Budget to infuse life into dying NBFCs

In the February 1 Budget, the government is planning to reverse the shrinking public consumption story by addressing a sector majorly responsible for financing consumer loans but is currently struggling to stay afloat due to severe financial crunch — NBFCs (non-banking financial companies).

With banks shying away from giving loans to NBFCs, the plan is to set up a special entity which can buy their debt and arrange funds for them from various sources, including the capital market.

The entity likely to be announced in the Budget may be a special purpose vehicle seeking to isolate the financial risks of shadow banks, which are the biggest lenders to housing and automotive sectors. This company would lend funds, especially debt funds of longer maturity, directly to NBFCs to supplement loans from banks and other financial institutions.

“Solving the credit problem of NBFCs on a long-term basis can be the best way to lift falling demand. It will also prove to be a growth multiplier,” an official told DH.

He said income tax relief measures were also being discussed, but that would help only a small section of tax-payers.

The NBFCs, which are responsible for about 40% of consumer financing in the country, have been choking for funds ever since the IL&FS crisis in September 2018, which dried up funds to these shadow banks.

The auto sector was the worst-hit because the NBFCs not only lend to consumers but also to auto dealers and the entire supply chain. After the IL&FS fiasco, mutual funds — the largest investors to NBFCs — stopped lending to them.

The RBI released funds aiming to finance them, but most of it went to pay back their old liabilities, and the crisis persisted for a sector which is responsible for about Rs 24 lakh crore of the total Rs 95 lakh crore lending in the economy.

This has led the government to think of a special purpose entity which channels funds to them.

The official said the entity is all to set be announced in the Budget to be presented by Finance Minister Nirmala Sitharaman.

The NBFCs operating in retail sector will be given priority funding by the special entity to be created.

All public finance institutions will have equity participation in the proposed entity, which would borrow funds from various sources, including the capital market, and provide to shadow lenders.

India’s economic growth slowed down to a six-year low of 4.5% in the July-September quarter of 2019-20. A huge decline in consumption led to the slowdown, according to the RBI, government and other economists.

Nearly 60% of India’s GDP is driven by domestic private consumption while only 10% is exports. The special support entity is expected to help solve the NBFCs’ credit crunch.

Last week, the World Bank had expressed concerns about the credit flow of NBFCs and warned that their slowdown was expected to linger.

Prior to that, the International Monetary Fund, too, had suggested the need to closely monitor the emerging risks from liquidity stress in NBFCs.