Non-banking finance companies (NBFCs) have been in the news for quite some time with regard to their exposure, bank borrowings, quality of assets and asset-liability mismatches. On the eve of the Budget, the debates and discussions became intense and there was clamour for liquidity support for the sector. It was expected that Budget 2019 would address some of the concerns and provide necessary stimulus.
While presenting the Budget, the Finance Minister did recognise the fact that NBFCs play an important role in sustaining consumption demand as well as capital formation in the small and medium segments. In this context, the FM mentioned that NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse.
The following are some of the Budget proposals for NBFCs:
For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of ₹1-lakh crore during the current financial year, the government will provide a one-time six months’ partial credit guarantee to public sector banks for the first loss of up to 10 per cent.
NBFCs which do public placement of debt have to maintain a Debenture Redemption Reserve (DRR) and, in addition, a special reserve, as required by RBI, has also to be maintained.
To bring more participants, especially NBFCs, not registered as NBFCs-Factor on the Trade Receivables Discounting Systems (TReDS) platform, amendment in the Factoring Regulation Act, 2011 is necessary and steps will be taken to allow all NBFCs to directly participate on the TReDS platform.
Apart from the above, the Budget, in the Finance Bill, has proposed amendments/insertions to some of the sections of the RBI Act (45-IA, 45-IC, 45-ID, 45-IE, 45 MAA, 45 MBA, 45 NAA, 58 B, 58 G) for strengthening the regulatory authority of the RBI over NBFCs.
Section 45-IA is proposed to be amended to empower the RBI to notify different amounts of net-owned funds for different categories of NBFCs. Two new sections — 45-ID and 45-IE — have been inserted giving powers to the RBI to remove directors from office and supersession of the board of directors for all NBFCs other than government companies.
Section 45 MAA has been inserted to give powers to take action against auditors, and Section 45 MBA for resolution of the NBFCs. Section 45 NAA directs any group company of NBFC to furnish financial statements. Sections 58 B and 58 G have been amended to increase the fine for false declaration, return and information. In the above context, it is important to mention that the Financial Stability Report of the RBI put forth details about the exposures, asset quality, asset-liability mismatch and capital adequacy of NBFCs. The report states that there are 9,659 NBFCs registered with the RBI as on March 31, 2019, of which, 88 were deposit accepting and 263 were systematically important non-deposit accepting NBFCs.
The consolidated balance sheet size of the NBFCs amounted to ₹28.8 trillion. The bank borrowings by NBFCs as a percentage of total borrowings have increased to 29.2 per cent from 21.2 per cent in March 2017. The capital adequacy measured in terms of capital to risk asset ratio (CRAR) declined to 19.3 per cent from 22.8 per cent in March 2018.
The stress test conducted by the RBI revealed that there is a potential threat to CRAR as it could decline even to 1.7 per cent which is far below the capital requirement of 15 per cent.
However, one would hasten to add that the Budget proposals, when read in conjunction with the financial developments of NBFCs, have initiated a good beginning . In the context of the powers entrusted to the RBI, the central bank should gear itself to monitor exposures in terms of bank borrowings, debentures and commercial payments, quality of assets, CRAR, asset-liability mismatch, and liquidity stress.
The writer, a former central banker, is faculty member at SPJIMR. The views are personal. (Through The Billion Press)