india

Updated: Jul 06, 2019 23:56 IST

Non-banking financial companies (NBFCs) have put the worst of the crisis they are confronting behind them, but the government and the Reserve Bank of India (RBI) will maintain a close watch on the sector on its way to full recovery, finance minister Nirmala Sitharaman said on Saturday, a day after unveiling a slew of measures to assist the process of healing.

“Largely it (NBFC crisis) has reached a peak in terms of challenges that they are facing. The problem probably is not over yet but it can only plateau rather than worsen,” Sitharaman, who presented her first budget in Parliament on Friday, said at a briefing for journalists. “The deteriorating situation has reached its bottom.”

“I cannot say it has come to a closure. I cannot say it has ended. I cannot say the problem is over... We will still be careful about watching it,” she said.

Sitharaman’s first budget provided for a one-time, six-month partial credit guarantee to banks to buy assets from NBFCs; the viable assets of NBFCs will be consolidated into a pool of ~1 lakh crore that can be bought by state-owned banks, with the government standing guarantee for the first loss of up to 10%.

She also proposed empowering the central bank to supersede the board of non-government NBFCs and enable their resolution through mergers or splitting them into viable and non-viable units.

The seriousness of the crisis in the NBFC sector became clear last year when Infrastructure Leasing & Financial Services Ltd (IL&FS) defaulted on debt, jolting the country’s financial markets. It prompted the government to seize control of the non-banking lender.

Sitharaman said there was “no one single reason” for the crisis, the reason why the government had decided to empower RBI with both regulatory authority as well as powers for resolution.

“We realised that there is a gray area in terms of regulation of NBFC,” she said, adding that non-banking lenders were playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industries.

RBI would also be the regulator for the housing NBFCs. The National Housing Bank (NHB), besides being the refinancer and lender to mortgage companies, is also the regulator of the sector. “This gives a somewhat conflicting and difficult mandate to NHB. I am proposing to return the regulation authority over the housing finance sector from NHB to RBI. Necessary proposals have been placed in the Finance Bill,” Sitharaman said.

She said the government was reviewing assessments of the NBFC crisis, which was caused by a combination of factors such as a liquidity crunch, governance issues and insolvency.

India has over 10,000 registered NBFCs lending to millions of households that may not have the creditworthiness to borrow directly from a commercial bank. NBFCs borrow much of their money from banks, mutual funds and via debt sales. Their borrowing costs have surged and the sector fell into crisis.

Former finance minister Arun Jaitley wrote in a blog, “The budget contains concrete proposals about support to the NBFCs whose liquidity, for the last several months, was under strain and had reduced the purchasing power of consumer. The sectors most affected by this were real estate, automobiles and the MSMEs [micro, small and medium enterprises]”.

Encouraging banks to take risks in lending to NBFCs through partial guarantees to ease credit flow is likely to have a positive impact on the economy, said Shyamal Mukherjee , chairman of consulting firm PwC India.

(Agencies contributed to this story)