Credit guarantee on debt for NBFCs, HFCs

Mumbai: The government has proposed to provide credit guarantee for the liquidity-struck shadow banking sector. Besides, the asset-wise eligibility criterion to be admitted under the debt recovery process for the non banking finance companies (NBFC) has also been reduced in the Budget announced on Saturday.

To address the liquidity constraints of NBFCs and housing finance companies (HFCs), the government proposed to set up a partial credit guarantee scheme for the sector after the Union Budget 2019-20. "To further this support of providing liquidity, a mechanism would be devised. The government will offer support by guaranteeing securities so floated," Sitharaman said.

Karthik Srinivasan, senior vice president and group head, financial sector ratings, Icra said, “Inclusion of more NBFCs under Sarfaesi Act 2002 and reduction in the minimum loan amount for recovery under Sarfaesi is a positive for NBFCs from a recovery perspective. However minimum loan amount for HFCs under Sarfaesi is much lower at Rs 1 lakh.”

“The proposed guarantee from GoI on securities issued under partial Credit Guarantee Scheme is aimed at improving the liquidity of NBFCs/ HFCs. Also, increased refinance from Nabard could support liquidity of agriculture-focused NB-FCs,” added Srinivasan.

Finance minister Nirmala Sitharaman in her budget speech also said, “the limit for NBFCs to be eligible for debt recovery under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act 2002 is proposed to be reduced from Rs 500 crore to asset size of Rs 100 crore or loan size from existing Rs 1 crore to Rs 50 lakh.” The move, according to experts, would help NBFCs in the recovery process of an even smaller loans.

To strengthen the cooperative banks, amendments to the Banking Regulation Act are proposed for increasing professionalism, enabling access to capital and improving governance and oversight for sound banking through the RBI.