Credit guarantee to banks, more powers to RBI as Modi govt moves to nip NBFC crisis in bud

In her first Budget, Nirmala Sitharaman nudges state-run banks to purchase assets of non-banking finance firms to help tide over liquidity crisis.

Finance Minister Nirmala Sitharaman presenting the 2019 Budget. | ANI

New Delhi: Amid fears of an impending financial sector crisis triggered by the IL&FS default, Finance Minister Nirmala Sitharaman Friday announced measures to financially support sound non-banking finance companies (NBFCs) while moving to tighten regulations for the sector.

In her maiden Union Budget speech, Sitharaman announced a one-time six-month partial credit guarantee scheme for Indian banks. Under this scheme, purchase of high rated pool assets of financially sound NBFCs by the banks will be guaranteed to accommodate up to 10 per cent of the first loss incurred by them.

 

The move aims to nudge state-run banks to purchase assets of NBFCs to help them tide over the liquidity crisis.

Sitharaman also announced that the regulation authority over housing finance companies was being shifted from the National Housing Bank to the Reserve Bank of India (RBI). Many housing finance firms have been under severe stress facing an asset liability mismatch pushing the need for tighter regulations for the sector.

The finance minister also said the government was introducing amendments to the Finance Bill to strengthen the regulatory powers of RBI over NBFCs, which have emerged as a sore issue since the IL&FS crisis caused widespread liquidity shortage.

Liquidity crisis

The trouble at IL&FS came to the fore in August 2018 after one of its group companies defaulted on debt payments, triggering a systemic liquidity crisis. With the imminent threat of a system-wide impact in case of further IL&FS default, the government stepped in to remove the company’s management and appoint a new board.

IL&FS was said to be overly leveraged with over Rs 57,000 crore of the Rs 90,000-crore exposure to state-owned banks and financial institutions.

Since then, many housing finance companies have seen the ratings of their debt paper downgraded.

Besides Dewan Housing Finance Ltd, which is on the verge of a potential repayment default, other housing firms including PNB Housing Finance and Reliance Home Finance have seen their debt papers downgraded.