As India prepares for the Union Budget 2026, the Non-Banking Financial Company (NBFC) sector has presented a crucial set of recommendations aimed at deepening financial inclusion and accelerating credit-led growth. George Alexander Muthoot, Managing Director of Muthoot Finance, asserts that the upcoming budget arrives at a pivotal moment for the nation's economic trajectory. With a backdrop of political stability, resilient macroeconomic fundamentals, and robust domestic demand, the government has a significant opportunity to implement targeted policies that empower last-mile lenders.
Four Key Pillars for NBFC-Led Financial Inclusion
The sector's budget wishlist is built around four primary areas of intervention. These proposals are designed to enhance the capacity of formal financial institutions to serve small borrowers and micro-entrepreneurs effectively, thereby strengthening household balance sheets across the country.
1. Leveling the Field with Priority Sector Status
A central demand is the grant of Priority Sector Lending (PSL) status to eligible gold loan NBFCs. Currently, a regulatory asymmetry exists where banks receive PSL recognition for similar lending activities, but gold loan NBFCs do not. This places the latter at a disadvantage, limiting their ability to scale responsibly and offer competitively priced credit.
Gold loans are predominantly availed by small borrowers, with ticket sizes often below Rs 50,000. These funds are typically used for urgent needs like medical expenses, education costs, agricultural inputs, or working capital for micro-businesses. Granting PSL status would create a level playing field, potentially lower the cost of funds for these NBFCs, and incentivize them to expand their outreach in semi-urban and rural markets where formal credit access remains limited.
2. Democratising Credit via UPI and Gold
The second proposal seeks to bridge a glaring gap in India's digital finance ecosystem. While the Unified Payments Interface (UPI) has revolutionised digital transactions, access to formal credit has not kept pace. Muthoot suggests the introduction of a gold-linked, revolving credit line via UPI, which NBFCs would be enabled to offer.
Under this framework, customers could leverage idle gold jewellery to secure an instant credit line accessible directly through UPI platforms. This would provide need-based access to funds at interest rates estimated between 12-18%, which is significantly lower than the rates on unsecured credit cards. The concept marries the trust and security of gold loans with the convenience and ubiquity of UPI, promising to dramatically improve affordable credit access for households and small business owners.
Muthoot shared that the idea was inspired by a customer interaction in Kochi, which highlighted the disconnect between daily UPI transactions and credit access. He believes integrating the two can reduce dependence on high-cost informal borrowing, boost short-term consumption, and, over the medium term, strengthen household financial resilience.
3. Rationalising Exposure Limits for Gold Loan NBFCs
The third recommendation calls for aligning the single counterparty exposure limits for gold loan NBFCs with the norms applicable to other NBFCs, which are set at 20% of Tier-1 capital. The current, more restrictive limits for gold loan companies constrain their lending capacity despite the fact that gold loans are fully secured and have historically demonstrated strong asset quality.
Rationalising these limits would allow well-capitalised and regulated NBFCs to extend credit more efficiently to a broader base of customers, without diluting prudential safeguards.
4. Creating a Fair Framework for Retail NCD Investors
The final area focuses on improving the market for retail debt. NBFCs rely on retail investors to diversify their funding sources through instruments like Listed Non-Convertible Debentures (NCDs). However, current Tax Deducted at Source (TDS) provisions mandate a 10% TDS on interest from listed NCDs, creating an unnecessary compliance burden, especially when these securities are traded on stock exchanges.
Given that listed securities provide a transparent audit trail, simplifying these TDS norms would ease friction and encourage greater retail participation. Additionally, the sector recommends allowing a higher interest rate for retail investors, pensioners, and senior citizens in public issues of secured NCDs, over and above rates offered to institutional investors. This would acknowledge the different risk-return expectations of retail investors and provide them with better incentives to participate in capital markets, supporting long-term savings.
In conclusion, the NBFC sector views the Union Budget 2026 as a catalyst that can unlock responsible, credit-led growth by addressing these structural and regulatory nuances. Implementing these measures could significantly enhance the formal financial system's reach and impact at the grassroots of the Indian economy.
