Non-Banking Financial Companies (NBFCs) have emerged as crucial players in India’s financial landscape, offering a diverse range of services that complement the traditional banking system. Regulated by the Reserve Bank of India (RBI), these institutions operate without accepting demand deposits, focusing instead on lending and investment activities. Over the years, NBFCs have become significant contributors to the financial sector. Pavitra Pradip Walvekar, the Pune-based promoter-director of Kudos Finance and Investments Private Limited, discusses expectations from the upcoming union budget for NFBCs. Let’s take a look.
The NBFC sector in India has experienced remarkable growth, with a projected Compound Annual Growth Rate (CAGR) of 18.5% between 2021 and 2026. This rapid expansion is reflected in the sector’s increasing annual turnover, driven by significant contributions from various segments like housing finance, microfinance, and consumer finance.
However, as the sector continues to evolve, there are high expectations from the upcoming Union Budget to pay attention to the needs of NBFCs. Pavitra Pradip Walvekar, believes that the budget should address key challenges faced by the NBFC industry, such as liquidity constraints and the need for regulatory reforms.
As the NBFC sector navigates the dynamic financial landscape, the Union Budget’s response to its specific requirements will be crucial in shaping the industry’s future and its continued contribution to India’s economic development.
Allocation of Additional Funds to Improve NBFC Liquidity and its Impact
The NBFC sector has highlighted the need for enhanced liquidity to sustain growth and serve underserved segments like MSMEs. Currently, NBFCs have a CRAR (Capital to Risk-Weighted Assets Ratio) of 26.6%, a GNPA (Gross Non-Performing Assets) ratio of 4.0%, and a return on assets (RoA) of 3.3%.
However, the sector has faced stringent regulatory action from the RBI, and there is a need to improve access to funds. Establishing a special refinancing body, similar to the National Housing Bank (NHB) for housing finance companies, could help provide NBFCs with additional liquidity support.
“Increased liquidity support for the NBFC sector is expected to have a significant positive impact on their operations. Providing additional funding through measures like a special refinancing body or increased bank lending will improve NBFCs’ access to capital, allowing them to meet their financial obligations and sustain growth, especially in serving underserved segments like MSMEs.” Says Pavitra Pradip Walvekar.
This enhanced liquidity is also likely to reduce the overall funding costs for NBFCs, as the combined effect of low interest rates and ample liquidity can sharply bring down their borrowing expenses. Importantly, liquidity support can help address the asset-liability mismatch faced by many NBFCs, improving their financial flexibility and stability.
With better access to funds, NBFCs will be able to expand credit supply, particularly to underserved communities, boosting financial inclusion and economic growth.
Introduction of Regulatory Reforms to Streamline Operations and Enhance Transparency
The NBFC sector is also seeking regulatory reforms to streamline operations and enhance transparency. This includes measures to promote responsible credit utilization, enhance access to credit for underserved communities, and foster financial literacy among customers. Additionally, the sector has called for initiatives that enable the growth of NBFCs serving priority sector clients and widespread campaigns to inculcate good credit behavior among the country’s growing borrower base.
Reiterating the importance of these changes Walvekar says “The upcoming Union Budget presents a crucial opportunity for policymakers to address the NBFC sector’s pressing needs and implement effective reforms. By prioritizing the sector’s liquidity and regulatory challenges, the government can lay the groundwork for long-term financial stability and sustainable growth.” He adds “A call-to-action is necessary to ensure that the NBFC sector’s voice is heard and its concerns are addressed. The sector’s continued growth and development are essential for India’s economic progress, and it is imperative that the Union Budget reflects this importance.”
By addressing the liquidity and regulatory challenges faced by the NBFC sector, the upcoming Union Budget can lay the groundwork for India’s vision of inclusive and sustainable development by 2047.
