Budget 2019 Offers NBFCs Various Enablers For Growth

Perhaps signaling change and hope was on the cards, Finance Minister Nirmala Sitharaman came to present her maiden budget as the first full-time woman Union Finance Minister with a red cloth folder, resembling the traditional Bahi Khata or books of accounts, instead of a briefcase. The red envelope had been stitched by her aunt and taken to the Siddhivinayak and Mahalakshmi temples for blessings.

And the blessings seem to have worked for the NBFC sector, which has been facing major challenges since last year. Here is a look at what this years’ budget had for the NBFCs.  

FM underlines importance of NBFCs

A delegation of NBFCs had, infact, met the Finance Minister before the budget, apprising her of the problems in the lending sector, especially the need of increased liquidity to enable future growth. As the recently announced Union Budget reflects, the finance minister appears to have made an earnest effort to enable growth for NBFCs. Stressing that the NBFCs play an “extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment,” the finance minister rolled out several measures to regulate and promote the growth of the sector.

Government quoted that fundamentally sound NBFCs should continue to get funding from banks and mutual funds without being excessively risk-averse.

Measures for sustaining high-growth in the NBFC sector:

• In her rescue package, finance minister announced that in order to boost liquidity access for the sector, the government will provide a one-time 6-month partial credit guarantee of Rs 1 lakh crore to state-run banks to purchase consolidated high-rated pooled assets of financially-sound NBFCs and this will cover their first loss of up to 10 percent. Experts firmly believe that the step will help improve the credit flow to the NBFCs who have been finding it difficult to tap funds from the public sector banks.

• The government would infuse Rs 70,000 crore capital into the state-run banks to improve credit flow to the NBFCs.

• Ushering in another massive change, it was announced that the RBI would now have complete regulatory powers over the housing finance companies (HFCs) and NBFCs – a power so far vested with the National Housing Bank. Many have welcomed the move as it brings banks, NBFCs and HFCs under a single regulator.

• The government also proposed to bring the auditors of NBFCs under the regulatory gaze of the RBI. One would have to closely watch how the RBI plans to use these powers to tighten asset-liability management and liquidity coverage ratios.

Let us also look at the other support measures provided by government

• Also, let’s not forget that the RBI stepped in to announce additional liquidity support by tweaking the banks’ bond-holding norms. It has said that the government securities of up to 1 per cent of the deposit base could now be considered high-quality assets under Basel III norms. This will help banks to borrow an additional Rs 1.34 trillion exclusively for buying pooled assets and giving loans to NBFCs.

• In addition to this, the government also announced that it would allow the foreign portfolio investors (FPIs) to trade investments in debt securities issued by Infrastructure Debt Fund–Non-Bank Finance Companies (IDF-NBFCs) to any local investor within the particular lock-in time frame. To incentivize the NBFCs to raise money through public issues, the government has also promised to do away with the Debenture Redemption Requirement (DRR) that used to reduce distributable profit.

• In another welcome proposal, interest income on bad or doubtful assets of NBFCs will be taxed on a receipt basis instead of the hitherto accrual basis. This move creates a level playing field for NBFCs with the scheduled commercial banks and other financial institutions.

Conclusion

India has around 10,000 plus NBFCs (as per RBI's Report on Trend and Progress of Banking in India 2017-18) that provides a crucial credit lifeline to the SME sector, which in turn provides employment to almost 40% of India’s workforce, next only to the agricultural sector. Their ability to reach credit to segments underserved by the banking sector makes them crucial to the growth of the economy. Though the budget announcements are a mixed bag of temporary and long-term relief measures, the budget is expected to provide a positive path for the NBFC sector.