Impact of Union Budget on Non-Banking Finance Companies

NBFCs address to the different financial needs of bank excluded customers. They present innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) according to their business necessities. NBFCs provide a fillip to transportation, job generation, wealth creation, bank credit in rural sections to assist financially weaker sections of the community. Some of the emergency services given by NBFCs include financial assistance and guidance in the matters pertaining to insurance.

Recently Nirmala Sitharaman announced Union Budget 2019-20. In this budget, she has given great focus on Non-banking financial companies.  She said that the government will lend a helping hand to top-rated entities in order to alleviate the ongoing burden on India’s non-banking finance companies

The Economic Survey has released just a day before the Budget, this survey has shown that NBFCs faced severe liquidity crunch as mutual funds stopped refinancing the loans of NBFCs. The survey warned that if the impact of stress in the NBFC sector spills over to this year as well, it may lead to lower credit off take from NBFCs, which may depress an increase in consumption spending.

“Non-banking financial companies play a significant role in the capital generation, and the government will provide a one-time partial credit guarantee to PSBs to obtain high-rated pooled assets of financially sound NBFCs,” she added.

Presently, NBFCs are efficiently driving the market in nurturing consumption demand and capital formation in the small and medium industrial segment. The goal of new implementations related to Non-banking Financial Corporation is to endorse these corporations to receive regular funding from banks and mutual funds without being unduly risk-averse. As per the provision, the government will grant a partial guarantee of 1 lack crore to state-run banks for acquiring consolidated high-rated pooled assets of financially-established Non-Banking Finance Companies. This will incorporate their first loss of up to 10 percent. The ultimate goal of this financial assistance is to enhance liquidity access for the sector.

Under the budget, Sitharaman also proposed permitting investments made by foreign institutional and portfolio investors in debt securities issued by Infrastructure Debt Fund-NBFC to be transferred or sold to any domestic investor within the specified lock-in period. Moreover many new rules and changes have been brought in this budget specifically for NBFCs; few of them are given below:

  • The government has allowed interest on certain bad or doubtful debts to be taxed in the year in which the interest is actually received to handle important NBFCs systemically like banks.
  • Debenture Redemption Reserve (DRR), which is practiced to build funds in public issues and is applicable for only public sector banks will also make available for Non-banking Finance Corporations. This decision will allow all NBFCs, even those not registered as NBFCs-Factor, to directly participate on the TReDS platform.
  • This Budget reinforces the crucial role that NBFC and HFCs play in credit delivery. This capitalization advance for banks, credit guarantee for high rated asset pools and easing of the reserve elements in public issue of debentures will further permit the course of liquidity to grow NBFCs having strong balance sheets.
  • Now, foreign institutional investors and foreign portfolio investors got permission to invest in debt securities by the shadow banks. This will allow the NBFC sector to raise more funds and fight with the liquidity crunch.
  • The proposal to let FIIs and FPIs invest in debt securities issued by NBFC would provide the required boost of capital to a sector now starving of capital; an important prop to several sectors, particularly, real estate and automobile, which are reeling for lack of finance to buyers.

Impact of Budget on RBI and NBFCs

Apart from different modifications and innovations, the budget has also made changes in the regulatory body of NBFCs. Reserve Bank of India (RBI) is the regulating body for NBFCs, and few decisions are taken to strengthen its authority over the sector.

The amendments proposed to the RBI Act 1934 holds the powers relating to resolution of NBFCs. As per the amendments, RBI can draft schemes for amalgamation, reconstruction or splitting up of the viable and nonviable businesses of the NBFC to assure the continuance of critical activities. The regulator may also establish “bridge institutions” that is a temporary arrangement to facilitate the progression of NBFC’s business.

With the new rule, RBI will get the power to remove a director of an NBFC, excluding those controlled by the Indian government. All NBFCs, mainly housing finance companies are facing cash crunch since the IL&FS debt crisis in September 2019. The crisis has badly impacted the business growth of these companies. It is expected that the supervision of RBI will bring better opportunities for housing finance companies.

Apart from numerous advantages, the new budget has also come up with some burden. After this new rule and regulations, NBFCs that do the public placement of debt need to maintain a DRR and besides a special reserve as needed by the RBI, has also to be maintained.

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