Liberalised FDI norms - key to unlock potential of NBFCs

The government’s commitment to propel the economy on an elevated growth trajectory and bring about paradigm policy and legislative changes for easing business sentiments in the country was aptly reflected in the 2016-17 Budget.

A key component of the path-breaking budget was the introduction of proposals to liberalise foreign direct investment (FDI) across diverse economic sectors, including the Non-Banking Finance Companies (NBFCs), unlocking their latent potencies.

Contribution of NBFCs

Over the years, the NBFC sector has created a vibrant entrepreneurial culture in the country by providing much-needed working capital at reasonable interest rates to small-scale entrepreneurs spread across the length and breadth of the country.

The growth of the NBFC sector in the country can be attributed to the fact that it has succeeded in reaching out to those having no access to mainstream economic institutions and harnessing their productive capacities.

Recognising the fact that NBFCs need to gear up to cater to a whole new emerging generation of entrepreneurs with diverse needs and strengthen their lending prowess, the government has amended FDI norms for liberalising the domestic NBFC sector.

Various budgetary reforms

Key reforms for the NBFC sector in the budget include making FDI norms applicable to activities beyond the present 18 activities through the automatic route, provided they are regulated by financial regulators or government agencies such as the Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi) and Pension Fund Regulatory and Development Authorities (PFRDA).

These measures are intended to smoothen the inflow of foreign capital in NBFCs, and in turn, strengthen the domestic economy. Present provisions do not permit FDI in NBFCs through the automatic route beyond the stipulated 18 activities, which include merchant banking, underwriting, portfolio management services, financial consultancy and stock broking. Pursuant to fulfillment of minimum capitalisation norms preset in the existing FDI regulations pertaining to NBFCs, FDI rules under the stated cases are applicable.

Other financial services which do not come under the gambit of any financial sector regulators can attract FDI through the approval route.

Additionally, to speed the implementation of the reforms process, mandates providing for minimum capitalisation norms under the FDI policy have been erased as minimum capitalisation norms have already been fixed by the respective regulators.

The reforms will be implemented on a pan-India basis and will not be limited to select states or districts. The inflow of FDI is expected to receive a booster shot inject fresh bouts of liquidity in the economy following the amendment of the Foreign Exchange Management (Transfer or Issue of Security by the Person Resident Outside India) regulations.

A transparent and structurally efficient business environment is essential to attract the global institutional investment and kickstart the investment cycle in the economy.

The government has given topmost priority to ‘ease of doing business’ in India. Recognising the fact, the government and the RBI may mull relaxing or expediting the passing of permits required to change the managements of NBFCs, which presently is a staid and time-consuming exercise bogged by outdated regulatory norms.

India is poised to play an enhanced role in the steering of the global economy in the days to come. At a time when the Brexit referendum in Europe has dampened the investment climate in the continent and the Chinese economy on the verge of a slowdown, the global investor fraternity has focused its attention on India, given its vast consumer outreach and a diverse market eager to lap up latest products and services.

Given its deep penetration in the rural outreaches of the country and their potential to leverage the entrepreneurial potencies of far-flung rural populations, NBFCs can prove to be the game changer in the country’s economic growth story.

The FDI liberalisation reforms proposed by the government have the capability and the capacity to attract much needed global capital in NBFCs, and in turn, transform India into a global economic powerhouse.

(The author is Managing Partner at SNG & Partners)