As Twin Balance-sheet Problem Resolves; What Lies Ahead For NBFCs?

Access to credit is one of the most important aspects of achieving financial inclusion. The Non-banking financial companies (NBFCs) remain the fundamental pillar of ‘credit access for all’. During unprecedented times banking sector struggled with the twin-balance sheet problem that is resolved now due to the joint initiatives taken by both the government and central bank.

The twin-balance sheet problem refers to the deterioration in the financial health of banks and corporates at the same time. "As a result (of various initiatives of the government) I am glad to say the problems of twin-balance sheets have gone away like the Reserve Bank observing it is a twin-balance sheet advantage that the Indian economy is benefiting from," Finance Minister Nirmala Sitharaman said on 1 July 2023 at a public event. 

As the interim budget or vote-on-account is going to be presented on 1 February in Parliament, the expectations of the NBFC sector from this interim budget are worth noting as NBFCs are ‘lenders of last resort’ for many MSMEs. The role becomes significant because 29 per cent of gross domestic product (GDP) is contributed by MSMEs and it serves as the second largest source of employment in the country. The government frames initiatives and policies that facilitate the seamless flow of resources, particularly capital to this sector.

The availability of bank credit without the hassles of collaterals or third-party guarantees would be a major source of support for first-generation entrepreneurs to realise their dream of setting up a unit of their own Micro and Small Enterprise (MSE). 

Keeping this objective in view, the Ministry of MSME unveiled the Credit Guarantee Scheme (CGS) to strengthen the credit delivery system and facilitate the flow of credit to the MSE sector. To operationalise the scheme, the government and the Small Industries Development Bank of India (Sidbi) set up the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

“In 2023, the CGTMSE cap was revised to allow for MSME loans to have interest rates not exceeding 21 per cent per annum. While this is an improvement from the previous cap of 18 per cent, it still excludes MSMEs that require unsecured small-ticket loans, restricting financial inclusion at the last mile. A reconsideration of the interest rate cap and guarantee cover under the CGTMSE scheme is essential to enable the scheme to deliver its full potential," said Hardika Shah, Founder and Chief Executive Officer (CEO), Kinara Capital.

Shah added that it will encourage more lenders to come on board and offer loans to even smaller MSMEs and at the same time improve loan terms for end borrowers.

Despite demonstrating their business acumen, women entrepreneurs often get overlooked when it comes to capital access. Financing for women-led businesses is mired by systemic and perception challenges. Even today, less than 1 per cent of investment goes to women-led businesses, indicating that there is a critical need for focused efforts to be made to bridge this gap.

“The budget should look at incentivising domestic as well as foreign investors for gender-lens investing in India. It should ease out the regulatory and policy impediments and encourage greater participation of women in the business landscape, as unlocking the power of women entrepreneurs would be crucial for India to achieve its goal of becoming a USD 30 trillion economy by 2047,” Shah emphasised.

The produce by MSMEs needs to be delivered to the last-mile customer, therefore here comes the role of robust connectivity along with heavy goods carrier. A strong and non-discrete supply chain can not be imagined without having a sufficient amount of carrier vehicles on the road therefore NBFCs providing credit access for purchasing vehicles become important.

“As India anticipates the upcoming Union Budget, it is noteworthy to recognise the direct link between government-led infra spending and a flourishing commercial vehicle ecosystem. The demand for commercial vehicles is a crucial metric, reflecting the pulse of the nation's infrastructure development and driving growth for commercial vehicles (CV) financiers, manufacturers and original equipment manufacturers (OEMs)," said Anand Bang, Chief Operating Officer (COO), Sales and Marketing, Tata Motors Finance (TMFL).

Bang added that policy measures and fiscal initiatives need to continue to orient with infrastructure development, alongside ensuring robust capitalisation in the NBFC sector. As NBFCs are emerging as frontrunners in pivoting the nation's economic trajectory, the upcoming budget requires maintaining a strategic outlook for NBFCs, particularly accounting for their reach, technological advances and capabilities in understanding the financial needs of the unbanked and underserved populations to fully tap the entrepreneurial aspirations of India Inc.

In the era when the world is becoming Phygital (physical plus digital), the role of digital lending can not be ignored since there are immense opportunities for credit that are available through this medium.

"The interim budget of 2024 offers an opportunity for the government to catalyse innovation and inclusivity within the digital lending sector. We expect that the government will put a greater emphasis on creating a more stable and efficient digital infrastructure for the industry. We also propose that the government establish a Fintech Fund, more specifically for Lendtech. Companies with their own NBFCs should be given priority and they should receive more affordable debt,” said Jayesh Jain, Group Chief Financial Officer (CFO), Balancehero India.

Jain further added that the banks generally avoid lending to fintech companies with BBB ratings and hence, encouraging banks to collaborate with BBB-rated fintechs can help banks diversify their lending portfolios which will lead to a more balanced and resilient lending space. 

“Micro-personal loans should also be classified as priority sector lending (PSL) in the budget to support financial inclusion. Furthermore, offering tax incentives to fintech and lendtech entities operating in the personal loans segment would prompt these companies to provide affordable credit to SMEs and individuals in Tier 2, 3 and 4 cities, fostering local economic development,” Jain emphasised.

In the month on November, the central bank increased the risk weightage for Regulated Entities i.e. banks and NBFCs which has increased the capital requirements which need to be kept aside for every credit made.

"Firstly, we urge the government to consider easing rules towards reverse flipping foreign holdco entities, fostering a more conducive environment for international investments. Secondly, addressing the challenges faced by NBFCs due to increased Risk-Weighted Assets (RWA) is paramount. This has inadvertently elevated the cost of borrowing from banks, impacting the crucial role NBFCs play in extending credit to various sectors of the economy. Streamlining RWA norms will not only ensure a more efficient lending ecosystem but also contribute significantly to the overall economic stability, fostering a more conducive environment for listing in Indian Markets," said Madhusudan Ekambaram, Co-founder and CEO, KreditBee.