Aware that a well-lubricated financial sector is critical for economic growth, finance minister Nirmala Sitharaman on Friday unveiled steps to unclog the financial pipelines, which ranged from recapitalizing state-run banks to ensuring a government-backed liquidity window for finance companies. Part of the plan includes empowering the Reserve Bank of India (RBI) with sweeping powers over non-banking financial companies (NBFCs). In addition, to grow retail participation in treasury bills and government securities, the government is preparing plans to allow seamless transfer between the RBI and depositories.
In her maiden budget speech, Sitharaman said the government will provide a one-time six month partial credit guarantee to banks to purchase assets from NBFCs under the pooled assets purchase programme. Under this, the viable assets of NBFCs will be consolidated in a pool which can be bought by state-run banks, with the government standing guarantee for the first loss of up to 10%. The pool will hold assets up to ₹1 trillion during the current year.
Sitharaman on Thursday also proposed an amendment to Section 45-IA of the RBI Act 1934 in the Finance Bill that will be placed before Parliament for approval. The amended Act empowers the central bank to supersede the board of NBFCs (other than those owned by the government) and enable resolution of financially troubled NBFCs through merger or splitting them into viable and non-viable units called bridge institutions. The RBI can also now remove auditors, call for audit of any group company of an NBFC and have a say over the compensation of the senior management.
Until now, NBFCs were governed by the Companies Act even as they were regulated by the RBI. The move to amend the RBI Act comes in the wake of the Infrastructure Leasing & Financial Services (IL&FS) crisis. The Serious Fraud Investigation Office (SFIO) had noted that the RBI’s timely intervention could have averted the NBFC crisis.
At the same time, Sitharaman also seemed to be alive to the fact that NBFCs needed a lifeline. “For purchase of high-rated pooled assets of financial sound NBFCs amounting to a total of ₹1 trillion during the current fiscal year, the government will provide a one-time six-month partial credit guarantee to public sector banks for the first loss of up to 10%," she said.
NBFCs, she said, are playing a key role in sustaining consumption demand as well as capital formation in small and medium industries. “NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk-averse," said Sitharaman.
This is a one-time funding for NBFCs and only top NBFCs will be able to avail of this facility. Unless banks start funding from the balance-sheet, NBFCs will not be able to grow their balance sheet," said Umesh Revankar, managing director and chief executive of Shriram Transport Finance Co. Ltd.
The RBI also announced measures to boost liquidity for NBFCs by incentivising banks to use an additional 1% of their net time and demand liabilities (NDTL) as high-quality liquidity asset for computing liquidity coverage ratio (LCR). This extra liquidity will be available to extend fresh funding to NBFCs and housing finance companies (HFCs) from 5 July.
“The front-loading of Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) of one per cent, exclusively meant for incremental exposure to NBFCs/HFCs, will form part of general FALLCR as and when the increase in FALLCR takes place as per original schedule on August 1 and December 1, 2019," the RBI said.
This move, the central bank said, will enable banks to avail additional liquidity of ₹1.34 trillion.
Sitharaman said the RBI will now regulate HFCs, a power so far vested with National Housing Bank (NHB).
“Efficient and conducive regulation of the housing sector is extremely important in our context. NHB, besides being the refinancer and the lender is also the regulator of the HFC sector. This is a somewhat conflicting and difficult mandate to NHB. I am proposing to return the regulatory authority over HFCs from NHB to the RBI," Sitharaman said.
In a move to deepen the corporate debt market with a special focus on infrastructure, the finance minister also announced the setting up of a Credit Guarantee Enhancement Corporation in this fiscal year. The government currently runs a Credit Guarantee Fund Scheme for micro and small enterprises to make available collateral free credit to such firms.
Sitharaman said steps will be taken to deepen the corporate tri-party repo market in corporate debt securities. Government will work with the RBI and the Securities and Exchange Board of India to enable stock exchanges to allow AA-rated bonds as collateral, she said.
The tri-party repo market provides opportunity to borrow against securities and provides short-term liquidity to participants. Typically, a repo transaction happens between two entities, wherein the borrower raises funds by selling securities with the promise to repurchase the securities on a specified date at a mutually agreed price. The introduction of a tri-party repo was part of the recommendations of the H.R. Khan committee’s report on the development of the corporate bond market.
Last year, the National Stock Exchange and BSE started an electronic platform for repos. However the securities allowed include only AAA-rated bonds, A+ rated commercial papers and certificates of deposits.
The RBI had introduced repos in corporate bonds back in 2010, but the response has been lukewarm due to non-availability of guaranteed settlement and an electronic dealing platform.
“These are welcome announcements. However we need to see how effectively it is implemented," said Arijit Basu, managing director, State Bank of India.