To restore confidence in the NBFC sector, the government will incentivise banks to lending to the NBFC sector, guaranteeing a small portion of the debt
The shadow banking housing companies (HFCs) will now come under greater scrutiny with the government handing over their regulation to the Reserve Bank of India (RBI). Until now they were regulated by the National Housing Bank (NHB).
To restore confidence in the NBFC sector, the government will incentivise banks to lending to the NBFC sector, guaranteeing a small portion of the debt. Banks can borrow up to Rs 1 lakh crore from RBI by pledging their excess government bonds. Losses up to 10% will be reimbursed to the banks in the first six months for assets bought through this route.
"NBFCs play an important role in capital formation and the government will provide a one-time partial credit guarantee to PSBs to buy high-rated pooled assets of financially sound NBFCs," Finance Minister Nirmala Sitharaman said in her Budget speech.
However, bankers are not amused. "Short-term asset pool or loans of shorter maturities will benefit. Banks will buy only short-term securities as there is a risk cover. It will help improve the liquidity crisis in the market," said a senior banker.
To provide liquidity support, the Foreign Institutional Investors (FIIs) and the Foreign Portfolio Investors (FPIs) will also be allowed to invest in debt papers of NBFCs.
"This Budget reinforces the important role NBFCs and HFCs play in credit delivery. The capitalisation boost for banks, credit guarantee for high-rated asset pools and easing of the reserve requirements in public issue of debentures will further enable the flow of liquidity to well-performing NBFCs with strong balance sheets," said Rajiv Sabharwal, MD & CEO, Tata Capital.
To bring parity between the NBFCs and banks, all the deposit-taking and systemically important non-deposit taking NBFCs can now pay tax in the year they receive interest for certain bad or doubtful debts. Government has also allowed NBFCs to raise funds in public issues and they do not have to maintain a debenture redemption reserve.
"Banks are not required to pay tax on the interest accrued in bad or doubtful debt until the interest is actually realised. Now with the same treatment extended to NBFCs, we have a level playing field," said VP Nandakumar, MD & CEO, Manappuram Finance Ltd.
"Though NBFCs are regulated by the RBI, it has limited authority over the sector. Therefore, proposals for strengthening the regulatory authority of RBI over NBFCs are being proposed," Sitharaman said.
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