Government mulls measures to ease NBFC funding challenges | Fusion - WeRIndia

In a bid to invigorate the backbone of India’s economy, the Micro, Small, and Medium Enterprises (MSMEs), the government is contemplating strategic measures.

These measures are aimed at addressing the funding challenges faced by eligible non-banking finance companies (NBFCs). The move is essential to reduce the cost of funds for NBFCs.

Also, they help enable them to extend loans to critical sectors such as agriculture and MSMEs at more affordable interest rates.

Transitioning to the heart of the matter, officials have disclosed that proposals under consideration include raising the deposit acceptance limit of NBFCs. They introduced deposit insurance and established a dedicated liquidity window for these financial entities.

These measures are envisaged to lower the cost of funds for NBFCs, which often reach as high as 26%, hindering their ability to provide competitive interest rates.

The MSME sector, contributing approximately 30% to India’s GDP, faces a substantial credit gap, with about 39% of the 63.4 million MSMEs yet to access loans through formal channels.

Recognizing the urgency of expanding formal and affordable credit facilities, officials, speaking on condition of anonymity, stress the need for such measures if India aims to become the world’s third-largest economy by 2030.

Notably, the national budget for 2024-25 is anticipated to play a pivotal role in boosting MSMEs.

Integration with international markets, digital support for global competitiveness, eased compliance with the goods and services tax, and provision of low-cost credit are among the reported initiatives.

The soaring cost of funds for NBFCs, exacerbated by global central banks’ interest rate hikes to curb inflation, has prompted discussions on diversifying funding sources.

Proposals include raising the deposit acceptance limit for certain NBFC categories, providing insurance cover for their deposits, and establishing a dedicated liquidity window to meet short-term requirements.

While acknowledging the potential benefits, concerns are raised about the impact on the nimbleness of NBFCs if they are allowed to accept deposits and adhere to stringent regulatory norms akin to commercial banks.

Nevertheless, experts emphasize the pivotal role of NBFCs in bridging credit gaps, particularly in regions underserved by traditional banks.

These proposed measures signify a concerted effort by the government to address funding challenges faced by NBFCs.

Besides, they pave the way for enhanced financial support to vital sectors, including MSMEs, and foster economic growth.

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