The beleaguered non-banking finance companies got special attention in the second stimulus package announced by the Centre on Friday. Most significantly, the Centre is in the process of creating a special purpose vehicle to provide liquidity support to NBFCs up to Rs 25,000 crore.
The NBFCs will be able to seek this liquidity prop against investment grade papers they hold. The government will announce the details of the SPV?s modus operandi shortly, but the mechanism is very similar to the one used by the United States Administration to prevent the collapse of mortgage giants Fannie Mae and Freddie Mac.
At the same time, the Reserve Bank of India has also allowed NBFCs focused on infrastructure financing to raise external commercial borrowings from multilateral and bilateral institutions. On its part, the Centre has promised to keep credit flowing for NBFCs? commercial vehicle loans ? by asking leading public sector banks to provide a special line of credit for such loans.
Deputy chairperson of the Planning Commission Montek Singh Ahluwalia admitted that the biggest problem in the economy was in sectors such as commercial vehicles. This stems largely from NBFCs? reluctance to lend even as they find it difficult to raise funds.?
?Our assessment is that the biggest problem is in the commercial vehicle sector, which incidentally also gives the maximum public benefit,? the Plan panel deputy chief said.
?We are taking a number of measures to channel credit to NBFCs. The SPV will channel financial support of up to Rs 25,000 crore to them to ensure that liquidity problems don?t pose a problem. The public sector banks? assistance to NBFCs for refinancing commercial vehicle sales will also help the auto sector,? Ahluwalia said.
To boost demand for commercial vehicles, at least from profitable transporters who can advance purchase decisions, Friday?s package has also thrown in an accelerated depreciation benefit of 50% for purchases made between January 1 and March 31. Apart from this, as a one-time measure, states will be provided assistance till June 2009, under the Jawaharlal Nehru National Urban Renewal Mission, for purchasing buses for their urban transport needs. ?
First reactions from NBFCs were positive, though they are wary of assessing the potential impact till the modalities become clear for the three steps. ?The measures look encouraging ?prima facie?. We have already got feelers from the Indian Banks? Association, as it has asked us to submit the list of NBFCs that finance commercial vehicles. But banks are generally not forthcoming.?
?Ten years ago, RBI had categorised loans for purchase of trucks under priority sector but no banks extended credit to the sector. It would have been better if a particular agency was identified to finance our operations,? said Raman Aggarwal, co-chairman of Finance Industry Development Council (FIDC), the self-regulatory body of NBFCs.
The FIDC had suggested creation of a separate body to refinance asset-financing NBFCs. ?It is better to identify a body and make it responsible for lending to a particular sector rather than asking ?leading? PSBs to do that,? Aggarwal said. He however, said that opening up the ECB route to infrastructure-financing NBFCs would allow them to raise long-term funds.?
Srei Infrastructure Finance chairman and managing director Hemant Kanoria said, ?This is a welcome step for the infrastructure financing and asset financing NBFCs for raising medium to long term funds. However, we feel that it should have been allowed under the automatic route so that the time required to raise resources could have been minimised.?
A senior official of a big asset financing NBFC said the measures are not going to have any impact as long as the industrial production remain low. Weak growth in industrial production results in low movement of commercial vehicles. The factory output registered negative growth of 0.4% in October last year.
?Although I am hopeful that the situation would change with the comprehensive measures taken by the government and RBI, details are still awaited regarding certain measures. We will have to see what they are,? he said.