The Budget Presents a Chance to Make NBFC Growth More Robust

As India continues its growth journey, Non-Banking Finance Companies (NBFCs) have emerged as key players in driving economic progress. While banks cater to established borrowers, NBFCs reach out to underserved communities, micro, small and medium enterprises (MSMEs) and individuals in unbanked regions. Their role is vital in empowering those who have long been excluded from formal credit channels.

However, many NBFCs face challenges in scaling up their operations. Limited access to affordable funding and a tight regulatory framework often skimp their ability to lend more effectively to small businesses, mostly MSMEs [micro, small and medium-sized enterprises] and other priority sectors. The Union Budget 2025 presents an opportune moment for the government to address these issues. Targeted policy interventions, such as easing fundraising, can strengthen NBFCs and amplify their capacity to drive inclusive growth.

Removing Roadblocks

A transformative intervention would be the establishment of a dedicated refinance window for NBFCs. This idea, first proposed by the 45th Parliamentary Standing Committee in 2003, has been echoed numerous times. A mechanism similar to that available for Housing Finance Companies (HFCs) could be a game-changer.

Development Financial Institutions (DFIs), such as SIDBI [Small Industries Development Bank of India], are well-positioned to play a central role in this. By expanding their mandate to include refinancing for NBFCs and establishing government-backed funds for on-lending, the government could create a system that resolves the immediate funding challenges faced by NBFCs.

For NBFCs to achieve their full potential, a robust and inclusive bond market is imperative. At present, India’s bond market is heavily skewed towards AAA and AA+ rated bonds, leaving little room for NBFCs with lower ratings to participate. The lack of a market-making mechanism only adds to the challenge.

This limited access forces NBFCs to rely heavily on bank funding, which restricts their ability to diversify and grow. A more structured bond market, particularly one that caters to bonds rated BBB+ to AA, could change this dynamic. By creating a liquid and accessible platform for NBFCs to issue bonds, the government could open up a direct channel for these institutions to raise capital from the public.

Such a mechanism would not only reduce NBFCs’ reliance on traditional funding sources but also empower them to lend more effectively to sectors that need it most—like MSMEs and climate-focused initiatives. The upcoming Union Budget provides a timely opportunity to address this gap.

Managing distressed assets remains a significant challenge for NBFCs, particularly due to the limitations of the current SARFAESI [Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest] Act threshold. At present, NBFCs can invoke the SARFAESI Act only for loans above Rs 20 lakhs, leaving them unable to efficiently address stressed accounts in the MSME sector, where the average loan size is much smaller. This delay in resolving distressed loans leads to a growing number of non-performing assets (NPAs), higher litigation costs and increased financial pressure. To enhance NBFCs’ capabilities to manage distressed assets, the Budget should consider reducing the SARFAESI threshold for NBFCs from Rs 20 lakhs to Rs 1 lakh, aligning it with the provisions available to banks and HFCs. 

The current taxation framework is yet another hurdle that NBFCs face, making it harder for them to compete on equal footing with banks. Unlike banks that are exempt from Tax Deducted at Source (TDS) on interest payments under Section 194A of the Income Tax Act, NBFCs are not granted this exemption. This discrepancy puts undue pressure on NBFCs, given their thin margins and high transaction volumes. The complex TDS calculations and compliance requirements further add to their administrative burden.

More Targeted Support

NBFCs have supported MSMEs, particularly through innovative instruments like factoring, which helps small businesses manage their cash flow. However, the current regulatory framework for factoring creates unnecessary roadblocks. NBFCs are required to secure dual registration to undertake factoring activities, a process that is both cumbersome and misaligned with the streamlined goals of the Factoring (Amendment) Act, 2021.

The Union Budget should simplify the process by subsuming factoring under the classification of NBFCs (investment and credit companies). This would allow all registered NBFCs to engage in factoring without needing separate registration.

In addition, the government should revisit the outdated caps on loans to priority sectors. Current limits, such as Rs 10 lakhs for agricultural loans and Rs 20 lakhs for non-agricultural loans, no longer reflect the realities of growing business needs and inflation. 

NBFCs have been instrumental in advancing India’s financial inclusion by bringing credit to underserved communities, supporting MSMEs and driving green initiatives. However, for NBFCs to realise their true potential, they need targeted policy support.

The Union Budget 2025 offers an opportunity to address challenges faced by the sector and lay the groundwork for its sustained growth. Introducing measures like a dedicated refinance window, a more inclusive bond market and a lower SARFAESI threshold could provide NBFCs with the financial flexibility they need. Similarly, aligning tax regulations with those of banks and simplifying rules around MSME financing would further empower NBFCs to expand their reach and impact.

The writer is executive vice-chairman, Shriram Finance. Views are personal.