Demand for creation of new NBFC-PSL category in Budget to boost MSME sector

The creation of a new category of Non-Banking Financial Companies (NBFCs) dedicated to priority sector lending (PSL) to support the growth of MSMEs features among the key demands by business leaders in the forthcoming Union Budget.

Finance Minister Nirmala Sitharaman will present the Union Budget in Parliament on Tuesday.

Shachindra Nath, Founder and MD of UGRO Capital Ltd, urged the government to address specific challenges faced by NBFCs that cater to the Micro, Small, and Medium Enterprises (MSMEs).

He called for the establishment of NBFC-PSL, which would focus at least 85% of their assets under management (AUM) on the priority sector.

"Creating an NBFC-PSL category will foster a more inclusive and resilient financial ecosystem for MSMEs," Nath told PTI.

He said loans from banks to NBFCs for onward lending to MSMEs should be classified as ‘PSL loans’, with current caps removed.

Nath also proposed reintroducing the Partial Credit Guarantee Scheme and expanding it to include term loans.

This would provide a portfolio guarantee for the purchase of bonds or commercial papers with a rating of ‘AA’ or below issued by NBFCs-MSMEs by public sector banks, facilitating greater funding for small and medium NBFCs.

He called for harmonising of the SARFAESI Act limit to enhance recovery processes for smaller loan defaults by reducing the cap for credit eligible under this act from Rs 20 lakh to Rs 1 lakh for NBFCs, similar to banks.

"This will also improve financial health and boost confidence among lenders and investors," Nath said.

Umesh Revankar, Executive Vice Chairman at Shriram Finance Ltd, stated that the Union government is expected to maintain its focus on infrastructure development and the MSME sector in the upcoming budget.

He said continued emphasis on infrastructure development, particularly logistics, will play a crucial role in making manufacturing in India more affordable and globally competitive.

"Improvements in logistics are likely to provide India with a significant advantage on the international stage," said Revankar.

The Engineering Export Promotion Council (EEPC India) has also urged the government to revive the interest subvention scheme for exporters in its pre-budget recommendation. EEPC India Chairman Arun Kumar Garodia has emphasised on the scheme's importance, especially with rising interest rates.

He called for restoring the 3% subvention rate for specific tariff lines and a 5% rate for MSME exporters across all product categories. The council represents nearly 9,500 member companies (over 60% MSMEs), contributing 25% of total exports.