The government announced several measures in the Union budget on Friday for the non-banking financial services sector, which has seen a spate of credit rating downgrades over the last few months and has been demanding a liquidity lifeline to help NBFCs.
Following the default by infra lender IL&FS last year, banks as well as mutual funds reduced their exposure to NBFCs. Typically, NBFCs raise short-term money by issuing commercial paper, which is then lend for long-term, like auto loans and home loans. Over the last few months, some of the NBFCs have found it difficult to raise fresh funding and have had to resort to asset monetisation to raise money. Inability to raise funds has in turn led to reduced lending business, which has had an impact on sectors like consumer durables, automobiles and housing, where NBFCs have a sizeable share of loans.
“NBFCs are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment. NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse,” said Nirmala Sitharaman in her budget speech.
One of the measures announced in the budget to increase liquidity is to push banks to buy assets from them under the pool purchase programme, and the government will provide one-time partial credit guarantee to state-owned lenders.
“For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year, government will provide one time six months' partial credit guarantee to public sector banks for first loss of up to 10 per cent,” said Sitharaman.
NBFCs, which do public placement of debt, have to maintain a debenture redemption reserve (DRR) and in addition, a special reserve as required by RBI, has also to be maintained. To allow NBFCs to raise funds in public issues, the requirement of creating a DRR, which is currently applicable for only public issues, as private placements are exempt, will be done away with, Sitharaman further announced.
“The credit guarantee provided by the government will further open up the liquidity line for fundamentally sound NBFCs,” said George Alexander Muthoot, MD, Muthoot Finance.
Also, it has been proposed that the Reserve Bank of India will regulate housing finance companies, until now regulated by the National Housing Bank.
Separately, the budget also proposed to infuse Rs 70,000 crore in state-owned banks, a move that should help these banks increase lending activity.
“The Union budget has taken several measures to reduce risk aversion and increase lending to NBFCs. Measures like one time partial six month guarantee to PSBs to buy sound NBFCs' loans and higher recapitalisation of PSBs require a special mention. Higher regulatory powers to RBI over NBFCs and return of regulation of HFCs back to RBI will definitely restore the confidence for well governed NBFCs,” said Dinanath Dubhashi, MD and CEO of L&T Finance Holdings.
Another step that has got a thumbs up is the proposal to bring parity between banks and NBFCs.
“Under section 43D, banks were not required to pay tax on interest accrued in bad or doubtful debt until the interest is actually realised. Now that the same treatment is extended to NBFCs, we have a more level playing field, a step towards harmonisation,” said V.P. Nandakumar, MD and CEO of Mannapuram Finance.
