Budget: Govt proposes credit guarantee on debt in crisis-hit NBFCs, HFCs

The government has proposed to provide credit guarantee for the NBFC sector that has been facing liquidity crisis since the burst of the IL&FS scam nearly one-and-a-half years ago.

Besides, the asset-wise eligibility criterion to be admitted under the debt recovery process has been reduced, according to Budget documents.

To address the liquidity constraints of non-banking financial companies (NBFCs) and housing finance companies (HFCs), the government proposed to set up a partial credit guarantee scheme for the sector after the Union Budget 2019-20.

"To further this support of providing liquidity, a mechanism would be devised. The government will offer support by guaranteeing securities so floated," the Budget documents said.

Pawan Singh, managing director and CEO, PTC India Financial Services, said, "The announcement of the government's intent to guarantee securities floated to provide liquidity for NBFCs is expected to help in tiding over the current liquidity crunch."

The Budget also stated that the limit for NBFCs to be eligible for debt recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, is proposed to be reduced from Rs 500 crore to asset size of Rs 100 crore or loan size from the existing Rs 1 crore to Rs 50 lakh.

Tata Capital MD and CEO Rajiv Sabharwal said positive measures have been taken to boost the NBFC and HFC sector. "Enhancement of FPI limits in corporate bonds, abolishing of the dividend distribution tax regime and date extension of the partial credit guarantee scheme will increase flow of liquidity."

Umesh Revankar, MD and CEO, Shriram Transport Finance, said that under the SARFAESI Act, the debt recovery has reduced from Rs 1 crore to Rs 50 lakh is one step ahead. "We would still expect it to be on par with banks which currently stand at Rs 1 lakh."

Muthoot Finance MD George Alexander Muthoot said, "The Budget 2020 plays the balancing act very well. The enhancement of the partial credit guarantee scheme for NBFCs is encouraging."

The IL&FS crisis following debt defaults in 2018 had led to a contagion in the domestic NBFCs sector, followed by DHFL defaults.

The payment defaults emanating from them resulted in a chain reaction, adversely affecting the market price of their commercial papers, panic sale by investors in debt mutual funds.

The Economic Survey 2019-20 on Friday introduced an early-warning detection 'Health Score' system for NBFCs and HFCs and help assess the impending liquidity problems facing the companies in the sectors.