NBFCs want priority sector tag to attract bank funds

Move to encourage banks to lend to NBFC as the former have to meet their yearly priority sector lending target

With fund flow from banks to the non-banking finance companies drying up, the later has requested the banking regulator to create a separate class of NBFC for those who have bulk of their exposure to the priority sector so that bank finance to this sector could be clasified as priority sector lending.

Such a move will encourage the banks to lend to NBFC as the former have to meet their yearly priority sector lending target.

Finance Industry Development Council (FIDC) an umbrella body of non-banking financial companies (NBFCs) has suggested Reserve Bank of India (RBI) to create a new class of NBFCs named NBFC- Priority Sector within the current regulatory framework for the NBFCs.

“We have requested RBI to recognise those NBFCs whose 60% of total income comes from lending to priority sector” said R Sridhar, chairman, FIDC. Loans to the farm sector, housing sector (upto Rs 30 lakh), among others are categorised as priority sector. Under priority sector NBFCs tag, FIDC want loans given by the banks to be classified as priority sector, Sridhar added.

Getting priority sector tag again will help NBFCs cost of funds to come down which will improve their profitability.

According to RBI data bank credit growth to NBFCs have slowed down in the current financial year which has grown by by 19.3% in December 2012 as compared with the increase of 36.9% in December 2011.

Currently RBI classifies NBFCs in seven classes, which are asset finance company, investment company, loan company, infrastructure finance company, core investment company, infrastructure debt fund and micro finance institution.    

“We have represented RBI as well as government that you can’t treat NBFCs which lend to smaller borrowers at par with bigger NBFCs which lend to infrastructure projects” said Arun Duggal, chairman, Shriram Capital. Therefore we have represented that going by the current definition of priority sector a new NBFC class should be created, Duggal added.    

“We have also asked RBI to exempt such priority sector NBFCs from the new securatisation guidelines” Sridhar said.

RBI in its securatisation guidelines had introduced minimum retention period with the originator before it securitises a loan. It had also said originator should retain some part of secutarised loan with it.
"Granting of these two benefits will make more resources flow into these companies" Sridhar said.