A man counts Indian one hundred rupee banknotes. (Photographer: Anindito Mukherjee/Bloomberg)

Budget 2019: NBFC Crisis Has Bottomed Out, Says Finance Minister 

Finance Minister Nirmala Sitharaman said the non-bank financial companies’ crisis seems to have bottomed out and the government along with the Reserve Bank of India will closely monitor the situation to ensure the sector comes out of the wood.

Sitharaman, in her Budget speech on Friday, announced a series of steps to give relief to non-banking financial companies facing a cash crunch following the collapse of IL&FS last year.

"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 ... the deteriorating situation is reached its bottom ... now it has bottomed out," she said.

Observing that the comprehensive solutions in the Budget have been announced, the Finance Minister said, "We shall be closely monitoring with the RBI to see how it's moving. So strictly speaking, I feel the NBFC issue has been addressed."

Also read: Budget 2019: Government, RBI Step In With Measures To Boost Liquidity For NBFCs

In a bid to address the stress in the sector, the government proposed that public sector banks would purchase high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year.

For this, the government will provide one time six months' partial credit guarantee to public sector banks for first loss of up to 10 percent.

Among others, Sitharaman had said the government will allow NBFCs to raise funds in public issues, and the requirement of creating a debenture redemption reserve, which is currently applicable for only public issues as private placements are exempt, will be done away with.

As of now, NBFCs that do public placement of debt have to maintain a DRR and in addition, a special reserve as required by the RBI has also to be maintained.

In a bid to improve regulatory oversight, the government also proposed to bring housing finance companies under the RBI from the fold of National Housing Bank.

Also read: Government Considering More Powers To RBI To Regulate NBFCs, Says Nirmala Sitharaman 

Sitharaman further said that these steps are aimed at improving the condition of the NBFC sector as a whole.

"If anything, it can only now improve or it can be going on plateau for some time and then probably improve...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.

With regard to the reaction of the market on raising minimum public float to 35 percent from existing 25 percent, the finance minister said, "I am yet to hear response Parliament debating about it."

On the issue of bringing down government stake to below 51 percent in public sector undertakings, Sitharaman said the move will help increase retail participation and deepen the market.

It will be designed in such a fashion that government directly or indirectly through its state-owned entities will hold 51 percent stake and the public characteristic is maintained, she said.

The government has decided to modify the present policy of retaining 51 percent, she said, adding that the government's 51 percent shareholding would include stakes held by state-owned institutions.

Giving example, she said, if the government stake in A company is 51 percent and another state-owned entity has 10 percent stake in that, there is headroom to dilute 10 per cent stake but still retaining 51 percent stake.

"So we are saying to that extent 10 (total 51 percent government and government-run institutions together) the extra that is there can be released for employees, retail who want to possess by which the government control is not being diluted below 51 percent," she added.

Also read: Budget 2019: India Needs To Fix Liquidity Crunch For NBFCs, Says Invesco’s Krishna Memani

Bloomberg Quint

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