In the second budget of the second term of the Prime Minister Narendra Modi-led government, Finance Minister Nirmala Sitharaman has had a tough job of striking a balance between meeting fiscal deficit targets and shaking up economic growth. Though the budget has primarily focused on areas like agriculture, infrastructure, individual taxpayers, foreign investors and domestic manufacturing, it has also announced reforms to boost liquidity for the NBFC sector and enable it to provide extra support to other sectors that can drive growth.
Here are the main reforms announced in Budget 2020 for the NBFC sector.
Reform 1: Reduced Limits for NBFCs under SARFAESI Act
Giving more power to NBFCs, the budget has reduced the asset size of NBFCs from Rs 500 crore to 100 crores to become eligible for debt recovery under the SARFAESI Act.
Also, NBFCs can now pursue debt recovery under the SARFAESI Act for loans starting at Rs 50 lakh, which was earlier Rs 1 crore.
Impact: This will help check the rise of Non Performing Assets ratio of NBFCs ( GNPA has increased to 6.3% in September 2019 from 6.1% in March 2019), and strengthen the recovery process.
In the long term, it will also help NBFCs to comply with minimum capital risk adequacy ratio (CRAR) mandated by RBI. The CRAR of the NBFC sector stood at 19.5% at the end of September 2019 and has been falling for the last 5 years.
Reform 2: Sovereign Credit Guarantee for the NBFC
Nirmala Sitharaman’s 2019 budget had formulated a partial credit guarantee scheme to tide over the liquidity crisis in the NBFC sector. Her 2020-21 budget further supports this by guaranteeing securities on stressed assets of NBFCs.
Impact: As the NBFCs’ stressed assets will now be backed by government-issued bonds, banks will become less risk-averse towards lending to NBFCs. This will help improve the current liquidity crunch in the system and boost credit growth.
The system is similar to the US TARP (Troubled Asset Relief Program), a program that was launched in 2008 to prevent the trickle-down effect in the economy and maintain liquidity.
Reform 3: Invoice Financing by NBFCs
Another move that is expected to massively help the micro, small and medium sector is the proposal to make amendments in the Factor Regulation Act 2011, which will enable NBFCs to extend invoice financing to MSMEs through TReDS.
Impact: This move will greatly reduce one of the top pain points of MSMEs - timely access to credit and working capital. With greater accessibility to capital, MSMEs will be able to explore a lot more opportunities, thus gaining financial stability. It will also add a new source of business for NBFCs, thus helping the sector control negative credit growth.
Other Major Takeaways from the Budget
In order to meet an ambitious target of making India a $5-trillion economy by 2024, the budget has announced these key reforms that is intended to put the spark back in the faltering economy.
Investment up to a tune of Rs 2.83 lakh crore has been planned for the rural economy while Rs 1.7 lakh crore has been announced for infrastructure development in the country.
In order to boost Agri finance, Sitharaman has proposed to expand the NABARD refinance scheme to cover NBFCs and cooperatives that are active in the agriculture sector. The finance minister has set agriculture credit availability at Rs 15 lakh crore for FY 2021.
The budget also proposes an optional new personal tax structure with tax cuts of 5 to 10 percent across various income levels. The new tax structure is aimed at simplifying income tax calculations for individuals.
Budget 2020 has abolished Dividend Distribution Tax (DDT) aimed at benefiting all tax players in the country. Dividend income from shares and mutual funds will now become taxable at the recipient front, as per their respective income-tax slabs.
An extension of Rs 1.5 lakh interest benefit on affordable housing loans, by another year to March 2021, has also been proposed.
The government has raised healthcare budget allocation to Rs 69,000 crore, proposing to build hospitals in Tier II and Tier III cities under the PPP model. New medical colleges and skill development programs have also been proposed to improve the supply of medical practitioners.
The government has also widened the fiscal deficit to 3.8% of GDP in the current year against the target of 3.3%. Fiscal deficit for FY 21 is pegged at 3.5% of GDP, which will give enough room for economic growth.
The proposals made in the budget for the NBFC sector can be termed as one of the most balanced approach towards addressing the current situation of the NBFC sector. The reduction in limits under SARFAESI Act and sovereign credit guarantee for stressed assets will help improve the asset quality and CRAR, while invoice financing will help bring in more business from the MSME sector.
Pursuing a broad theme of wealth creation, the Union budget of 2020 ensures more social spending and higher disposable income in the hands of the middle class. This move is aimed at reviving the consumption cycle, improving credit growth and reversing the effects of the slowdown in the economy.