A Reserve Bank of India (RBI) committee report on micro, small and medium enterprises (MSMEs), released on Tuesday, had a few crucial recommendations which can make non-banking financial companies (NBFCs) assume a bigger role in developing the sector by introducing more finance companies as ready lenders to the segment.
To start with, the committee suggested that more NBFCs be onboarded on the trade receivable platform — TReDS — of the Reserve Bank of India (RBI). The TReDS platform mitigates risk arising out of non-payment of receivables of MSMEs that supply to a large buyer or are a part of a formal supply chain. The receivables are put up for bidding and the highest bidder gets the bill and the MSME’s account is credited securely.
While banks can take part in such a platform, only a few NBFCs, registered specifically as factoring NBFCs can participate. In the absence of adequate players, “MSME sellers often take a blind call on the credentials of such buyers and their ability to pay in time”. Of course, there is a trade credit insurance product, but not many MSMEs know that, noted the committee report.
However, if more NBFCs are allowed in the factoring platform, MSMEs will immediately witness ready buyers, and their debtor delay and working capital cycle will improve vastly.
Another important measure, according to Raman Aggarwal, chairman of Finance Industry Development Council (FIDC), which represents the NBFC sector, is tweaking the Sarfaesi Act to allow NBFCs to initiate recovery proceedings below Rs 1 crore. Currently, NBFCs are not allowed to file suits for amounts less than Rs 1 crore. But bills discounted by MSMEs will have ready buyers in NBFCs when they will have the protection of law to recover the money.
Importantly, the report suggested hiking the cap for interest rate on loans given to the MSME sector. According to the present guidelines on priority sector loans (PSL), the ultimate borrower should not get loans at more than 8 per cent over the base rate of a bank.
Considering the present base rate of about 8 per cent, the borrower can get the money even from NBFCs (which then can be securitised for PSL certificate) at not more than 16 per cent. The committee said such cap should be raised to 12 per cent, and the need for such cap reviewed periodically. This means that loans can be given at 20 per cent to MSMEs at present base rate level.
Although this may look like an increase in rate but, according to Aggarwal, many NBFCs don’t have the operating cost covered at the 8 per cent spread offered by the PSL regulation.
“If the spread is increased, many smaller NBFCs will be available to lend to the MSME segment. Often times, the issue is for small loans, borrowers prefer smaller NBFCs that can be approached. The proposal to lift the cap is something that we have always advised, and if this is accepted, it will be a big bonus for both NBFCs as well as the ultimate borrowers,” Aggarwal said.