State Bank's managing director and group head (national banking) SR Iyer told The Financial Express: "We have decided to selectively waive the informal cap on financing NBFCs. We are offering loans to triple-A rated companies."

The ban on NBFC financing was imposed in the wake of the CRB scam which rocked the financial sector two years back. Even though there was no Reserve Bank of India directive banning bank finance to NBFCs, most of the commercial banks and financial institutions decided to play safe and not take fresh exposures to NBFCs.

"Things are different now. We are lending to NBFCs after proper assessment," Iyer said. According to sources, SBI has recently sanctioned loans to Tata Finance and Kotak Mahindra. However, thebank is not willing to lend to the subsidiaries and joint ventures of large international banks and finance companies which have been in the retail business. A recent Crisil report on NBFCs said some of the foreign entities have taken positions in the truck and corporate finance businesses besides car financing. They are expected to bring down the returns and spreads in this business too on account of their low-cost funds, support of international parents and sophisticated mechanisms to monitor and control risks. The shakeout in the industry has left a handful of Indian survivors. In the changed scenario, the cost of funds and ability to capitalise at regular intervals are key factors for NBFCs to sustain good asset quality, maintain reasonable returns and defend market position, the study said.

According to Crisil, the emergence of mutual funds as an alternative source of funds augurs well for the stronger NBFCs in their efforts to raise funds at competitive costs. Also, the investor base has widened forsecuritisation of receivables by NBFCs.

"We will not offer fresh loans to the steel industry as we have already reached the exposure ceiling," State Bank chairman GG Vaidya said. This is in conformity with the stance taken by financial institutions on the steel sector financing.

The lifting of the ban on NBFC financing is significant in the context of tardy credit growth for the bank. In fiscal 1999, the State Bank's credit growth was 12.5 per cent-below the industry average.In the April-June quarter of 1999-2000, the bank has registered a dip in its credit portfolio to the tune of Rs 221 crore, compared to a negative growth of Rs 1,241 crore in the first quarter of last fiscal. On a year-on-year basis, SBI's advances were up by 14.26 per cent to Rs 77,422 crore. "With the economy looking up, the credit offtake is bound to pick up," Vaidya said.