Budget 2019: Liquidity support to banks does not rescue weak NBFCs

The Budget allowed more NBFCs to come to the bill discounting platform TreDs, potentially solving the funding need for MSMEs

Even as a flurry of measures to aid the non-banking financial companies (NBFC) was announced in the Union Budget for 2019-20, the firms themselves don’t see much value in the announcements.
 
The measures, executives of these firms said off the record, have come too late and do not address the fundamental question of liquidity for the sector.
 
There were five key measures announced in the Budget.
 
The main measure was partial credit guarantee scheme for highly rated pooled assets of up to Rs 1 trillion for financially sound NBFCs. The first loss of 10 per cent was covered for the first six months.
 
The Reserve Bank of India (RBI) immediately came up with a liquidity line of Rs 1.34 trillion that can be utilised by banks to lend to the NBFC segment.  Besides, the Budget removed the Debenture Redemption Reserve (DRR) for public issuance of non-convertible debentures, passed on the regulatory supervision of housing finance companies (HFCs) to the Reserve Bank of India (RBI), from National Housing Board (NHB). It also gave a tax break to NBFCs stating that tax on their non-performing loans would be computed on a realised basis, and tax would not be deducted at source on the interest payments received.
 
The Budget provided extra budgetary allocation of Rs 20,000 crore under Prime Minister Niwas Yojana for Urban dwellings and gave a strong push for other housing schemes as well.
 
The Budget also allowed more NBFCs to come to the bill discounting platform TreDs, potentially solving the funding need for micro, small and medium enterprises, while it allowed foreign institutional investors to transfer their investment in infrastructure debt funds to any domestic investors within specified lock-in period.
 
However, none of these improve the liquidity in the system for NBFCs, executives said.
 
According to a senior official of a large NBFC, the liquidity lines announced in the Budget do not really help non-bank firms with a lower rating. These firms are surviving by securitising their good assets.
 
“There are always ready buyers for our good assets. Without any government support, banks are ready to lap it up,” said the official, requesting anonymity.
 
“This measure would have infused some confidence in the system if it was done in September or October. But it is too late and NBFCs and HFCs that have been downgraded because of stress cannot take advantage of this. Those with still good rating can head to the bond market to raise funds. But where is the bond market for lower rated firms,” said the executive.
 
According to Finance Industry Development Council, a lobby group of finance companies the measures announced in the Budget may not address the liquidity issue substantially.
 
“But the fact that the government shall offer the First Loss guarantee on the NBFC pool of assets, indicates the importance and confidence that the government has in the sector,” said Raman Aggarwal, chairman, FIDC.
 
However, bankers maintain that the problems of NBFCs have to be dealt with internally, and the government or the RBI won’t intervene for fear of creating a moral hazard.
 
“These are good steps. The RBI is taking care of liquidity and to build the confidence in market, the government is going to support pool purchase (of highly rated assets). At the individual entity level, the lender and entity have to sort out the arrangements,” said Rajnish Kumar, chairman, State Bank of India (SBI).
 
The SBI is a major buyer of pooled asset of NBFCs and had earmarked Rs 45,000 crore in the last fiscal for this purpose. However, the target has not been met by the bank.
 
“Last year, we could not complete the target. We have to look at the availability and the conditions that will guide the scheme. A bank can firm up how much and what to purchase after the details come. Our emphasis has been on a priority sector like housing,” Kumar said.

 
According to George Alexander Muthoot, managing director of Muthoot Finance, welcomed the government’s focus on affordable housing, which raised the interest deduction on loans taken for houses up to Rs 45 lakh by Rs 1.5 lakh to Rs 3.5 lakh.
 
“In order to accelerate the goal of ‘Housing for All’, the tax holiday provided to developers will boost the affordable housing sector,” Muthoot said.
 
However, other NBFC industry executives said unless liquidity is improved the HFCs cannot give loans to the housing sector. Banks are unlikely to serve all beneficiaries under PMAY. And so, it is important that liquidity in NBFCs should be perked up first.
 
The decision to remove DRR and allowing tax deductibility will result in level-playing field and bring down the cost of operations for the sector, FIDC said.
 
“Amendment of Factoring Regulation Act and allowing all NBFCs will channelise substantial amount of working capital to MSME sector,” the FIDC said in its statement.