In a bid to gain market share, some NBFCs have over-extended themselves geographically. This has resulted, at times, in increased costs, dubious credit underwriting and ineffective operations. NBFCs are also subject to differential tax treatment on provisioning and not at par with banks. Tight capital, loss of revenue, due to Covid along with a limited support have had an adverse effect, particularly on smaller NBFCs.

Digital payments, more so during Covid times, have emerged as the solution for transfer of money. This can be further leveraged to push down collection cost of NBFCs. Tie-up with Fintech players can significantly drive their competitive advantage. Analytics can be used for better customer segmentation and designing customer-need specific product which can generate higher sales conversion rates. Real-time view of sales pipeline, lead conversion, servicing of customer and customer ageing enables companies to drive sales and risk better. Co-origination guidelines introduced by RBI allow both banks and NBFCs to meet their objectives while leveraging on each other’s strength.

The market share of NBFCs with <Rs10,000 crore AUM is estimated to be close to 20 per cent as per a research done by CRISIL last year. There exist many smaller NBFCs which are well capitalised, having a good quality asset base and are categorised as ‘systemically important’ by RBI. Some banks deprive these smaller NBFCs, which also cater to SMEs and to customers in geographically remote areas, of much needed cheaper finance. As per the Financial Stability Report of July 2020 by RBI, ‘Smaller/mid-sized and AA or lower rated/unrated NBFCs have been shunned by both banks and markets, accentuating the liquidity tensions faced by NBFCs’.

NBFCs may take years to reach the desirable credit ratings, but the problem of credit needs be tackled today. Banks could always have a risk adjusted pricing model to address this situation, and can get these smaller NBFCs under their lending ambit. Recent decision by the government to extend the Partial Credit Guarantee Scheme (PCGS) 2.0 by another three months and easing the investment cap for AA and AA-rated bonds is a step in the right direction.

The synchronous efforts by the government and RBI – namely enhancing the investment and turnover limits for classification of MSME and the recent notification allowing one-time loan restructure brings a number of entities under the relief purview. Notably, the financial parameters in resolution framework are designed in such a way that it limits the potential for abuse by ensuring restructure of only those entities that have potential for revival. These measures require further fortification through sectoral policy reforms. This will go a long way in facilitating a better outcome of the recent initiatives taken by the RBI through the lending institutions.

Views expressed in this column are personal