The government should restore priority sector status for bank loans to non-banking finance companies

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(NBFCs), industry body Assocham has said.

The Reserve Bank of India's decision to disallow banks from classifying loans given to NBFCs as priority sector loans will significantly curtail credit flow and in turn curb growth, it said in a statement.

The chamber said a fine line needs to be drawn between genuine NBFCs involved in asset-financing business and those specialising in high-risk segments.

NBFCs depend on banks for major chunk of their credit requirement.

"A substantial part of incremental NBFC lending has flowed to entities like IDFC, PFC, REC, IRFC and IIFCL which are also classified as NBFCs, while the balance has gone to others," Secretary General D S Rawat said.

All asset finance companies in the country have a wider reach and are best placed to lend to unorganised sectors, he said in a communication to the RBI.

Besides, Assocham said core investment companies (CICs) should be permitted to invest 10 per cent of the corpus in any scheme, including mutual funds.

Under existing norms, NBFC-CICs are required to invest at least 10 per cent of their investments in money market instruments, it said.

However, such CICs which do not have any deposits from the public or loans from banks may be permitted to invest in any scheme of mutual fund, including money market instruments, the chamber added.