The Confederation of Indian Industry (CII) has suggested a five-point agenda for consideration of the finance ministry and the Reserve Bank of India to arrest the steep rise in non-performing assets (NPA) and slowdown in loan growth of non-banking financial companies (NBFCs).
"The non-banking financial company (NBFC) sector needs to be integrated to the core of Indian financial system with adequate policy support to help meet the financing needs of the economy and achieve financial inclusion," CII director general Chandrajit Banerjee said in a statement here Sunday.
The agenda focuses upon meeting funding requirements of the sector, maintaining the existing NPA classification norms, bringing NBFCs under the ambit of the SARFAESI (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, addressing concerns on capital adequacy requirements and resolving tax-related issues.
Emphasising that a robust NBFC sector is critical to supplement the banking sector for meeting the economy's funding needs, CII said a focused long-term vision with specific milestones and roadmap should be laid out to increase the share of the NBFC sector.
"Given that bank assets as a percentage to GDP is approaching 100 per cent mark, NBFC sector has a tremendous potential to scale up and increase its contribution to the Indian economy," CII said.
Clarity on the policy road-map for the NBFC sector for the next 10 years would promote systematic and organized development of the sector, Banerjee said.
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While NBFCs assets as a percentage to the GDP have risen from 8.4 percent in 2006 to 12.5 percent in 2013, the NBFC sector has a share of just 8 percent in the total financial sector assets of the country's economy.
There is a need for a robust framework for safeguarding depositors' interest and strengthening customer protection, CII said.
Extension of the SARFAESI Act to the NBFC sector will promote the orderly growth and development of the sector by creating a level playing field for NBFCs vis-a-vis banks and empowering them to recover their NPAs, the industry body suggested.
"To help meet the funding requirement of the NBFC sector adequately, there is a need to support financing from major sources, including banks and mutual funds, as also to promote access of funds through other routes like corporate bond market and external commercial borrowings," it added.
NBFCs currently need to classify a loan as NPA if the borrower defaults for 180 days as against 90 days for banks. The RBI has suggested the 90-day rule to apply for NBFCs too.
Since NBFCs cater to the unbanked customer segment with no collaterals and irregular cash flows, there is a need for maintaining the existing norms, CII suggested.
Over the last five years, RBI has increased the total capital adequacy ratio floor from 10 to 15 percent due to which NBFCs have been consistently raising capital.
In the current scenario, there is a strong case for maintaining the existing tier-I capital ratio, given the difficulties faced by NBFCs in raising equity, it said.
Owing to the prevailing economic downturn, the NBFC sector is also showing signs of stress as evidenced from the steep rise in NPAs.
Further, with high interest rates and reduction in lending by banks, NBFCs are facing the dual impact of rising credit costs and are operating in a very tight liquidity situation.