Govt takes steps to revive NBFC sector

Govt takes steps to revive NBFC sector

New Delhi, Jul 5: In a major step aimed at easing the ongoing stress on India’s non-banking finance companies (NBFCs), the government will lend a helping hand to top-rated entities, Finance Minister Nirmala Sitharaman announced in the Union Budget 2019-20.
“NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse,” Sitharaman said, while presenting the first Budget of Modi 2.0 government in the Lok Sabha on July 5.
To enhance liquidity access for the sector, the government will provide one-time 6-month partial guarantee of Rs 1 lakh crore to state-run banks for purchasing consolidated high-rated pooled assets of financially-sound NBFCs. This will cover their first loss of up to 10 percent.
“I think this would a long way in improving the credit flow to the corporates who are unable to tap into the funding from public sector banks,” said Sandeep Upadhyay, MD & CEO, Centrum Infrastructure Advisory.
Sitharaman also proposed permitting investments made by foreign institutional and portfolio investors in debt securities issued by Infrastructure Debt Fund-NBFC to be transferred or sold to any domestic investor within specified lock-in period.
To treat systemically important NBFCs on par with banks, the government has allowed interest on certain bad or doubtful debts to be taxed in the year in which the interest is actually received.
Also, to allow NBFCs to raise funds in public issues, the requirement of creating a Debenture Redemption Reserve (DRR), which is currently applicable for only public issues as private placements are exempt, has been done away with.
Sitharaman said that steps will be taken to allow all NBFCs, even those not registered as NBFCs-Factor, to directly participate on the TReDS platform.
“This Budget reinforces the important role that NBFC and HFCs play in credit delivery. The capitalization boost for banks, credit guarantee for high rated asset pools and easing of the reserve requirements in public issue of debentures will further enable flow of liquidity to well-performing NBFCs with strong balance sheets,” said Rajiv Sabharwal, MD and CEO, Tata Capital.
RBI to get more powers over NBFCs
While the Reserve Bank of India (RBI) is the regulating body for NBFCs, there is a need to strengthen its authority over the sector, Sitharaman said.
The amendments proposed to the RBI Act 1934, include powers relating to resolution of NBFCs. The RBI may frame schemes for amalgamantion, reconstruction or splitting up of the viable and nonviable businesses of the NBFC to ensure continuance of critical activities. The regulator may also establish “bridge institutions” that is a temporary arrangement to enable continuity of NBFC’s business.
The RBI will also have power to remove a director of an NBFC, excluding those owned by the government.
The finance minister also proposed to bring housing finance companies (HFCs) under the purview of RBI for better supervision.
The Economic Survey, released a day before the Budget, said immediately after the IL&FS crisis, NBFCs faced severe liquidity crunch as mutual funds stopped refinancing the loans of NBFCs. The survey warned that if the impact of stress in the NBFC sector spills over to this year as well, it may lead to lower credit offtake from NBFCs, which may dampen growth in consumption spending.