Positive approach to NBFCs needed

The Reserve Bank of India's annual Monetary Policy announcement came as a surprise to some. However, not many believe that this rate reduction is by any means a harbinger for a benign rate regime in the foreseeable future.

Reining in the fiscal deficit is critical. But that requires a high level of energy and commitment from the government.

Growth in India takes place despite the government. We have and we should continue to bet on actions of actors other than the government to bring about innovation, energy and concerted action.

The regulator has to do its bit to hasten development. While its hands are tied to the government's as far as monetary policy is concerned, regulatory reforms could unleash creative energies of finance on India's entrepreneurs.

Let's look at how the RBI's actions can lead to lower cost of funds for customers in India.

Regulatory reforms

The RBI has promised draft guidelines on a new regulatory framework for non-banking finance companies (NBFCs) by end-June 2012.

The NBFCs serve the demand for finance that banks shun. It is common knowledge that banks in India leave a lot on the table.

India tops the charts in financial exclusion. The RBI is seen coercing the banks on financial inclusion in the same policy statement.

Coercion rarely leads to sustainable development. But sustainable NBFCs can be a powerful vehicle of finance that should be supported by a positive regulatory framework.

Facts vindicate the point. Last fiscal, while non-food bank credit grew at 19 per cent, NBFCs' credit grew at 31 per cent.

On like-to-like comparison, NBFCs' operating cost and bad debt cost ratios are better than banks by a wide margin. This is because of the NBFCs' focused business model that is agile and responsive to customer needs. Lower costs means lower price for customers.

The proposed regulatory framework should provide an appropriately enabling environment to support this driver of innovation and growth in the Indian economy.

Credit information

On the banking side, the RBI has suggested to the banks to move towards a unique customer ID. This can reduce cost of credit to good customers. The central bank has to go an extra step and mandate that the unique ids have to be linked to Aadhaar . All customers do not carry the same risk,but they get home loans at the same rate. This is because the credit information bureau is in its infancy.

With a regulatory push to ensure each customer is uniquely identifiable, the credit history of each customer can be made handy. Better customers can get lower interest rates, despite the bleak scenarios of monetary situation. There is a lot we can hope for from the RBI, despite the government.

(The author is partner and director, BCG. The views are personal.)

COMMENT NOW