Budget 2023 Simplified: Will The National Financial Information Registry Change Lending Dynamics?

Financial Support
14 Mar 2023

The government of India has proposed the National Financial Information Registry (NFIR). It is a step towards better access to finance for SME’s and improving lending practices. The centralized database will maintain company financial data from various sources eg. banks, financial institutions, and other credit providers. Access to finance is essential for economic growth and achieving financial stability. NFIR will be a monumental step in boosting credit finance for SMEs across various sectors of the economy.

Impact of NFIR on Lending Dynamics in India

  • Improved Availability and Quality of Credit Information for Lenders

The NFIR will help financial companies make better decisions while evaluating applications for unsecured loans. It will maintain data on businesses who borrow money from different sources.

With the information collected by NFIR, lenders will have access to the credit history of their unsecured loan applicants. They will be able to see if they have borrowed money before and if they paid it back on time. This way, lenders will be able to make more informed decisions when providing SME funding. It makes the practice safer for the lender.

The NFIR will promote responsible borrowing and lending practices for SMEs as well as financing companies. Providing lenders with accurate credit information will encourage them to avoid over-indebting borrowers. The applicant will also be more aware of their credit history. This will incentivize maintaining a good credit score, and improve access to finance for SMEs  in the future.

  • Promotion of Financial Inclusion

The NFIR promotes financial inclusion in many ways. One is by providing lenders with a better picture of a borrower’s creditworthiness, NFIR will give lenders access to the borrower’s financial history, helping them make better lending decisions.

By enabling lending to a broader range of entities, this move expands opportunities for sourcing finance for SMEs especially for SME unsecured loans. More people and businesses will have access to credit, which can help them grow and invest in the future.

The NFIR will increase access to credit for those who were earlier excluded from the formal credit market. This includes entities that have been denied loans for low credit scores, or limited financial knowledge. By providing these individuals and businesses with access to credit, the NFIR can help them grow their businesses.

  • Role of Account Aggregator System

The Account Aggregator System (AAS) makes financial data more accessible to concerned entities. It collects and consolidates all disparate financial data, making it easier for businesses to access credit. The AAS is also extending coverage to include supply chain financing solutions, bill discounting, and factoring.  The day-to-day functioning of a majority of entrepreneurs depends on obtaining timely finance for their SMEs.

The NFIR will have a significant impact on micro, small, and medium enterprises (MSMEs). The registry will ease credit flow and strengthen cash-flow-based lending from collateral-backed sources. It will directly impact better credit flows and promote economic inclusion. Banks and Non-Banking Financial Companies (NBFCs) can now review GST and data from the authorities. They will have access to credit bureau data on delays and defaults.

  • Role of Government Initiatives

The digitization of trade data lets companies validate business transactions from legitimate sources. This has enabled the provision of nuanced scorecards to financiers. This allows them to extend credit to businesses with little or no prior credit history. Initiatives such as the Goods and Service Tax Network (GSTN) and e-invoicing help businesses digitize their trade data. Businesses can now record their transactions electronically. This makes it much easier for lenders to verify the legitimacy of these transactions. With the help of the AA framework, more individuals can now gain access to finance for SMEs.

The NFIR, among other government initiatives, aims to improve access to finance for SMEs in India. The step is a critical positive move for India’s inclusive economic growth.

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