BUDGET

The government has finally stepped in to ease pressure on the beleaguered non-banking
finance companies (NBFCs), which have been reeling under liquidity stress since IL&FS
defaulted on repayment in September last year.

Acknowledging the role of NBFCs in sustaining consumption demand as well as capital

formation in SMEs, Finance Minister Nirmala Sitharaman said the government would
provide a one-time six months' partial credit guarantee to public sector banks to buy high-
rated pooled assets worth Rs 1 lakh crore from NBFCs.

This will provide the much-needed liquidity to NBFCs. They can thus liquidate their
portfolio and meet their liabilities in a timely manner and will accelerate monetization of
assets by NBFCs as banks will be able to acquire pooled loan assets without extra
ordinary caution on asset quality.

The budget announced that the current requirement of creating a Debenture Redemption
Reserve (DRR) would be done away with to allow NBFCs to raise funds in public issues.
"The withdrawal of DRR requirements will allow higher allocation of capital and
lowered cost of capital by NBFCs to real estate sector since a significant part of the
financing occurs through Non Convertible Debentures.

The budget also offered greater parity in tax treatment of NBFCs vis-a-vis scheduled
banks. Currently, interest on certain bad or doubtful debts made by scheduled banks and
other financial institutions is allowed to be offered to tax in the year in which this interest
is actually received. The budget has extended this facility to deposit taking as well as
systemically important non-deposit taking NBFCs also.

The budget has permitted investments made by FIIs and FPIs in debt securities issued by
Infrastructure Debt Fund - Non-Bank Finance Companies (IDF-NBFCs) to be transferred
or sold to any domestic investor within the specified lock-in period.

It proposed a unified regulatory body for both NBFCs and HFCs under the aegis of
Reserve Bank of India. Ms. Nirmala Sitharaman said it would improve the regulation of
HFCs and improve transparency in the system. Till now, the National Housing Bank was
regulating HFCs.
 UNAFFECTED SECTORS

Non-Banking Finance Companies such as Bajaj Finance, Sundaram Finance

and Manappuram Finance posted strong growth in the past quarter, even as the sector was
still negotiating its worst crisis in a decade and some like and Dewan Housing missed
payment commitments.

Sound management practices and absence of financial engineering helped these

outperformers navigate the crisis and grow bigger, said industry trackers. While the cost
of funds increased for most NBFCs with banks becoming cautious about lending to the
sector, these companies saw financing costs ease even.

NBFCs in the consumer, SME, gold loan, commercial vehicle finance and microfinance
segments have been relatively less affected by the liquidity crisis in the sector. For the
companies that give loans against gold, the asset liability maturity levels are positive.
They also have low leverage, pricing power and a highly liquid collateral, which would
ensure easy access to bond markets as well as bank funding.