Amid Ongoing Liquidity Crisis, Union Budget 2019 is a Sight of Relief for NBFCs
The minister acknowledged the efforts of the NBFCs, who play an important role in sustaining consumption demand as well as capital formation among the MSMEs
It’s been months since the Non-Banking Financial Companies (NBFCs) in India were facing issues with special thanks to the on-going liquidity crisis. But the Union Budget 2019 bought in some good news for the industry.
Nirmala Sitharaman, the first full-time women finance minister of the country, while presenting her maiden budget acknowledged the efforts of the NBFCs, who play an important role in sustaining consumption demand as well as capital formation among the MSMEs.
Sitharaman went on to announce key initiatives to support NBFCs. Here are some as follows:
Steady Flow of Funds
In light of the ongoing liquidity crisis, several NBFCs complained that they couldn’t raise funds from banks and mutual funds. However, Sitharaman believes that fundamentally sound NBFCs should continue to gets funds without being unduly risk-averse.
“For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of INR 1 lakh crore during the current financial year, the government will provide one time six months' partial credit guarantee to Public Sector Banks for first loss of up to 10%, ” she announced.
Additionally, to raise funds in public issues, NBFCs are no longer required to create Debenture Redemption Reserve (DRR).
“NBFCs which do the 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,” she added.
Sameer Aggarwal, Founder & CEO, RevFin says credit provided by NBFCs drives growth in consumption and hence the GDP. Liquidity in the NBFC sector has been constrained for several months now. The Finance Minister has tried to resolve this.
“Recapitalization of banks to the tune of INR. 70,000 crores. As banks are a major source of funding for NBFCs, the capital infusion in banks will provide much-needed liquidity to NBFCs. Second, the government would provide partial loan guarantees on 10 per cent of losses up to Rs. 1lakh crores on high-rated pooled assets. This guarantee will provide banks with the required safety net to infuse liquidity into the NBFC sector,” he added.
Strengthening RBI’s Authority
Even though, Reserve Bank of India (RBI) is the regulator for NBFCs, the apex bank’s authority is limited to a certain extent.
Having said, Sitharaman said that appropriate proposals for strengthening the regulatory authority of RBI over NBFCs are being placed in the Finance Bill.
Access to TReDs platform
In other to get more action on TReDs platform, the finance minister also announced the ministry to amend the Factoring Regulation Act, 2011.
This allows all NBFCs to discount invoice on TReDs platform. The move will also several MSMEs to raise funds.
“Allowing all NBFCs to participate in TREDS is a great move for the sector, this will greatly help several MSMEs in accessing supply chain finance at a competitive cost and great ease,” Manish Lunia, Co-founder, FlexiLoans.com shared.
Furthermore, in the case of income from interest on bad or doubtful debts, NBFCs are charged tax on an accrual basis. However, in case of other financial institutions such as the scheduled banks, public financial institutions, cooperative banks, etc, tax is charged on receipt basis.
With Budget 2019, Sitharaman has now extended this facility.
“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,” the finance minister noted.
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