NBFCs say that they cater to the unbanked segment of society both in urban and rural areas. They play a complementary and supplementary role to banks in retail lending. A wholesaler/ retailer relationship between banks and NBFCs is a model that has worked very well over the years. The AFCs that lend to the small road transport operators and NBFCs that lend to SME businesses and services play a very important role in the economy of the country. AFCs finance physical assets such as automobiles, tractors, lathe machines, generator sets, and earth moving and material handling equipment.
All experts committees and task forces set up by the government and RBI have fully recognised and appreciated the role played by NBFCs and particularly by AFCs in the development of important sectors like road transport and infrastructure. The history of NBFCs in India began with the sector engaging in asset-backed lending; some of the early players are still in existence and have a proven track record of more than 50 years. Historically, NBFC-AFCs have maintained their reputation both in terms of regulatory compliance and in meeting their liabilities. Recognising the trouble-free performance of NBFC-AFCs, RBI has given preferential treatment to this class of NBFCs in matters pertaining to fund-raising. There has been no reported case of any default by any of the NBFC-AFCs.
NBFCs that finance SMEs are able to fulfil the credit needs of those for whom organised bank funding remains elusive. Banks are only used to financing people who have a bank account, people who are capable of providing collateral and producing post-dated cheques, etc. Those who cannot fulfil these criteria turn to moneylenders, who charge huge rates of interest. NBFCs step in to fill this gap. They have an intimate knowledge of their clients income patterns, credit histories and family details; they use this knowledge to make an accurate credit assessment, which helps at the point of collection.
Total funds requirement for the road transport sector in India has been increasing over the years. Demand for new trucks has accelerated due to the increased movement of goods (thanks to a booming economy) and the heavy infrastructure spending by the government. Plus, due to recent judgements, trucks that are more than 15 years old have to be phased out. This also translates into an additional demand for funds. Under the current regulatory framework, banks can lend directly to the priority sector. There is no prohibition. However, they are not able to do so effectively as they do not have the reach of NBFCs in this business. Banks are under no compulsion to lend to NBFCs, but are doing so to meet their priority sector lending targets.
Apparently, the reason behind last months step has been the recent data on sectoral development of credit released by RBI, which shows an increase in credit to the NBFC sector by 55% as compared to the increase in overall bank credit of 20% during the year ended March 31. NBFC industry sources say that mere increase in bank credit to the NBFC sector is not a matter of concern. But one should look at which NBFCs have benefited from the increased credit. This would throw light on the end use of funds. Sources point out that that a major portion of the increased bank credit to the NBFC sector has gone into funding of a few large public sector entities like the Infrastructure Development Finance Company and the Power Finance Corporation. If the increased credit has gone for infrastructure financing or for small road transport operators and SMEs, then this has to be welcomed. On the other hand, if credit has flowed to risky and speculative asset classes, it needs to be viewed seriously and suitable steps must be taken to curb this.
The move to restrict bank credit to NBFCs will force them to cut down on their lending. The customers of these NBFCs who were able to borrow at competitive rates would now be forced to approach the unorganised sector for borrowing and their borrowing cost would increase automatically. This drastic step has been taken without any consultation with the industry. The borrowing cost for SMEs, small road transport operators and all other end-users will immediately increase by at least 2%. Banks may also find it difficult to meet their priority sector targets. Industry sources say that bank finance to self-help groups for onward lending is still recognised as a priority sector advance. In such case, singling out NBFCs is unfair and unjustified.
The economy is slowing. The automobile sector is showing signs of strain. Large truck manufacturers depend on NBFCs for a large number of their sales. The country is full of transport operators who own two or three trucks who get their finance through NBFCs. The industry leaders say that instead of throwing out the baby with the bathwater, RBI should identify the problem areas and tighten the regulations for those NBFC categories. Given the heterogeneous nature of the sector, a one shoe fits all approach would not work.