Budget 2019: Government, RBI Step In With Measures To Boost Liquidity For NBFCs

Government to provide short-term partial credit guarantee to high-rated pooled assets of NBFCs.

A woman signs a register to receive a loan during a meeting organized by SKS Microfinance Ltd. in Sadasivpet, India. (Photographer: Adeel Halim/Bloomberg)
A woman signs a register to receive a loan during a meeting organized by SKS Microfinance Ltd. in Sadasivpet, India. (Photographer: Adeel Halim/Bloomberg)

The government and the Reserve Bank of India have stepped in to support India’s strained non-banking financial companies by assuring increased liquidity and a provision for a partial guarantee to help these firms sell loans.

Delivering the Union Budget speech, Finance Minister Nirmala Sitharaman explained:

  • The government will provide a one-time six-month partial credit guarantee to public sector banks for first loss of up to 10 percent on high-rated pooled assets of NBFCs.
  • This guarantee would be provided for a total amount of Rs 1 lakh crore during the current financial year.

The measures announced will allow NBFCs to sell their assets more easily and enable PSU banks to buy them. Inability to raise funds from the market meant that NBFCs have been completely reliant on securitisation of their existing loan pools. By providing banks some support in absorbing losses that may emerge from such loan purchases, the government will enable NBFCs to raise liquidity.

When an NBFC securitises its assets for sale to third-party investors, the government will provide a guarantee for the first six months, said Raman Aggarwal, chairman of FIDC, a self regulatory organisation for NBFCs. “The move is a measure to boost liquidity by encouraging banks to partake in such transactions.”

Along with a partial guarantee to pooled assets, measures such as exemption from creating a debenture redemption reserve and providing access to the TREDs platforms are expected to help ease liquidity crunch in the sector, Aggarwal said.

Soon after the government’s announcement, the Reserve Bank of India said it would front-load steps that are intended to ensure more liquidity to banks for on-lending to NBFCs.

Under the ‘Facility To Avail Liquidity for Liquidity Coverage Ratio (FALLCR)‘, the RBI intended to give banks an option to generate additional liquidity of upto 1 percent of the deposit base, linked to the incremental lending to NBFCs and HFCs. This facility was intended to be introduced in two stages in August and December. This provision for additional liquidity will now be front-loaded.

The provision will enable banks to avail additional liquidity of Rs 1,34,000 crore, the RBI said in a statement.

Stronger Supervision

The Finance Bill also hands the RBI stronger supervisory powers over NBFCs.

The RBI now has the power to supersede the boards of NBFCs and remove directors should it feel the affairs of the entity are being run in a manner detrimental to the institution. These powers, similar to those the RBI has in the case of banks, will be extended to deposit taking NBFCs and systemically important NBFCs.