HomeNewsThe Budget tries to tackle NBFC crisis

The Budget tries to tackle NBFC crisis

The Finance Minister Nirmala Sitharaman has realised the seriousness of Non Banking Finance Companies (NBFC) crisis and has felt that there is an urgent need to tackle the problem. The Budget 2019 which incidentally is her maiden budget, has some steps in this direction.

“Non-Banking Financial Companies (NBFCs) are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment,” she said in her Budget speech. The government wants to help those NBFCs that are fundamentally sound but are unable to get funds due to current fiasco following IL&FS fallout. According to FM such NBFCs should continue to get funding from banks and mutual funds without being unduly risk averse. As a measure to help these NBFCs to come out of the mess, Government will provide one time six months’ partial credit guarantee to Public Sector Banks for first loss of up to 10% for purchasing high-rated pooled assets of financially sound NBFCs, amounting to a total of Rupees one lakh crore during the current financial year.

The government also has realised that there is need to tighten the regulatory mechanism for NBFCs. Though the Reserve Bank of India (RBI) is the regulator for NBFCs, the apex bank has limited regulatory authority over NBFCs. Therefore, suitable proposals for strengthening the regulatory authority of RBI over NBFCs are being placed in the Finance Bill.

Further, NBFCs which do public placement of debt have to maintain a Debenture Redemption Reserve (DRR) and in addition, a special reserve as required by RBI, has also to be maintained. To allow NBFCs to raise funds in public issues, the requirement of creating a DRR, which is currently applicable for only public issues as private placements are exempt, will be done away with.

Solution to the liquidity crisis being faced by NBFCs was one of the major demands of associations representing the country’s realtors. “The liquidity crisis is the major factor preventing completion of over 5.6 lakh stalled units across top 7 cities. For this, the government could possibly increase the finance limits for NBFCs – a major source of funding for developers,” Property Consultant Anarock had said in its recent report.

NBFC is the major source of finance for Indian real estate sector. During the period from FY 2014 to FY 2018, Indian real estate sector has received more than Rs 4,000 billion of funds from banks and NBFCs. However, of late, real estate developers have been leaning more on NBFCs than on banks for their funding requirements. This is visible from the fact that while bank funding to developers was reported to post a 4.7% compounded annual growth rate (CAGR) over FY14-18, NBFCs reported a 45.3% CAGR. Further, NBFC share in real estate financing has increased from 24% at end-FY14 to 53% as at the end of March 2018.

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