Ahead of Budget 2025-26, Non Banking Financial Companies (NBFCs) on Thursday urged Finance and Corporate Affairs Minister Nirmala Sitharaman to create a dedicated refinance window in the upcoming budget for them to help diversify their funding sources in the spirit of building an “Atmanirbhar Bharat”.

Funds raised by NBFCs through this refinance mechanism may be exclusively used to finance MSMEs, priority sector and green initiatives, the Finance Industry Development Council (FIDC), a representative body of NBFCs and HFCs, suggested.

“We have suggested that a Development Finance Institution (DFI) like SIDBI be asked to provide refinancing facility to NBFCs for on-lending to the MSME and the priority sector, with special fund allocation from the government”, Raman Aggarwal,Director, FIDC said after the 7th pre-budget meeting that Sitharaman chaired with representatives of financial sector and capital markets in the capital.

Foreign borrowings

Aggarwal highlighted that foreign borrowings by NBFCs have surged in the wake of reduced bank borrowings.

In order to diversify their funding and reduce dependence on banks, large NBFCs are opting for foreign borrowings for on-lending in the domestic market, he said.

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This is more so after the Reserve Bank of India (RBI) RBI expressed their concern on over dependence of NBFCs on bank funding, leading to decline in bank lending support to such entities. A large number of small and medium sized NBFCs, who are majorly dependent on bank borrowings, are now required to borrow from their larger peers at a higher cost. 

As per the data released by RBI on External Commercial Borrowings (ECBs), NBFCs have borrowed $16 billion during 2024 (January – October) with $5.5 billion in October alone. This is a significant increase as compared to previous years. This is primarily due to the reduction in bank borrowings. This also shows the increased interest and confidence among foreign investors, he added.

Reducing threshold

At the pre-budget meeting, FIDC also made a case for reducing the loan amount threshold for Enforcing Security Interest under the SARFAESI law to ₹ 1 lakh from ₹ 20 lakh in the case of NBFCs.

Aggarwal also said that FIDC has also urged Sitharaman to exempt NBFCs from TDS deduction under section 194A of income tax law in order to ensure harmonisation and remove the ambiguity in Co-lending.

Gopal Jain, Managing Partner & Co-founder Gaja Capital & Co-Chair of Regulatory Affairs Committee, IVCA, said “we emphasised the need to build on the positive policy momentum from the previous Union Budget to further strengthen the Indian alternate capital ecosystem. Additionally, unlocking pools of domestic capital remains critical.”

By implementing these measures and modernising regulatory frameworks, India can pave the way for a robust and globally competitive alternative investment landscape, he added. “We remain optimistic about the government’s continued support in the upcoming Union Budget”, Jain added.

The suggestions to Sitharaman from captains of financial sector and capital markets include further strengthening of Social Stock Exchange system in India, granting a better tax treatment for debt mutual funds and exploring the possibility of allowing employers to give their employees an option to choose between provident fund and National Pension System (NPS). 

Currently, provident fund is mandatory as statutory contribution and very few employees want to contribute to both PF and NPS at the same time, it was submitted to Sitharaman.

The other corporate honchos who attended the pre-budget meeting include Ashish Kumar Chauhan, MD&CEO, National Stock Exchange; Hitendra Dave, CEO, HSBC Bank; Partha Pratim Sengupta, MD & CEO, Bandhan Bank; Radhika Gupta, MD& CEO, Edelweiss Mutual Fund and Shriram Iyer, CEO, HDFC Pension Fund.