In a bid to enhance the availability of credit for Micro, Small, and Medium Enterprises (MSMEs), the World Bank, in its latest report, has stated that the government should remove the interest cap on NBFCs to ease the lending restriction.
The World Bank’s report outlined several key recommendations aimed at strengthening Non-Banking Financial Companies (NBFCs).
It said, “Providing adequate financing for micro, small and medium enterprises (MSMEs) by strengthening NBFCs’ ability to lend to them by removing the existing interest cap on NBFCs to be eligible for guarantees provided by the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).” These recommendations focus on improving NBFCs’ access to liquidity, easing restrictions on their lending, and introducing risk-sharing mechanisms to facilitate bank funding to NBFCs.
One of the primary measures suggested is the removal of the existing interest cap on NBFCs to be eligible for guarantees under the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). By eliminating this cap, the World Bank says that the NBFCs will have greater flexibility in lending to MSMEs, ensuring better access to financing for small businesses.
Additionally, introducing risk-sharing mechanisms for banks that lend to NBFCs would encourage greater participation from the banking sector in supporting NBFC funding.
The tightening of regulatory supervision on NBFCs has led to concerns over liquidity access, particularly for smaller and medium-sized NBFCs.
To address this, the World Bank recommends the introduction of a permanent liquidity arrangement that includes periodic liquidity facilities through development finance institutions (DFIs), Targeted Long-Term Repo Operations (TLTROs), and partial credit guarantee schemes. Such measures would ensure a steady flow of funds for NBFCs, reducing their dependence on short-term borrowing and making financing more accessible for MSMEs.
During the pandemic, government-backed long-term lending support was largely accessible only to well-established and financially sound NBFCs, leaving smaller and medium-sized players struggling for funds.
To prevent a recurrence of such disparities, the World Bank suggests that the government and the Reserve Bank of India (RBI) implement a more structured and permanent liquidity mechanism.
This would provide much-needed stability to NBFCs, particularly those catering to MSMEs, and ensure that smaller lenders are not left behind in times of financial distress.
In conclusion, strengthening NBFCs through regulatory flexibility, improved liquidity access, and risk-sharing mechanisms will significantly enhance their ability to finance MSMEs. The recommendations put forth by the World Bank emphasise the need for a balanced approach–tightening regulatory supervision while simultaneously ensuring NBFCs have adequate liquidity support.
