Union Budget 2019 India: Enhancing credit guarantee for portfolio purchases will improve the flow of funds to healthy NBFCs. This will help NBFCs provide unsecured lending to MSMEs that struggle for capital.
Budget 2019 India: India’s non-banking financial companies (NBFC) has welcomed measures proposed by finance minister Nirmala Sitharaman to boost access to capital. Acknowledging the role of NBFCs in “sustaining consumption demand” and “capital formation in the small and medium industrial segment”, the minister said in her maiden budget speech earlier this month adding that the fundamentally sound NBFCs should continue to receive funding from banks and mutual funds.
“The budget underlined the role that NBFCs play in the capital formation of MSMEs segment, and that NBFCs should continue to get funding from the banks. Since the liquidity crisis, the banks have become more conservative lending to NBFCs or providing interest rate reductions,” said Hardika Shah, Founder & CEO, Kinara Capital.
Enhancing credit guarantee for portfolio purchases will improve the flow of funds to healthy NBFCs. This will help NBFCs provide unsecured lending to MSMEs that struggle for capital, said Shah.
Nirmala Sitharaman had said that for buying “high-rated pooled assets of financially sound NBFCs” that amounts to Rs 1 lakh crore in FY20, the government will offer partial credit guarantee to public sector banks (PSB) of six months for one time for first loss of up to 10 per cent.
Also, Rs 350 crore earmarked by the government for interest subvention of GST-registered MSMEs for fresh and incremental loans will “directly improve the digital footprint of Indian MSMEs and make it easier for NBFCs to grant them loans using the readily available GST data,” said Sanjay Sharma, Managing Director, Aye Finance.
In addition, the minister had also announced quashing of creating a debenture redemption reserve (DRR) for NBFCs to raise capital in public issues. Along with the partial credit guarantee for PSU banks to purchase high rated pooled assets of NBFCs, “the relaxation of the DRR norms for public issuance of debentures will give a fillip to debt access for NBFCs with sound fundamentals and performance track record,” said Gaurav Kumar, Co-Founder and Director, Vivriti Capital.
Nirmala Sitharaman had also announced interest income on bad or doubtful debts made by NBFCs to be taxed on receipt basis instead of accrual basis to provide a level playing field to NBFCs since for scheduled banks, public financial institutions, state financial corporations, state industrial investment corporations, etc., interest on bad or doubtful debts is charged to tax on receipt basis.