FIDC-led consortium to set up on-tap refinance mechanism non-bank lenders

Non-bank lenders led by industry body Finance Industry Development Council (FIDC) have made representations to the Ministry of Finance, the Reserve Bank of India (RBI) and Small Industries Development Bank of India (SIDBI) to set up a on-tap refinance mechanism for such companies under the latter. The request is to set up a funding facility on the lines of NHB refinance that will provide a facility for onward lending to MSMEs and other credit starved sectors.

“There is a dire need for an effective refinance mechanism to ensure persity and greater regularity in sources of funds to NBFCs,” FIDC said in its letter. “We believe that SIDBI is most suited as an institution to provide such a facility to NBFCs for onward lending to MSMEs and other appropriate sectors.”

Non-bank lenders believe that since most of them depend upon banks for their funding needs, it has resulted in inadequate and erratic flow of funds and increased concentration risk at a systemic level.

Presently, the RBI earmarks special liquidity facility to SIDBI for on-lending and refinancing through novel models and structures. These funds are used to support the funding requirements of micro, small and medium enterprises (MSMEs), particularly smaller MSMEs and other businesses including those in credit deficient and aspirational districts.

FIDC has also proposed relaxation of criteria used by SIDBI for providing funding support to non-bank financial institutions. These lenders have submitted that the size and scale of a particular NBFC should not be considered as
a qualifying criterion for a “go-no go” decision for lending.

Non-bank lenders argue that given the standardised templates employed by rating agencies, size of the NBFC becomes as key input to credit rating, due to which smaller NBFCs end up receiving lower rating, irrespective of vintage and other financial parameters.

“While rating should be an important consideration for SIDBI to assess its credit risk, we submit that this may be seen as only one of the criteria, which could be counter-balanced with vintage of NBFC, the track record and experience of the key personnel, financial parameters, credit quality and capital adequacy,” the letter states.

NBFCs have also sought increasing the credit guarantee cover for 75% of non-performing loans as the reduction in cover has led to such lenders insisting on secondary collateral to manage their MSME loan risks.

The credit guarantee fund trust for micro and small enterprises (CGTMSE), operates the credit guarantee scheme for small and medium sized firms and is operated by the government and SIDBI.

“The recent reduction in the amount of claim admissible under the CGTMSE scheme has severely dampened the risk appetite of NBFCs in financing MSMEs,” as per FIDC.

“With the CGTMSE cover becoming lesser and costlier, NBFCs have no choice than to become risk averse or to insist on secondary collateral to manage their risks. This may severely restrict the flow of funds from NBFCs to MSMEs. We request restoration of the earlier limits for admission of claims under the scheme.”