While the NBFCs Assets as a percentage to GDP has increased from 8.4 per cent in 2006 to 12.5 per cent in 2013, the NBFC sector has a share of just 8 per cent in the total financial sector assets of the Indian economy. A focused long term vision with specific milestones and roadmap should be laid out to increase the share of NBFC sector for the broad-based development of the Indian financial sector, said CII.
CII feels that a robust NBFC sector is critical to supplement the banking sector to meet the funding needs of the economy. 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. Globally also, the NBFC sector is accorded great importance and has even surpassed the size of GDP in developed economies including the US, the UK and the Euro Area.
The 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 the financial inclusion agenda. Clarity on the policy road-map for the NBFC sector for the next 10 years would promote systematic and organized development of the sector, said Mr Chandrajit Banerjee, Director General, CII.
With the greater importance assigned to make the economic growth more inclusive, NBFCs have come to be regarded as important financial intermediaries particularly for the small-scale and retail sectors.
Calling for a long-term vision for the development of the NBFC sector in India, CII has suggested a 5 point agenda for consideration of the Ministry of Finance and the Reserve Bank of India. The Agenda focuses upon (1) Meeting the funding requirement of the sector adequately, (2) Maintaining the existing NPA classification norms, (3) Bringing NBFC sector under the ambit of the SARFAESI Act, (4) Addressing concerns on Capital Adequacy requirement, (5) Resolving tax related issues.
Under present conditions, NBFCs are faced with a number of issues which remain unaddressed for the sustainable growth of the sector relating to unmet demand for funds, raising core capital, proposed NPA classification norms, lack of legislative framework for safeguarding depositors' interest and strengthening customer protection and non-parity with banks on taxation.
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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 very tight liquidity situation.
Policy and regulatory changes relating to removal of the priority sector lending status on bank loans to NBFCs from 1st April 2011 (except to 'eligible micro finance institutions'), restrictions placed on providing credit enhancement in bilateral assignment transactions under the revised securitization guidelines of August 2012 and the sectoral cap of 30 per cent on mutual funds' debt investments by SEBI in October 2012 have put lot of hardship for NBFCs in raising funds at competitive rates resulting in higher cost to the end borrowers.
To help meet the funding requirement of the NBFC sector adequately, there is a need to support financing from its 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.
In case of the NPA classification norms, at present, NBFCs 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 unbanked customer segment with no collaterals and irregular cash flows, there is a need for maintaining the existing norms.
To give a boost to the NBFC sector, there is a need for a robust framework for safeguarding depositors' interest and strengthening customer protection. Extension of the SARFAESI Act to the NBFC sector will go a long way towards the orderly growth and development of the sector. This much needed reform will provide a level playing field for NBFCs vis-vis banks and empower them to recover their NPAs without court's intervention.
On the capital adequacy front, RBI's draft norms prescribe the tier-I capital be raised to 10 per cent from the existing 7.5 per cent. For captive NBFCs, it was proposed to be raised to 12 per cent. The RBI has over the last five years increased the total capital adequacy ratio floor from 10 to 15 per cent, due to which NBFCs have been consistently raising capital in the past years. 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.
Among the major taxation related issues of the NBFC sector are, the extension of exemption on TDS in line with Banking Companies, LIC & other Public Financial Institutions, Allowability of Provision for NPAs and removing withholding tax on borrowing via ECB.
Addressing the above issues and concerns through a well defined policy vision and roadmap would make the growth and development of the NBFC sector more robust and sustainable.
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