NBFCs seek continued liquidity support in upcoming Budget

To mitigate the impact of COVID-19 on NBFC sector, the government and Reserve Bank of India (RBI) have announced various schemes such as the Partial Credit Guarantee Scheme (PCGS), Targeted Long-Term Repo Operations (TLTRO) and Special Liquidity Scheme (SLS). In its pre-budget memorandum submitted to Finance Minister Nirmala Sitharaman last month, Finance Industry Development Council (FIDC) said bank funding of small and medium NBFCs has been a challenge due to various reasons, especially during the last two years.

Mumbai: Non-banking finance companies expect the government to provide continued liquidity support by encouraging banks to lend more to the sector, setting up a permanent refinance window and relaxing external commercial borrowing norms in the upcoming Budget.

The government will present the Budget for fiscal 2021-22 on February 1, 2021.

To mitigate the impact of COVID-19 on NBFC sector, the government and Reserve Bank of India (RBI) have announced various schemes such as the Partial Credit Guarantee Scheme (PCGS), Targeted Long-Term Repo Operations (TLTRO) and Special Liquidity Scheme (SLS).

"This budget is important because it will be the first budget after the pandemic, which dragged the economy into contraction mode and has taken more than 1.5 lakh lives so far in India.

"The government and RBI took calculated measures which aided economic recovery. We expect similar policy momentum to prevail in the Union Budget FY22," IndoStar Capital's CEO and executive vice-chairman R Sridhar said.

In its pre-budget memorandum submitted to Finance Minister Nirmala Sitharaman last month, Finance Industry Development Council (FIDC) said bank funding of small and medium NBFCs has been a challenge due to various reasons, especially during the last two years.

"The tepid response to the TLTRO 2.0, which mandated banks to invest at least 50 per cent of the stipulated amount in small and medium NBFCs, was a clear example of this. The need, therefore, is to reduce the over-reliance on banks and have a dedicated refinancing body," FIDC, a representative body of assets and loan financing NBFCs, had said in the memorandum.

It suggested allocating a fund dedicated to funding small and medium NBFCs to SIDBI and Nabard.

"The arrangement of treating bank lending to NBFCs for on-lending to priority sector to be treated as priority sector lending (PSL) for banks should be made permanent and the limit needs to be increased to at least 10 per cent of total PSL by banks," FIDC had said.

Cyril Amarchand Mangaldas partner L Viswanathan said in the recent years, NBFCs that are important intermediaries of credit have faced concerns of liquidity, governance and solvency and it is hoped that the Budget will ease some of the pressures.

The budget coincides with some announcements by the RBI regarding overhauling regulations for systemically important NBFCs to mitigate any risks of regulatory arbitrage, he said.

"The regulatory certainty, as well as the additional weight of these regulations, could be balanced through liquidity and credit measures announced in the budget for this sector," Viswanathan said.

He suggested that the RBI directed funding for the sector, including TLTRO windows, maybe widened to cover more NBFCs and should continue for a longer period.

Viswanathan said he expects announcement of a more permanent refinance window and easing of external commercial borrowing (ECBs) into the sector in the Budget.

Moneyboxx Finance Ltd co-founder Mayur Modi said the NBFC sector has the potential to play an extremely important role in shaping the revival of the economy but is confronted by liquidity issues due to lack of funding from the banking sector.

"This needs to be addressed at the earliest. As public sector banks (PSBs) have surplus liquidity in the system, the government must encourage them to lend to the NBFC sector," he said.

Also, in the upcoming Budget, the government should look at setting up a special window at the RBI for NBFCs, especially for small and those focused on rural areas, so that their cost of the fund comes down, which will ultimately benefit the economy, Modi said.

In its memorandum, FIDC had requested to exempt NBFCs registered with RBI and classified by the central bank as deposit-taking NBFC (NBFCs-D) and non-deposit taking systemically important NBFC (NBFCs-ND-SI) from the provisions of TDS (tax deducted at source) on interest income.

Tourism Finance Corporation of India's MD and CEO Anirban Chakraborty said the travel and tourism sector has been one of the most impacted sectors during the course of the pandemic.

"Few sector-specific sops may be considered by the government to help the hospitality sector emerge out of this situation," he said.

Steps like reduction in GST slabs, waiver/normalisation of various license fees, sector-specific stimulus package (viz interest support by government, additional funding by lenders, etc) may be considered, Chakraborty added.

"Government should continue to encourage domestic tourism by extending and increasing the threshold LTA benefits for expenses incurred for domestic travels/stays," he noted.

Microfinance institution Satin Creditcare Network's chairman and MD HP Singh said during the outbreak of the pandemic and the subsequent lockdown, the government and RBI took several pragmatic measures to restore liquidity and bring immediate relief to the stressed sector through partial credit restructuring, moratorium benefits, TLTRO operations among other measures.

These initiatives have helped in improving the quantum of liquidity, disbursements and collections during these unprecedented times, he said.

"Through the Budget, the government can continue supporting economic activities until a complete recovery is achieved, which will result in growth in the coming fiscal," Singh said.