Budget 2024: Tackle NBFC challenges for MSME support: UGRO Capital MD

The MSME sector plays an integral role in India’s economic growth and like the entire nation, the industry has its own set of expectations from the Budget 2024 scheduled to be announced on July 23. The sector in the interim February budget received allocations of ₹22,137.95 crore for the establishment of more clusters and new technology centres.

"The MSME sector is a cornerstone of India's economic growth, marked by increased contributions and high optimism for progress. The surge in registrations on the UDYAM portal for credit and policy benefits underscores this momentum,” says Shachindra Nath who is the MD and the founder of UGRO Capital. This small business lending fintech platform provides customised loan solutions. Over 4.72 crore enterprises are registered on the Udyam portal as of today. This necessitates “close monitoring of emerging risks”.

“The sector's low risk and falling delinquency rates are enhancing borrowing prospects, with NBFCs showing consistent credit growth, especially post-Covid,” he adds.

Nath hence, hopes that the budget will address particular challenges met by NBFCs for MSMEs to have a more inclusive and resilient financial ecosystem.

To his list of recommendations, the first recommendation that Nath makes is “the creation of a new category of NBFCs dedicated to Priority Sector Lending (PSL), termed NBFC-PSL, focusing 85% of their AUM on the priority sector.”

He says, “We also recommend reintroducing the Partial Credit Guarantee Scheme (PCGS) for NBFC-MSMEs, providing a portfolio guarantee for the purchase of Bonds or Commercial Papers with a rating of AA or below issued by NBFC-MSMEs, by public sector banks.”

He argues that “this will facilitate greater funding to small and medium NBFCs. Expanding this scheme to include term loans from banks and financial institutions will further support the sector.”

Nath recommends, “harmonising the SARFAESI Act limit by reducing the cap for loans eligible under this act from INR 20 Lakhs to INR 1 Lakh for NBFCs, similar to banks, will enhance recovery processes for smaller loan defaults.”

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 enables banks and other financial institutions to recover a loan of a certain amount by auctioning commercial or residential properties.

“This will improve financial health and boost confidence among lenders and investors,” he adds.