Budget 2019: Govt to provide credit guarantee to PSBs to buy NBFC assets

New Delhi: Non-banking financial companies (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 the Union Budget 2019-20 on Friday.

NBFCs are playing an important role in sustaining consumption demand as well as capital formation in small and medium industrial segment, she said in her maiden Budget Speech in Parliament.

 "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, government will provide one time six months' partial credit guarantee to public sector banks (PSBs) for first loss of up to 10 per cent," Sitharaman said.

Also, even as NBFCs are regulated by the RBI, it has limited authority over the sector, therefore appropriate proposals for strengthening the regulatory authority of RBI over NBFCs are being placed in the Finance Bill, the minister said.

However, she said NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse.

The NBFC sector is currently undergoing a liquidity hurdle with a spate of defaults of companies such as IL&FS along with its group companies and DHFL that started unfolding since September 2018.

Among others, Sitharaman said the government will allow NBFCs to raise funds in public issues, and the requirement of creating a debenture redemption reserve (DRR), which is currently applicable for only public issues as private placements are exempt, will be done away with.

As of now, NBFCs that do public placement of debt have to maintain a DRR and in addition, a special reserve as required by the RBI, has also to be maintained.

"To bring more participants, especially NBFCs, not registered as NBFCs-Factor, on the TReDS platform, amendment in the Factoring Regulation Act, 2011 is necessary and steps will be taken to allow all NBFCs to directly participate on the TReDS platform," she said.

Sitharaman also said efficient and conducive regulation of the housing sector is important in India's context. Currently, the National Housing Bank (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. Necessary proposals have been placed in the Finance Bill," the minister said.