At a time when the shadow banking industry is under stress due to liquidity, the government on August 2 approved the Reserve Bank of India (RBI) norms for credit guarantee to the non-banking financial institutions (NBFCs).

“To further ease flow of funds to the housing sector, the National Housing Bank (NHB) is making available from today, a liquidity infusion facility of Rs 10,000 crore for housing finance companies (HFCs) as additional liquidity for individual housing loans, for affordable housing,” the finance ministry said in a press release.

In her maiden budget speech, finance minister Nirmala Sitharaman had said, "For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year, government will provide one time six months' partial credit guarantee to public sector banks (PSBs) for first loss of up to 10 per cent."

Regarding this, the RBI has sent a proposal to the finance ministry on draft modalities of the guarantee to operationalize the budget proposal.

“The government has accorded its approval to the modalities that would be set in motion by RBI. The department of financial services, ministry of finance would put in place an oversight mechanism for this scheme," the release said.

The finance minister is also supposed to meet all the heads of the public sector banks and heads of major private sector banks on August 5 to review matters related credit growth in various sectors such as micro, small and medium enterprises (MSMEs), retail, automobiles and housing, among others.

The NBFC sector is currently undergoing a liquidity hurdle with a spate of defaults of companies such as IL&FS along with its group companies and DHFL that started unfolding since September 2018.

The battered NBFC sector is a cause of concern as the Indian economy is in the middle of an economic slowdown as growth in Asia's third-largest economy slumped to a five-year low.

Eight infrastructure sectors, which constitute 40.27 percent of the index of industrial production (IIP) almost remained flat at 0.2 percent in June, according to government data released on August 1.

Gross domestic product (GDP) growth in India in the March quarter slowed more than expected to 5.8 percent from 6.6 percent in the December quarter. This was the slowest quarterly GDP growth in five years.

Annual GDP growth slowed to 6.8 percent in the year ended 31 March from 7.2 percent in the previous year.

Since last month, the RBI, the Economic Survey of the finance ministry, and the Asian Development Bank have cut their growth outlook for India to 7 percent.

The International Monetary Fund has reduced its growth projection for India in 2018-19 by 30 basis points to 7 percent expecting weaker domestic demand.