NBFCs occupy an important position in the Indian economy. For borrowers, NBFCs are often the lender of last resort when banks deny loans. NBFCs are an important source of extra returns for mutual funds, who have the appetite to invest in debt securities of NBFCs. With the NBFC sector in trouble, finance minister Nirmala Sitharaman in her maiden Budget tried to provide some relief to this embattled sector.
The importance of NBFCs can be gauged from the fact that the word 'NBFC' was mentioned by the finance minister 18 times in her Budget speech. She has proposed investments made by FIIs/FPIs in debt securities issued by the Infrastructure Debt Fund – Non-Bank Finance Companies (IDF-NBFCs) to be transferred/sold to any domestic investor within the specified lock-in period.
Next, for purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year, the government will provide a one-time six months' partial credit guarantee to Public Sector Banks for first loss of up to 10 per cent.
Ashwani Bhatia, managing director and CEO, SBI Mutual Fund, says that this facility along with the RBI decision to provide funding against excess SLR to banks should reduce some of the liquidity pressures facing the NBFC/HFC sectors.
The credit guarantee provided by the government will further open up the liquidity line for fundamentally sound NBFCs, says George Alexander Muthoot, MD, Muthoot Finance. Initiatives to provide parity in tax treatments versus scheduled banks with respect to interest and deposit taking have also been announced.
Ajay Piramal, chairman of the Piramal Group, said: “We are happy to see the government signal its confidence for a well-financed, robust NBFC sector through the one-time six-month partial credit guarantee. This development would be an important milestone for the NBFC sector that is crucial for the sustained growth of the economy.”
Dhiraj Relli, managing director and CEO, HDFC Securities, feels that the one-time six-month partial credit guarantee to buy pooled assets of sound NBFCs could relieve some pain for NBFCs but one will have to “look up for companies that would qualify” for this. This seems to be important because at this moment there is some lack of clarity about eligible NBFCs.
Karthik Srinivasan, senior VP and Group Head - Financial Sector Ratings at ICRA, is of the opinion that an early implementation and clarity on the contours of the proposed partial credit enhancement by the government for pools bought by public sector banks from NBFCs would aid the liquidity flow to the currently beleaguered sector.
The finance minister also proposed to give the Reserve Bank of India (RBI) more power to regulate NBFCs. “The RBI is the regulator for NBFCs. However, the RBI has limited regulatory authority over NBFCs. Appropriate proposals for strengthening the regulatory authority of the RBI over NBFCs are being placed in the Finance Bill,” Sitharaman said.
Efficient and conducive regulation of the housing sector is extremely important in our context. The National Housing Bank (NHB), besides being the refinancer and lender, is also the regulator of the housing finance sector. “This gives a somewhat conflicting and difficult mandate to NHB. I am proposing to return the regulatory authority over the housing finance sector from NHB to RBI. Necessary proposals have been placed in the Finance Bill,” the finance minister said.
Providing more powers to the RBI over NBFC and shifting the regulatory powers from NHB to RBI for housing finance companies (HFCs) are measures that were badly required, says Relli of HDFC Securities. The return of regulatory and supervisory powers of HFCs to the RBI will lead to an alignment of regulations, pointed out Rakesh Singh, CEO – Aditya Birla Finance.
NBFCs, which do public placement of debt have to maintain a Debenture Redemption Reserve (DRR) and in addition, a special reserve, as required by the RBI, has also to be maintained. To allow NBFCs to raise funds in public issues, the finance minister said the requirement of creating a DRR, which is currently applicable for only public issues as private placements are exempt, will be done away with.