Rs 70,000 crore infusion plan for state banks, more power to RBI
Part of the plan includes empowering Reserve Bank of India (RBI) with sweeping powers over non-banking finance companies (NBFCs).Updated: Jul 05, 2019, 22:59 IST
Aware that a well-lubricated financial sector is critical for economic growth, finance minister Nirmala Sitharaman on Friday announced measures to unclog choked financial pipelines. The steps range from recapitalising state-owned commercial banks to ensuring a government-backed liquidity window for finance companies.
Part of the plan includes empowering Reserve Bank of India (RBI) with sweeping powers over non-banking finance companies (NBFCs). In addition, to improve retail participation in treasury bills and government securities, the government is drawing up plans to allow for seamless transfer between RBI and depositories.
In her first budget speech, Sitharaman said the government will provide a one-time six-month partial credit guarantee to banks to purchase assets from NBFCs under the pooled assets purchase programme. Under this, the viable assets of NBFCs will be consolidated into a pool which can be bought by public sector banks, with the government standing guarantee for the first loss of up to 10%. The pool will hold assets up to ₹1 lakh crore during the current year.
Sitharaman on Thursday also proposed an amendment to Section 45-IA of the RBI Act 1934 in the Finance Bill that will be placed before Parliament for approval. The amended Act will empower the central bank to supersede the board of NBFCs (other than those owned by the government) and enable resolution of NBFCs through mergers or splitting them into viable and non-viable units called bridge institutions. The central bank can also now remove auditors, call for the audit of any group company of an NBFC and have a say over senior management’s compensation.
Until now NBFCs were governed by the provisions under the Companies Act even as they were regulated by the RBI. The move to amend the RBI Act comes in the wake of the IL&FS crisis. The Serious Fraud Investigation Office (SFIO) had noted that RBI’s timely intervention could have averted the NBFC crisis.
At the same time, Sitharaman also seemed to be alive to the fact that NBFCs needed a lifeline. “For purchase of high-rated pooled assets of financial lysound NBFCs amounting to a total of ₹1 lakh crore during the current financial year, the government will provide a one-time six-month partial credit guarantee to public sector banks for the first loss of up to 10%,” she said.
NBFCs, she said, are playing a very import role in sustaining the consumption demand as well as capital formation in small and medium industries. “NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk-averse,” said Sitharaman.
“This is a one-time funding for NBFCs and only top NBFCs will be able to avail of this facility. Unless banks start funding from the balancesheet, NBFC will not be able to grow their balancesheet,” said Umesh Revankar, MD & CEO of Shriram Transport Finance.
RBI also announced measures to boost liquidity for NBFCs by incentivising banks to use an additional 1% of their net time and demand liabilities (NDTL) as a high-quality liquidity asset for computing liquidity coverage ratio (LCR). This extra liquidity will be available to extend fresh funding to NBFCs and Housing Finance Companies (HFCs) from 5 July.
“The front-loading of Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) of one per cent, exclusively meant for incremental exposure to NBFCs/HFCs, will form part of general FALLCR as and when the increase in FALLCR takes place as per original schedule on August 1 and December 1, 2019,” said RBI.This move, RBI said, will enable the banks to avail additional liquidity of ₹1.34 trillion.
Further in the speech, Sitharaman added that the RBI will now regulate the HFCs, a power so long vested in the National Housing Bank (NHB).
“Efficient and conducive regulation of the housing sector is extremely important in our context. The NHB, besides being the refinancer and the lender is also the regulator of the HFC sector. This is a somewhat conflicting and difficult mandate to the NHB. I am proposing to return the regulatory authority over HFCs from NHB to RBI,” said Sitharaman.
In a move to deepen the corporate debt market with a special focus on infrastructure, Sitharaman also announced the setting up of a Credit Guarantee Enhancement Corporation this current financial year. Currently, the government runs a Credit Guarantee Fund Scheme for Micro and Small Enterprises to make available collateral free credit to these small firms.
Sitharaman announced that ₹70,000 crore will be infused into public sector banks to boost credit.