NBFC Sector Update

The Finance Industry Development Council (FIDC), representing non-banking finance companies (NBFCs), has urged the Finance Minister to ease regulatory norms to help strengthen the NBFC sector. During a pre-budget consultation with Finance Minister Nirmala Sitharaman on June 20th, FIDC's Director, Raman Aggarwal, presented several proposals to address critical challenges faced by NBFCs.

Key Proposals:

1. Revision of the SARFAESI Act: FIDC seeks changes to the SARFAESI Act to provide NBFCs with stronger mechanisms for handling non-performing assets, as the current provisions are perceived as less favorable to NBFCs compared to banks.

2. Streamlining Dual Registration: FIDC proposes eliminating the dual registration requirement with the Reserve Bank of India (RBI) for factoring services, aiming to reduce regulatory burdens for NBFCs.

3. TDS Deduction Relief: FIDC advocates for removing the 10% Tax Deducted at Source (TDS) deduction mandate for non-individual borrowers from NBFCs to simplify tax compliance and create a level playing field with banks.

4. Funding Allocation via SIDBI: FIDC suggests a dedicated allocation of funds to SIDBI for refinancing small and medium NBFCs to reduce their overdependence on banks and ensure a consistent flow of funds for financing Micro, Small, and Medium Enterprises (MSMEs) and the priority sector.

Meeting Overview:

Prominent officials, including Union Minister of State for Finance Pankaj Chaudhary, the finance secretary, and secretaries from various economic departments attended the meeting. Aggarwal emphasized the critical role NBFCs play in providing continuous credit to various sectors, stressing the urgent need for regulatory support to sustain their operations.

NBFC Sector Growth:

As of March 2023, the NBFCs' credit to GDP ratio stood at 12.6%. Aggregate lending by NBFCs rose significantly by 20.8% in September 2023 from 10.8% the previous year, reflecting the sector's expanding influence on India's economy. The sector ranks as the third-largest non-banking financial sector globally, following the United States and the United Kingdom.

Resilience and Innovations in the Financial Sector:

India's banking system has shown remarkable resilience over the past decade, overcoming various domestic and international challenges. Government and RBI initiatives, such as capital infusions, mergers to create stronger banks, governance improvements, and expanding digital banking services, have contributed to this stability. During the pandemic, these measures ensured the financial sector remained well-cushioned against economic shocks while fostering growth and innovation.

Self-Regulatory Organisations (SROs) for NBFCs:

The RBI has invited applications for recognizing Self-Regulatory Organisations (SROs) for the NBFC sector. This initiative aims to enhance regulatory effectiveness by leveraging the technical expertise of practitioners. The SRO framework will set minimum benchmarks for members and ensure fair representation of smaller NBFCs.

These proposals underscore the critical need for regulatory reforms to support the growing NBFC sector. Addressing issues like SARFAESI Act revisions, dual registration, TDS deduction relief, and dedicated funding through SIDBI can help create a more robust and sustainable financial ecosystem. Together with ongoing initiatives to enhance governance and digital banking, these measures will strengthen India's financial sector, fostering continued growth and resilience.