The budget threw non-banking finance companies (NBFC) a Rs 1 lakh crore lifeline with a promise to stand part guarantee on loans purchased by state-run banks for six months.
Banks can borrow from the RBI by pledging their excess government bond holdings to fund the purchase of NBFC assets.
The RBI has advanced a new mandatory government bond holding rule for banks to buy such assets, which could potentially release Rs 1.3 lakh crore.
The government guaranteed to bear the first loss of up to 10% of the assets, but that may fall short of what the industry has been demanding in terms of support.
“Whether banks will be able to use the limit in six months for securitisation is to be seen,” said Umesh Revankar, MD and CEO, Shriram Transport Finance.
“Direct ref inancing window would have been a better option. We have to see how banks formulate their credit policy. It will mostly go to housing finance companies.”
NBFCs have been demanding a special liquidity window ever since credit markets t ightened af ter Infrastructure Leasing & Financial Services imploded last September.
With both mutual funds and banks pulling back on lending due to fear of defaults, NBFCs’ funding cost soared and liquidity dried up.
“NBFCs are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment,” said finance minister Nirmala Sitharaman. “NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk-averse.”
The government has also created a level playingfield for NBFCs. Just like banks, they need not pay tax on interest accrued on bad loans.
Furthermore, the hands of RBI are being strengthened in regulating NBFCs, where it would have the power to act against the board of directors if it believes that the management is weak. But state-owned NBFCs would be beyond the RBI’s pale.
The government’s latest measures are seen as a sign of commitment to resolving the crisis.