According to two officials, the government is thinking of taking steps like increasing the deposit acceptance limit for qualified non-banking finance companies (NBFCs), instituting deposit insurance, and giving NBFCs access to a dedicated liquidity window in order to lower their cost of funds and enable them to offer loans to important industries like agriculture and micro, small, and medium-sized businesses (MSME) at lower interest rates.
“Interest rates charged by NBFCs are, however, high, which may go up to 26%, depending on the nature of loans. Interest rates are high because cost of funds for NBFCs are high compared to commercial banks. Hence, various proposals under consideration to reduce their costs,” officials said.
As per HT’s article on November 14, MSMEs could benefit from the national budget for 2024–25 by being integrated with worldwide markets, receiving low-cost loans, having digital assistance for global competitiveness, and having easier compliance with the goods and services tax.
The majority of NBFCs, in contrast to conventional banks, are unable to take public deposits at cheap rates. Their funding sources are relatively costly because they lend only after taking out loans from markets and banks, including loans from outside commercial entities. Due to a virtual ban on deposit-taking NBFC registration (NBFCs-D) that has existed since 1998, the majority of newly established NBFCs (NBFCs-ND) do not accept deposits.
“Deposit acceptance limit of NBFCs-D could be raised. Besides, their deposits could be provided with insurance cover similar to the ones available for deposits in commercial banks (to minimise risks and reduce costs),” he added.
“We may consider a dedicated liquidity window for NBFCs for their short-term liquidity requirements and may allow upper layer NBFCs to take public deposits under strict regulations,” he added. “By reducing risk weight of loans under priority sector and by making all bank lending to NBFCs for on-lending to the priority sector could also reduce the borrowing cost for NBFCs.”
“Allowing NBFCs to take deposits would require them to strictly observe strong regulatory norms like commercial banks, which will mar the nimbleness of NBFCs and may lead to loss of the inherent flexibility they currently have,” an expert claimed.
