Mumbai: The government announced a host of credit and tax measures in the Union Budget 2019-20 to ease the stress in India’s non-banking finance companies (NBFCs) and prevent a full-blown crisis. The Budget announced that to enhance liquidity access for the sector, the government will provide one-time six-month partial guarantee of Rs one lakh crore to state-run banks for purchasing consolidated high-rated pooled assets of financially-sound NBFCs.
This will cover their first loss of up to 10 per cent. In addition, the government will permit 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. In order to treat systemically important NBFCs on par with banks, the government allowed interest on certain bad or doubtful debts to be offered to tax in the year in which the interest is actually received.
Also, to allow NBFCs to raise funds in public issues, the requirement of creating a Debenture Redemption Reserve (DRR), which is currently applicable for only public issues as private placements are exempt, has been done away with thereby increasing liquidity in the system.
The government will take steps to allow all NBFCs, even those not registered as NBFCs-Factor, to directly participate on the TreDS platform, which would open a new avenue of financing for them said experts. And most importantly, the government announced greater powers to the Reserve Bank of India (RBI) to regulate NBFCs and proposed to bring housing finance companies (HFCs) under the purview of RBI for better supervision. These measures according to experts would aid investors to repose faith in the sector.
Nirmala Sitharaman, finance minister while presenting the first Budget of Modi government in the Lok Sabha on Friday said, “NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk-averse.”
Soon after the Budget announcement for NBFC sector, the RBI announced that it will provide a required liquidity backstop to the banks against their excess G-sec holdings. The move will release additional liquidity worth '1.34 lakh crore to banks, which can be used for on-lending to shadow banking companies, which have been fund-starved since last September after industry major IL&FS went bankrupt. Banks generally hold much more than the mandated 19 per cent SLR (statutory liquidity ratio) by holding more government securities which on average is around 23 per cent for the system.
“To provide a level playing field, it is proposed that interest on bad or doubtful debts in the case of deposit-taking NBFC and systemically important non deposit-taking NBFC shall be charged to tax on receipt basis. It is also proposed to provide that deduction of such interest shall be allowed to the payer on actual payment,” said Sitharaman.
The Finance Industry Development Council (FIDC) a representative body of the assets and loan financing NBFCs hailed the move. Mahesh Thakkar, director general, FIDC said, “The decision to remove Debenture Redemption Reserve on public bonds issued by NBFCs and allowing tax deductibility of the Provisions made u/s Section 43D will result in level-playing field and bringing down the cost of operations for the sector.”
