Government proposes debt guarantee to overcome the liquidity challenge in NBFC, HFC sector

NEW DELHI: The government has proposed to provide a credit guarantee for the NBFC sector that has been facing a liquidity crisis since the outbreak of the IL&FS scam almost a year and a half ago.

In addition, the eligibility criteria in terms of assets to be admitted in the debt recovery process has been reduced, according to budget documents.

To address the liquidity restrictions of non-bank financial companies (NBFC) and housing finance companies (HFC), the government proposed establishing a partial credit guarantee scheme for the sector after the Union Budget 2019-20.

To promote this support of providing liquidity, a mechanism would be devised. The government will offer support guaranteeing such floating values, say the Budget documents.

Live plus Pawan Singh, managing director and CEO of PTC India Financial Services, said: The announcement of the government's intention to ensure that the securities float to provide liquidity to the NBFCs is expected to help overcome the current liquidity crisis.

The Budget also stated that the limit for NBFCs to be eligible for debt recovery under the Financial Assets Securitization and Reconstruction and Interest Guarantee Compliance Act (SARFAESI), 2002, is proposed to reduce from Rs 500 to 100 Rs million to the asset size of Rs 100. crore or size of the existing rupee loan of Rs 1 to Rs 50 lakh.

The CEO and CEO of Tata Capital, Rajiv Sabharwal, said positive steps have been taken to boost the NBFC and HFC sector. The improvement of the FPI limits on corporate bonds, the abolition of the tax dividend distribution regime and the extension of the date of the partial credit guarantee scheme will increase the liquidity flow.

Umesh Revankar, MD and CEO, Shriram Transport Finance, said that under SARFAESI, debt recovery has been reduced from Rs 1 crore to Rs 50 lakh is one step ahead. We still expect it to be on par with the banks that are currently in Rs 1 lakh.

Muthoot CFO George Alexander Muthoot said: It is very balanced. The improvement of the partial credit guarantee scheme for NBFC is encouraging.

The IL&FS crisis after debt defaults in 2018 had caused a contagion in the national NBFC sector, followed by DHFL defaults.

The default of payment that resulted from them caused a chain reaction, which negatively affected the market price of their commercial papers, the sale of panic by investors in mutual debt funds.

The 2019-20 Economic Survey on Friday presented an early detection 'health detection' system for NBFC and HFC and help assess the impending liquidity problems faced by companies in the sectors.