In a move that would increase the flow of credit to small non-banking finance corporations (NBFCs), public sector banks have agreed to give collateral-free loans to NBFCs for financing purchase of commercial vehicles. While doing this, they would not ask for credit rating.

Till now, banks lend to NBFCs against collaterals and ask them to get rated by an outside agency to save time and cost on due diligence. According to industry estimates, small and unrated NBFCs are spread across the country and account for 30-40% of overall funding by NBFCs. Typically, an NBFC with net worth of Rs 25 lakh is considered small.

Banks have also agreed to extend a line of credit worth Rs 5,000 crore to NBFCs for purchase of commercial vehicles, said a source, who was present in the meeting.

As a step to enhance credit flow and stimulate demand in the economy, government had last month announced that an arrangement would be worked out with leading PSBs to provide a line of credit to NBFCs specifically for purchase of commercial vehicles (CVs).

As part of this arrangement, Indian Banks? Association (IBA) would soon issue a circular to all banks, asking them to entertain fresh applications by NBFCs for loans to finance CVs. The rate of interest and other details have to be worked out between a particular bank and NBFC.

The decision was taken at a meeting of banks with NBFCs in the presence of financial services joint secretary Amitabh Verma and representatives from Reserve Bank of India (RBI) on Tuesday.

IBA chairman T S Narayanasami, State Bank of India chairman and managing director (CMD) O P Bhatt, Punjab National Bank chief general manger (credit) Arun Kaul, Union Bank of India CMD M V Nair and Bank of Baroda CMD M D Mallya were also present at the meeting.

With high rate of interest on auto loans and slumping demand in the economy, sales of CVs declined 58% in December. During November 2008-January 2009, flow of loans to buy automobiles and CVs slowed down 5.5%. According to Finance Industry Development Council (FIDC), a lobby of NBFCs, NBFCs cannot charge interest lower than 17-17.5% from borrowers as they get loans from banks at 14-15%.

?Most of the asset-financing NBFCs accept deposit and are rated by outside agencies. But now the worthiness of these outside agencies is a matter of doubt. We asked banks to go by their own due diligence and not ask for such ratings because small NBFCs were having problems in getting adequate loans,? an official of a NBFC said on the condition of anonymity.

The official said unrated NBFCs are well regulated by RBI, as they are required to have a capital adequacy ratio (CAR) of at least 15%. In addition to this, they are subject to on-sight inspection by the central bank every two years, he added. In contrast, other NBFCs need a CAR of 12%.

FIDC co-chairman Raman Aggarwal said that NBFCs require Rs 11,000-12,000 crore to finance CVs in the next six months and Rs 5,000 crore would meet the demand for the next three months.

Official of another leading NBFCs said, ?The line of credit would provide some help to the sector. Overall, the impact would be low as the demand for CVs is falling.?