Finance Industry Development Council (FIDC), a representative body of the non-banking financial companies (NBFCs) in India has called for setting up a dedicated refinance institution in the country for NBFCs to exclusively cater to the credit needs of MSMEs, priority sector and green initiatives. The request was part of FIDC’s pre-budget memorandum to the finance minister Nirmala Sitharaman.
Referring to the 45th report of the Parliamentary Standing Committee on Finance, which had recommended setting up of a refinance institution for NBFCs on the lines of the National Housing Bank for housing finance companies, FIDC said development finance institutions like SIDBI should provide refinance to NBFCs for on-lending to the MSME and priority sectors with special fund allocation from the government.
“The supply of (bank) funding to NBFCs has not increased commensurately over the years which has resulted in liquidity being a recurring challenge. With RBI expressing their concern on the over dependence of NBFCs on bank funding, bank borrowings have also shown a decline which has resulted in large NBFCS looking for foreign borrowings and a large number of small and medium-sized NBFCs, who are majorly dependent on bank borrowings, have to borrow from their larger peers at a higher cost,” FIDC said.
The council also called for doing away with the need for NBFCs to register as NBFC-Factor to undertake factoring services and participate on the invoice discounting platform TReDS.
“For the existing registered NBFCs, factoring should be subsumed by the classification of NBFC (ICC) meaning thereby that the separate classification of NBFC (Factor) should be done away with. In such cases, all the registered NBFCs may be authorized to commence or carry on the business of factoring under the Factoring Regulation Act by registering itself on TReDS platform,” FIDC said.
In January 2022 the Reserve Bank of India (RBI) issued regulations for the amended Factoring Regulation Act, 2011 after the Parliament passed the Factoring Regulation (amendment) Bill in July 2021 that made eligible “as many as 9,000 NBFCs to participate in the factoring market, instead of just seven now, boosting cash flow to small businesses,” Finance Minister Nirmala Sitharaman had said speaking on the bill in Rajya Sabha in July 2021.
The amendment had removed earlier guidelines that allowed NBFCs to remain in factoring business only if their financial assets in the factoring arm and income earned from it was over 50 per cent of the company’s gross assets and net income.
The council also requested increasing the cap of 5 per cent to at least 10 per cent of the total priority sector lending done by banks for better flow of credit to the priority sector by ensuring a greater portion of bank funding to NBFCs going towards priority sector lending.