In India, Non-Banking Financial Companies (NBFCs) play an important role in providing credit to underserved segments of the economy, such as small and medium-sized enterprises (SMEs), agriculture, and rural areas. However, due to their inherent risks and limited access to low-cost funds, NBFCs often rely on bank finance to meet their funding requirements. In this context, the relationship between banks and NBFCs is crucial for the development of the financial sector in India.
Bank finance to NBFCs in India can take various forms, such as term loans, working capital loans, overdrafts, and cash credit facilities. Banks provide finance to NBFCs based on their creditworthiness, financial performance, and compliance with regulatory requirements. The Reserve Bank of India (RBI) regulates the relationship between banks and NBFCs to ensure that it is based on prudential norms and does not pose any systemic risks to the financial system.
In recent years, the RBI has taken several measures to enhance the flow of bank finance to NBFCs and improve the quality of credit to the sector. Some of these measures include:
- Priority Sector Lending: The RBI has mandated banks to allocate a certain percentage of their total lending to priority sectors, which includes lending to NBFCs for on-lending to agriculture, micro, small and medium enterprises (MSMEs), and housing sectors.
- Securitization and Assignment of Loans: Banks can securitize and assign their loans to NBFCs to enhance their liquidity. This allows banks to free up their capital for fresh lending, while NBFCs can acquire assets that generate regular cash flows.
- Co-Lending Model: The RBI has introduced a co-lending model, which enables banks to co-lend with NBFCs to enhance credit flow to priority sectors. Under this model, banks and NBFCs will share the credit risk and reward in a pre-agreed proportion.
- Refinancing and Special Liquidity Facility: The RBI provides a refinancing facility to banks for lending to NBFCs, which enables them to access low-cost funds for onward lending. The RBI has also introduced a special liquidity facility for NBFCs to help them overcome temporary liquidity mismatches.
In conclusion, bank finance is a critical source of funding for NBFCs in India, and the relationship between banks and NBFCs is regulated by the RBI to ensure that it is based on prudential norms and does not pose any systemic risks to the financial system. The RBI has taken several measures to enhance the flow of bank finance to NBFCs and improve the quality of credit to the sector, which will help in promoting financial inclusion and supporting economic growth.