As of the end of March 2024, NBFCs had a CRAR of 26.6%, a GNPA ratio of 4.0% and a return on assets (RoA) of 3.3%. (Representational image only)

Ahead of the upcoming Union Budget scheduled to be presented on July 23, the Non-Banking Financial Company (NBFC) sector is expecting enhanced financial inclusion and reinforcing digitalisation efforts to sustain the sector’s growth.

Finance Industry Development Council (FIDC), which represents the industry, has suggested establishing a special refinancing body, just as the government has created National Housing Bank (NHB) for housing finance companies.

On the other hand, the sector this year has seen stringent regulatory action from the Reserve Bank of India (RBI). Additionally, speaking at an event in May this year, RBI Deputy governor J. Swaminathan cautioned the NBFCs not to be overly reliant on algo-based credit models. However, the apex bank, in its 29th Financial Stability Report (FSR) said that the NBFCs are well capitalised, giving an edge to the financial sector in the country.

As of the end of March 2024, NBFCs had a CRAR of 26.6%, a GNPA ratio of 4.0% and a return on assets (RoA) of 3.3%.

“The growth of the Indian NBFC industry is significantly influenced by robust financial inclusion, consumer demand and improving trade balances. The upcoming Union Budget should emphasise enhancing financial inclusion across the country, implementing policy reforms, and reinforcing digitalisation efforts to sustain the sector’s growth.

Financial and digital inclusion will enhance credit access by increasing convenience and reducing turnaround times,” said Rakesh Kaul, CEO, Clix Capital.

“The government must consider incentivising and promoting such measures so that NBFCs can carefully take advantage of global integration, ensuring sustainable growth and financial inclusion across India’s diverse economic landscape,” said Jitendra Tanwar, Managing Director & CEO of Namdev Finvest Private Limited.

He further added that the government must consider incentivising and promoting such measures so that NBFCs can carefully take advantage of global integration, ensuring sustainable growth and financial inclusion across India’s diverse economic landscape.

Expressing his confidence in the Budget this year, Krishan Gopal, CFO, Aye Finance, said, “I believe this Budget will lay the groundwork for India’s vision of development by 2047. We expect the Government to recognise the efforts of NBFC lenders that are transforming micro-enterprise lending in India by providing customised credit lines, announcing schemes and subsidies and even considering classifying them as Priority Sector Lenders.”

“Despite strong competition from banks, non-banking financial companies (NBFCs) have shown remarkable resilience in retaining a significant market share. To drive further growth, we seek policies that promote responsible credit utilisation, enhance access to credit for underserved communities, and foster financial literacy among customers,” said Mathew Muthoottu, MD Muthoottu Mini Financiers Limited.

”NBFCs are expecting the Budget to carry provisions that spur consumption, such as via tax relief etc.; implement initiatives that enable growth of NBFCs serving priority sector clients; and undertake widespread campaigns aimed at inculcating good credit behaviour amongst the country’s growing borrower base,” opined Neha Juneja, Co-founder and CEO, IndiaP2P, on her Budget expectations.

Anticipating the allocation of additional funds for the sector, Pavitra Walvekar, the CEO of Kudos Finance, which is based out of Pune, said, “Key initiatives should include the allocation of additional funds to improve liquidity for NBFCs and the introduction of regulatory reforms to streamline operations and enhance transparency. These steps will bolster credit availability, particularly for underserved segments like MSMEs, and promote financial stability in the long run.”

The RBI on Friday released draft guidelines on digital lending to ensure transparency in the aggregation of loan products from multiple lenders by lending service providers (LSP) so that borrowers get prior knowledge about all credit offers that are available in the market.

LSPs are entities engaged by banks or NBFCs to carry out some functions for them such as customer acquisition, underwriting and loan recovery on digital platforms. In some cases, a regulated entity can also act as an LSP.

Banks and NBFCs should ensure that their LSPs provide a digital view of all the loan offers available to the borrower from all the willing lenders that the LSP has arrangements with, the RBI draft guidelines state.

The digital view, the RBI said, should include the name of the bank or NBFC extending the loan, the amount and tenor of loan, the annual percentage rate and other key terms and conditions in a way that enables the borrower to make a fair comparison between various offers.

The RBI said the guidelines have been issued as it has observed that many of the LSPs offer aggregation services for loan products, while they have outsourcing arrangements with several lenders and the Digital Lending App of the LSP matches the borrower to one of the lenders. In such cases, particularly where an LSP has arrangements with multiple lenders, the identity of the potential lender to the borrower may not be known upfront to the borrower.

While the LSP can adopt any mechanism to ascertain the willingness of the lenders to offer a loan, the RBI said it should follow a “consistent approach” that must be disclosed suitably on their website.

A link to the key facts statement (KFS) must also be provided in respect of each of the regulated entities, it said.

The content displayed by the LSP should be “unbiased” and should not directly or indirectly promote or push a product of a particular lender, including by use of any practices or deceptive patterns, to mislead borrowers into choosing a particular loan offer, the guidelines state.

The RBI has invited comments from stakeholders on the draft circular by May 31.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

Representational image. File
| Photo Credit: Reuters

Reserve Bank of India (RBI) has issued fresh guidelines to the Regulated Entities (REs) such as commercial and other banks, Non-Banking Finance Companies (NBFCs) and other lenders to ensure reasonableness and transparency in disclosure of penal interest. 

This follows findings that many REs are using penal rates of interest, over and above the applicable interest rates, in case of defaults/non-compliance by the borrower with the terms on which credit facilities were sanctioned.

“The intent of levying penal interest/charges is essentially to inculcate a sense of credit discipline and such charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest,” the RBI said in a circular. 

“However, supervisory reviews have indicated divergent practices amongst the REs with regard to levy of penal interest/charges leading to customer grievances and disputes,” it added.

According to the new directive, penalty if charged for non-compliance of material terms and conditions of loan contract by the borrower would be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. 

“There shall be no capitalisation of penal charges i.e., no further interest computed on such charges. However, this will not affect the normal procedures for compounding of interest in the loan account,” the circular said. 

The REs have been asked not introduce any additional component to the rate of interest and ensure compliance to these guidelines in letter and in spirit.

Board approved policy

The REs will formulate a Board approved policy on penal charges or similar charges on loans, by whatever name called.

And the quantum of penal charges shall be reasonable and commensurate with the non-compliance of material terms and conditions of loan contract without being discriminatory within a particular loan / product category.

The penal charges in case of loans sanctioned to ‘individual borrowers, for purposes other than business’, shall not be higher than the penal charges applicable to non-individual borrowers for similar non-compliance of material terms and conditions.

Now the RBI wants the REs to clearly disclose the quantum and reason for penal charges to the customers in the loan agreement and most important terms & conditions / key fact statement as applicable, in addition to being displayed on REs website under Interest Rates and Service Charges.

“Whenever reminders for non-compliance of material terms and conditions of loan are sent to borrowers, the applicable penal charges shall be communicated. Further, any instance of levy of penal charges and the reason therefor shall also be communicated,” the RBI circular said. 

These instructions will come into effect from January 1, 2024. 

And the REs have been asked to carry out appropriate revisions in their policy framework and ensure implementation of the instructions in respect of all the fresh loans availed/ renewed from the effective date. 

In the case of existing loans, the switchover to new penal charges regime will be ensured on next review or renewal date or six months from the effective date of this circular, whichever is earlier, the circular said.

These instructions will, however, not apply to Credit Cards, External Commercial Borrowings, Trade Credits and Structured Obligations which are covered under product specific directions, the RBI has clarified.