New Delhi [India], March 6 – In its latest report, the World Bank has urged the Indian government to remove the interest cap on Non-Banking Financial Companies (NBFCs) to improve the availability of credit for Micro, Small, and Medium Enterprises (MSMEs). The report outlined a series of recommendations aimed at strengthening NBFCs to better serve MSMEs and facilitate easier access to financing.
One of the key proposals in the report suggests removing the existing interest cap on NBFCs to make them eligible for guarantees provided by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). This move would give NBFCs greater flexibility in their lending activities, ensuring that small businesses have better access to essential credit.
The report further emphasizes the importance of improving NBFCs’ access to liquidity, easing lending restrictions, and introducing risk-sharing mechanisms to encourage more bank funding for NBFCs. These measures are designed to enhance the capacity of NBFCs to lend to MSMEs, which are often constrained by limited financing options.
The tightening of regulatory supervision on NBFCs in recent years has raised concerns about their ability to access liquidity, particularly for smaller and medium-sized NBFCs. To address this, the World Bank recommends implementing a permanent liquidity arrangement, which would include periodic liquidity facilities through development finance institutions (DFIs), Targeted Long-Term Repo Operations (TLTROs), and partial credit guarantee schemes. These measures would ensure a continuous flow of funds for NBFCs, reducing their dependence on short-term borrowing and improving financing availability for MSMEs.
During the pandemic, government-backed long-term lending support was primarily accessible to well-established and financially strong NBFCs, leaving smaller players struggling to secure funds. The World Bank suggests that a more structured and permanent liquidity mechanism be put in place by the government and the Reserve Bank of India (RBI) to prevent such disparities from recurring.
The report concludes that by providing regulatory flexibility, enhancing liquidity access, and introducing risk-sharing mechanisms, the government can strengthen NBFCs and improve their capacity to finance MSMEs. This balanced approach is seen as crucial in ensuring that NBFCs can effectively support the growth and stability of small businesses in India.