCs and not just HFCs. Also, permit subsidiary companies of NBFCs to promote the insurance business.
Assocham has also recommended amending the Insurance Act to permit a subsidiary company to promote the insurance business.
"When a financial services company is a subsidiary of another company then it's not possible to diversify into the insurance sector as subsidiary companies are not allowed to promote an insurance company. Hence the financial service company is not able to meet the insurance needs of its customers," according to Assocham.
The industry body has also urged the government to float a special purpose vehicle (SPV) with initial capital infusion by the government, which may then raise funds by issuing bonds.
This SPV may use the funds exclusively for the funding of small and medium-sized NBFCs. It should be allowed to leverage about 4 times thus providing Rs 5,000 crore of fresh funds to the NBFCs, the body said.
Further, it has also suggested allowing the deposit-taking NBFCs to accept recurring deposits to facilitate financial inclusion and inculcate savings culture in rural India.
It will also prevent the gullible small investors from falling prey to the unregulated and unorganised sector, Assocham said.
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