RBI opens banks’ liquidity tap for NBFCs, HFCs

In Budget Speech Nirmala Sitharaman Announces Creation Of'Gandhipedia

During her budget presentation, Sitharaman also spoke about the "One Nation One Card" that the Prime Minister Narendra Modi had launched in March this year.

Finance Minister Nirmala Sitharaman Friday announced that the government will pump in 70,000 crore into public sector banks (PSBs) to strengthen them and enhance their lending capacity.

The amount proposed to be invested in state banks is below the Rs 1.06 lakh crore injected in the previous financial year and Rs 88,139 crore in FY18.

She proposed the government encourage public sector banks to buy high-rated pooled assets of up to Rs 1 trillion of financially sound NBFCs, for which the government will provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent.Banks have been buying assets of NBFCs via securitisation to help liquidity-starved ones to remain in business.

More news: Archie christened in private ceremony

Soon after the Budget announcement for NBFC sector, the RBI announced that it will provide a required liquidity backstop to the banks against their excess G-sec holdings. Authorities will also ease restrictions on foreign institutional investors that have invested in NBFCs' debt securities.

"NBFCs are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment", she said. "NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk-averse". Just like banks, they need not pay tax on interest accrued on bad loans.

A year after a series of defaults by Infrastructure Leasing & Financial Services that exposed the weakness in India's shadow banks, the problem is deepening with other NBFCs such as Dewan Housing Finance Corp. and Anil Ambani's Reliance Capital Ltd. struggling to find new money. As a result, the NBFCs borrowing costs have surged as many banks and mutual funds stopped lending to them.

She also proposed empowering the central bank to supersede the board of non-government NBFCs and enable their resolution through mergers or splitting them into viable and non-viable units. The minister said this was being done to boost the credit flow to the economy.

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