Impact of Budget 2020 on NBFCs

Deepti Shikha

04 Jan, 2021

Non-Banking Financial Companies or NBFC plays a vital role in India’s financial system. However, the Government has proposed to provide credit Guarantee for the NBFC Sector to overcome from the outgoing liquidity crisis. After the IL&FS scam suspected to be worth Rs. Ninety-one thousand crores and other Banking scams such as the Punjab National Bank (PNB) scam or the DHFL defaults there has been a deep liquidity crunch in the market which had a profound impact on NBFC’s crisis. In Budget 2020, the center has allowed NBFC’s to extend invoice financing to MSMEs or the Ministry of Micro, Small and Medium Enterprises. Budget 2020 has brought some positive news for NBFCs and MSMEs.

Key points for NBFC in Budget 2020

• The Government in the recent budget has proposed to provide credit Guarantee for the NBFCs (Non-Banking Financial Companies) which is facing liquidity crisis in current time due to some debt scams and debt defaults.
• Besides, the asset wise eligibility criteria to be admitted under the Debt Recovery process have been reduced.
• To meet the liquidity constraints of Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs), the Government has proposed to set up a Partial Credit Guarantee Scheme.
• The limit for NBFCs to be eligible for Debt Recovery under the SARFAESI (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest) Act, 2002 is proposed to be reduced from Rs. 500 crore to asset size of Rs 100 crore or loan size from the actual amount of Rs 1 crore to Rs 50 lakh.
• Amendments have been proposed to the Factor Regulation Act, 2011^[1] –NBFCs have been enabled to extend invoice financing to MSMEs through TReDS or Trade Receivables Discounting System platform, which is an online bill discounting platform. 
• NABARD refinance scheme– To increase the credit availability for the women self Help Groups through NABARD or MUDRA, the refinance scheme would be extended to NBFCs that are in agriculture-related lending.
• The loan restructuring window for MSMEs, which was to end in March 2020 has been extended until March 2021.

Decoding the announcement in the Budget for NBFC

Here we will try to decipher all the measures provided in Budget in detail:

Partial Credit Guarantee Scheme

• In the previous year’s Budget, the Government had proposed a Partial Credit Guarantee (PCG) Scheme to help NBFCs tide over liquidity crisis. 
• However, the scheme that was launched in August 2019 failed to take off due to a number of obstructions. 
• In December 2019, the Ministry of Finance approved an extension of the Personal Guarantee scheme to June 30, 2020, with an option to extend it by another three months depending on its progress.
• Banks were permitted to purchase from the pool of ‘BBB+’ rated assets of NBFCs, lower than the stipulated of ‘AA’ rated assets which limited its scope.
• NBFCs that slipped into the SMA-0 category in one year before the IL&FS crisis will also be eligible for this scheme.
• However, in the recent Budget, the Finance Minister said that a mechanism would be devised for the Personal Credit Guarantee (PCG) scheme without divulging more details on this part.
• This step will help in boosting the liquidity for NBFCs. However, the Government needs to provide more clarity in this regard. 

Debt recovery under SARFAESI Act

• To ensure NBFCs recover smaller accounts, the government reduced the eligibility criteria for enforcement of SARFAESI( Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest ) Act.
• Accordingly, the available asset size was decreased from Rs 500 crore to Rs 100 crore and the loan size reduced from Rs 1 crore to Rs 50 lakh.
• Under the SARFAESI Act, the debt recovery has decreased from Rs 1 crore to Rs 50 lakh.

Access to TReDs

• The Factor Regulation Act 2011 enabling NBFCs to extend the invoice financing to MSMEs through TreDS.
• TReDS or Trade Receivables Discounting System platform is an Online discounting platform.
• This move is aimed to enhance the economic and financial sustainability of MSMEs.

NABARD refinance scheme

• To increase the credit availability for women self-help groups through NABARD, the refinance scheme would be extended to NBFCs that deals in agri-related lending.
• According to the regulator, the NBFCs with asset quality concerns are facing constraints on higher borrowing costs.

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Wrapping Up

The Indian economy is at a point of inflection. The previous Budget brought with itself several moves from the Government to boost the cashless economy and the availability of credit. The lending book of NBFCs has grown at a rate of 18 percent in the last five years. Also, the sector’s contribution to the total credit has increased from 15 percent to 20 percent in the previous three years. The IL&FS crisis following debt defaults in the year 2018 had led to corruption in the domestic NBFCs sector, followed by DHFL defaults. The liquidity problems in NBFCs have been the focus in the Budget and all the schemes are meant to solve this crisis.

Also, Read: Prior Approval for NBFC’s Merger/Amalgamation from RBI.