The non-banking financial (NBFC) sector got a nasty shock last month. The priority sector status accorded to bank loans to NBFCs for lending to SMEs, small road transport operators, agri-based activities and SSIs was withdrawn by RBI. This has come at a particularly unfortunate time for the asset financing NBFCs (NBFC-AFCs).
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 Ďwholesaler/ retailerí 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 clientsí income patterns, credit histories and family details;