NBFC crisis has peaked but not ended yet: Finance Minister

By Anjana Das

New Delhi, July 6 (IANS) Finance Minister Nirmala Sitharaman on Saturday said the non-banking finance company (NBFC) sector crisis has plateaued but not ended yet and her ministry will monitor the emerging situation with the RBI, a day after she announced a slew of measures to address the lending concerns of the NBFCs.

"The assessment and inputs that are coming about NBFCs... since it is caused by various different factors like liquidity, governance or insolvency, largely it (the NBFC crisis) 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 even if you want to put it at the worst. The deteriorating situation has bottomed out," she said in a post-Budget interaction.

Sitharaman said the NBFC crisis might improve after some time and the process is on.

"If anything, it can only now improve or it is going to plateau for some time and then probably improve. So the picture that's given to me that it is bottomed out...," she said.

The Finance Ministry would monitor the emerging situation along with the Reserve Bank of India in the coming times and the Budget has addressed the issue of NBFCs adequately, she added.

"We have come up with comprehensive solutions in the Budget. We shall be closely monitoring with the RBI to see how it (the situation) is moving so strictly speaking, I feel the NBFC issue has been addressed," she said, while asserting that it should not be seen as being ended.

"I cannot say it (the NBFC crisis) has come to a closure. I cannot say it has ended. I cannot say the problem is over and I can look and spare. I am not saying that. We will still be careful about watching it," the minister said.

In the 2019-20 Budget, liquidity tap were opened for NBFCs, with the government announcing it will partially guarantee high-quality pooled assets of NBFCs and the RBI opening an indirect liquidity window to aid banks to give funds to the "important" sector, which is on the verge of collapse.

NBFCs play "an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment", Sitharaman had said in her maiden Budget speech on Friday.

Therefore, NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds, she said.

She proposed the government encourage public sector banks to buy high-rated pooled assets of up to Rs 1 trillion of financially sound NBFCs, for which the government will provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent.

Banks have been buying assets of NBFCs via securitisation to help liquidity-starved ones to remain in business.

The RBI also chipped in by tweaking banks' bond-holding norms, and said government securities of up to 1 per cent of the deposit base could now be considered high-quality assets under Basel III norms. This will allow banks to borrow an additional Rs 1.34 trillion exclusively for buying such pooled assets and giving loans to NBFCs.

However, experts say it is unlikely that mutual funds will start increasing their allocations towards NBFCs even though the Budget proposes certain steps to ease the stress.

The NBFC crisis started last year due to the default by IL&FS leading to credit squeeze, over-leveraging, excessive concentration, massive mismatch between assets and liabilities. Banks had started to stop refinancing NBFCs.

(Anjana Das can be contacted at anjana.d@ians.in)