Limit On Bank Credit For Nbfcs To Go

The Reserve Bank of India is planning to remove the ceiling on the amount of bank credit available to non-banking finance companies. The RBI is expected to issue a circular to this effect in a few days, say top sources.

At present, an NBFC can avail bank credit only up to three times its net owned funds, if over 75 per cent of its assets and income are from lease and hire purchase. Companies with less than 75 per cent of their income and assets in these activities can avail only up to twice their net owned funds.

"The removal of this ceiling will be a signal that RBI is no longer averse to banks extending finance to NBFCs on a case-to-case, merit basis," said Mahesh Thakkar, executive director of the Association of Leasing and Financial Services Companies.

Earlier, NBFCs had a ceiling on overall leverage of up to 10 times the net owned funds of NBFCs. After the CRB scam, the RBI had imposed the existing monetary ceiling on bank finance.

The demand to remove this cap has been stepped up ever since the January 2 guidelines linking deposit taking to credit rating, as it had put a further squeeze on funds available to NBFCs for their operations.

Recently, the AL&FS had requested the RBI to impress upon banks to extend need-based credit on merit to NBFCs and that the monetary limits prescribed for bank finance be removed.

The RBI had recently classified bank credit to NBFCs for on-lending to small transport operators as priority sector lending. This move had been interpreted as being favourable for NBFCs as it paved the way for greater flow of bank funds to NBFCs in this business.

From the banks' point of view, this would also open up another avenue of priority sector lending and help them in achieving targets as stipulated by the RBI in a more effective way by lowering transaction costs and transferring the monitoring of these smaller loans to NBFCs.