Budget steps on NBFCs to boost consumption, says FM Nirmala Sitharaman

A day after presenting her maiden Budget, Finance Minister Nirmala Sitharaman said the crisis in non-banking financial companies (NBFCs) had bottomed out and that the proposed steps for the sector would help boost consumption.

“Largely, it (NBFC crisis) has reached a peak in terms of challenges that they are facing. The problem probably is not over yet, but it can only plateau rather than worsen. The deteriorating situation has reached its bottom. If anything, it can only improve now,” she said. The government, along with the RBI, would closely monitor the situation to ensure the sector comes out of the woods, the minister added.

“Consumption-related support that NBFCs have been giving, whether it is for purchase of vehicles, expansion of business, or buying homes, that will be back on course,” Sitharaman told reporters on Saturday.

To contain the stress in the sector, the Budget proposed that public sector banks would purchase high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 trillion during the current financial year. For this, the government will provide a one-time six months’ partial credit guarantee to public sector banks for their first loss of up to 10 per cent.

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. In addition, a special reserve as required by the RBI has also to be maintained. In an effort to improve the regulatory oversight, the government also proposed bringing back housing finance companies under the Reserve Bank of India (RBI) from the National Housing Bank (NHB) fold.

In a surprise move, the Budget has lowered the fiscal deficit target to 3.3 per cent of gross domestic product (GDP) from 3.4 per cent in the Interim Budget. Analysts and policy watchers were expecting either the same target as in the Interim Budget or a slight fiscal expansion.

 “There is a law under Fiscal Responsibility and Budget Management (FRBM), where we have committed ourselves to fiscal consolidation. We have a narrative of fiscal relaxation, and I would happily join the debate on our fixation with a 3 per cent target. But even now it is a debate. It has not come to the extent of changing the FRBM law of allowing fiscal relaxation yet,” Sitharaman said. 

The FM admitted that she had certain constraints while preparing her first budget.” I had two bookends given for me. On one end was the Interim Budget and at the other was the 14th Finance Commission period. Given that, the best thing I could do was give the numbers that I gave,” she said.

On the proposal to bring down the government stake to below 51 per cent in PSUs, Sitharaman said it would help increase retail participation and deepen the market. It would be designed in such a fashion that government, directly or indirectly through its state-owned entities, may hold 51 per cent stake, while the public characteristic is maintained, she said.

The government has decided to modify the policy of retaining 51 per cent, she said, adding that the government's 51 per cent shareholding would include stakes held by state-owned institutions. If the government stake in a company is 51 per cent and another state-owned entity has 10 per cent stake in that, there is headroom to dilute the 10 per cent stake even when the 51 per cent stake is retained, the minister explained.