Finance Minister Nirmala Sitharaman’s recent call to ramp up lending to micro, small, and medium enterprises (MSMEs) through increased partnership between non-banking financial companies (NBFCs) and public sector banks (PSBs) is a timely nudge.
PSBs have long been the lumbering giants of Indian finance, flush with low-cost deposits but shackled by bureaucratic inertia and a risk aversion that's almost pathological. Post the IL&FS debacle and the pandemic's aftermath, PSBs have turned even more cautious in lending.
MSMEs, the backbone of India's job creation and GDP have been left gasping for credit. The credit gap for these enterprises stands at a staggering Rs 25 lakh crore, as per some estimates, and traditional banks have done precious little to bridge it.
Why? Because venturing into the hinterlands or assessing the creditworthiness of a small-town entrepreneur doesn't fit their cookie-cutter models. NBFCs have mastered the art of last-mile lending, reaching borrowers in remote villages, informal sectors, and underserved niches where PSBs fear to tread.
With their tech-driven underwriting, flexible products, and deep local networks, NBFCs have been filling the void.
But NBFCs often struggle with funding costs, relying on market borrowings that spike during liquidity crunches. Tie-ups with PSBs could be the game-changer, allowing banks to co-lend or provide wholesale funding while NBFCs handle origination and collections.
In this context, Sitharaman's emphasis on institutionalised collaboration isn't just rhetoric; it's a blueprint for synergy. Imagine PSBs leveraging their balance sheets to back NBFC-led loans, reducing the latter's cost of funds by 200-300 basis points.
Critics might argue that NBFCs carry higher risks, pointing to past blow-ups. Fair enough, but that's where institutionalisation comes in—robust due diligence, shared risk models, and RBI oversight can mitigate that.
Moreover, boosted MSME lending could unleash a multiplier effect, creating jobs, spurring consumption, and aiding India's quest for a $5-trillion economy. In a post-Covid landscape riddled with global uncertainties, ignoring this will be a mistake.
In this backdrop, Sitharaman has thrown down the gauntlet. For PSBs, it's time to shed the complacency and boost NBFC tie-ups. Not as a favour, but as a survival strategy.
(Banking Central is a weekly column that keeps a close watch on and connects the dots regarding the sector's most important events for readers.)
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