The Union Budget will partially guarantee high-quality pooled assets of non-banking financial companies (NBFCs) and the Reserve Bank of India (RBI) has opened an indirect liquidity window for the sector to aid banks to give funds to the sector, which is on the verge of collapse.
NBFCs play “an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment”, Finance Minister Nirmala Sitharaman said in her maiden Budget speech.
Therefore, NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds, she said.
The FM proposed the government encourage public sector banks to buy high-rated pooled assets of up to Rs 1 trillion of financially sound NBFCs, for which the government will provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent. The banks can buy assets of NBFCs up to Rs 1 trillion during FY20.
Banks have been buying assets of NBFCs via securitisation to help liquidity-starved ones to remain
The RBI chipped in by tweaking banks’ bond-holding norms, and said 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 allow banks to borrow an additional Rs 1.34 trillion exclusively for buying such pooled assets and giving loans to NBFCs.
However, experts say it is unlikely that mutual funds will start increasing their allocations towards NBFCs even though the Budget proposes certain steps to ease the stress.
“MFs are likely to stay risk-averse as these are pass-through products and investors will have to bear the brunt if risky bets don't pay off in the current environment,” said a fund manager, requesting anonymity.
RBI powers over NBFCs
The Budget has given the RBI sweeping powers over housing finance companies (HFCs) and NBFCs, including the power to change the management at these firms. The Budget has relieved the National Housing Bank (NHB) of its regulatory powers over HFCs and handed them back to the RBI.
This is a good move, considering that banks, NBFCs and HFCs will now come under a single regulator, said Kartik Srinivansan, senior vice-president, ICRA.
The government proposed that the RBI could remove any director and supersede the board of directors of NBFCs (for five years) if the affairs of the NBFC are conducted in a manner detrimental to the interests of creditors or depositors, or financial stability.
The government has also proposed to bring the auditors of NBFCs under the regulatory gaze of the RBI. Also, it has been proposed that the RBI, if it deems fit, can amalgamate one NBFC with another, reconstruct an NBFC, or split an NBFC into various units.
In another move that is bound to help NBFCs in raising money, the government has allowed the foreign portfolio investors (FPIs) to sell investments in debt securities issued by Infrastructure Debt Fund–Non-Bank Finance Companies (IDF-NBFCs) to any domestic investor within the specified lock-in period. It is one of measures proposed to enhance the sources of capital for infrastructure financing.
To encourage NBFCs to raise money through public issues, the government has promised to do away with the Debenture Redemption Requirement (DRR). NBFCs which want to raise funds through public issues have to maintain a DRR and a special reserve as prescribed by the RBI.
"The exemption over the debenture redemption reserve needs to be seen in conjunction with the one-time partial credit guarantee the government is giving state-owned banks. The move is in the right direction as the intent is to stabilise the system first so that there is no build-up of further stress," said Dwijendra Srivastava, chief investment officer-fixed income, Sundaram MF.
Moreover, the finance minister has sought to create a level playing field for deposit-taking and non-deposit taking systemically important NBFCs with the scheduled commercial banks and other financial institutions. Interest income on bad or doubtful assets of NBFCs, so far, has been taxed on an accrual basis. But, in the Union Budget, it has been proposed to charge tax on interest income from doubtful assets or bad assets on receipt basis.
“We have been requesting income tax deductions for bad loan provisioning for long. Now NBFCs will be at par with banks, housing finance companies and other financial institutions. NBFCs will now get good liquidity soon,” said Mahesh Thakkar, director general, Finance Industry Development Council.
Inputs by Jash Kriplani