Budget 2019: Government Announces Steps To Revive Shadow Banks

In order to ease the ongoing stress in the country's non-banking finance companies (NBFCs), Finance Minister Nirmala Sitharaman on Friday said that NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse. In her first Budget speech, Ms Sitharaman said, "For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of 1 lakh crore during the current financial year, government will provide one time six months' partial credit guarantee to public sector banks for first loss of up to 10 per cent."

NBFCs, she said, are playing a very important role in sustaining the consumption demand as well as capital formation in small and medium industries. She added that appropriate proposals for strengthening the regulatory authority of Reserve Bank of India (RBI) over NBFCs are also being placed in the Finance Bill.

However, NBFCs which do public placement of debt also have to maintain a Debenture Redemption Reserve (DRR). In addition, a special reserve as required by RBI also needs 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," Ms Sitharaman said while presenting the Budget speech.

Announcing measures related to capital markets, Ms Sitharaman said investments by FIIs (Foreign Institutional Investors) and FPIs (Foreign Portfolio Investors) in debt securities would be allowed to be transferred and sold to domestic investors in a timely manner and also proposed FPI investment in debt securities issued by NBFCs.

"It is proposed to permit investments made by FIIs/FPIs in debt securities issued by Infrastructure Debt Fund - Non-Bank Finance Companies (IDF-NBFCs) to be transferred/sold to any domestic investor within the specified lock-in period," she said.