The non-banking finance companies that are facing a crisis of confidence saw a slew of measures from the budget to restore investors’ confidence in the sector.
The Reserve Bank of India also stepped in as it announced additional liquidity support to the sector through banks to the tune of ₹1.34 lakh crore, after the Finance Minister concluded her budget speech.
The government has decided to give more powers to the central bank to regulate the non-banking finance companies and the regulator will have the power to supersede the board of the shadow banks, apart from those owned by the government.
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According to the Finance Bill, if the RBI is satisfied that in the ‘public interest’ or to prevent the affairs of an NBFC being conducted in a manner detrimental to the interest of the depositors or creditors, the board can be superseded for a maximum five years and an administrator can be appointed.
The RBI will also regulate housing finance companies which are under the purview of the National Housing Bank.
“The NHB, besides being the refinancer and lender, is also regulator of the housing finance sector. This gives a somewhat conflicting and difficult mandate to NHB. I am proposing to return the regulation authority over the housing finance sector from NHB to RBI,” Ms. Sitharaman said.
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“Shifting regulation of HFCs from NHB to RBI is an important step to give confidence to domestic and foreign investors,” said Deo Shankar Tripathi, MD & CEO of Aadhar Housing Finance Ltd.
Following the budget announcement that for purchase of high-rated pooled assets of financially sound NBFCs, of not more than ₹1 lakh crore, the government will provide one-time six months’ partial credit guarantee to public sector banks for first loss of up to 10%, the RBI has decided to provide required liquidity to the banks against their excess G-sec holdings.
“The partial credit guarantee from GoI would help NBFCs raise funds from PSU banks, thus providing the funding support to NBFC/HFCs. However, with the guarantee being available for only six months, the preference could be for relatively shorter-term retail assets,” said Karthik Srinivasan, Group Head - Financial Sector Ratings, ICRA Ltd.
The central bank has also decided to frontload the Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) which will enable the banks to avail additional liquidity of ₹1.34 lakh crore.
The budget also proposed that foreign institutional investors and foreign portfolio investors will be allowed to invest in debt securities by shadow banks, which help NBFCs to raise more funds.
The budget also provided some tax incentives to the NBFCs by treating them on par with banks.
The interest on bad loans for deposit-taking NBFC and systemically important non deposit-taking NBFC will now be charged to tax on receipt basis.
In addition, the tax incentives for loans on e-vehicles is expected support sales and be a positive for vehicle financing NBFCs.