By Shachindra Nath
The increase in MSME contribution to India’s growth, their high optimism for progress despite their challenging external environment, and the accelerated pace of registration by MSMEs on the UDYAM portal to access credit and policy benefits underscore an upswing in MSME activity and performance. Given the changing business dynamics, monitoring the incipient risk of the MSMEs becomes imperative. The low risk and falling delinquency rates are improving the borrowing prospects of the MSME sector. NBFCs have demonstrated a consistently high credit growth trend to the micro and small segments before and after the pandemic.
In this context, we would like to recommend these expectations from the FY24 Union Budget, which aims to address the specific challenges faced by NBFCs, and lay the groundwork for a more inclusive, resilient, and dynamic financial ecosystem for MSMEs. Implementation of these measures will not only benefit the NBFC sector but also contribute significantly to broader economic growth and financial well-being.
Creation of a new category
The proposal suggests the creation of a new category of NBFCs exclusively dedicated to serving the priority sector, more specifically to MSMEs. Similar to the existing classification such as NBFC-HFC and NBFC- MFIs, this envisioned category can be named NBFC-PSL. The criteria for inclusion in this category is to be NBFCs having a minimum of 85 per cent of their AUM focused towards the priority sector.
Banks lending to NBFCs for on-lending to micro & small enterprises irrespective of the ticket size of the loans (as of now, it is capped at max Rs 20 lakh for non-agri loans and Rs 10 lakh for agri loans) are to be treated as PSL. Currently, it is capped at 5 per cent of total PSL by Banks.
Re-Introduction of partial credit guarantee scheme
Re-introduce partial credit guarantee scheme (PCGS) for NBFC-MSME which can be in line with PCGS 1.0 & PCGS 2.0 to provide portfolio guarantee for purchase of bonds or commercial papers with a rating of A or below issued by NBFC-MSME by public sector banks.
Also, reduce risk weight for portfolio originated by NBFC MSME for underlying customers so that such NBFCs can increase the credit penetration.
Harmonization of SARFAESI limit
Reducing the cap for loans eligible under the SARFAESI Act for NBFCs from Rs 20 lakh to Rs 1 lakh, in line with banks, would enhance the recovery process for smaller loan defaults. This alignment would allow NBFCs to address a larger number of non-performing assets, improving their financial health and boosting confidence among lenders and investors. It would also reduce credit risk, encouraging more lending to the vital MSME sector, thereby supporting economic growth and employment.
Shachindra Nath is the Founder & MD at UGRO Capital. Views expressed are personal. Reproducing this content without permission is prohibited.