Budget 2019-20: On Banks and NBFC

By jatin July 6, 2019 12:09


Finance Minister Nirmala Sitharaman, in her maiden Budget, sought to tackle several pain points in the economy through incremental steps rather than opting for the spectacular announcement route.

Some Key Announcement

  1. Bank Recapitalisation:
  • One of the biggest announcements made was of a ₹70,000 crore capital infusion in public sector banks to be used as growth capital, now that the legacy issues plaguing the sector have been addressed.
  • Budget 2019 proposes to implement reforms to prevent deposit of cash into bank accounts of people without their knowledge.
  • Currently, a person can deposit cash in any individual’s bank account without the knowledge or consent of the account holder, provided the depositor knows the bank account number of the recipient.
  • It may be mentioned that during demonetisation and in its wake there were reports of cash money being deposited in bank accounts, particularly Jan Dhan accounts, of many people which they later claimed to have been done without their knowledge.
  1. For NBFC Sector – A slew of measures to ease the liquidity and regulatory problems affecting the Non-Banking Financial Company (NBFC) sector, a key pain point in India’s economy at the moment.
  • The government will provide a one-time partial credit guarantee to PSBs to buy high-rated pooled assets of financially sound NBFCs
    • The NBFC sector is currently undergoing a liquidity hurdle with a spate of defaults of companies such as IL&FS along with its group companies and DHFL that started unfolding since September 2018.
  • NBFCs are regulated by the RBI, it has limited authority over the sector, therefore appropriate proposals for strengthening the regulatory authority of RBI over NBFCs are being placed in the Finance Bill
  • The government will allow NBFCs to raise funds in public issues, and the requirement of creating a debenture redemption reserve (DRR), which is currently applicable for only public issues as private placements are exempt, will be done away with.
    • As of now, NBFCs that do public placement of debt have to maintain a DRR and in addition, a special reserve as required by the RBI, has also to be maintained.
  • The Union Budget has proposed that foreign institutional investors and foreign portfolio investors will be allowed to invest in debt securities by the shadow banks. This will allow the NBFC sector, facing a liquidity crunch, to raise more funds.
    • The proposal to let FIIs and FPIs to invest in debt securities issued by NBFC would provide a much-needed boost of capital to a sector now starving of capital; an important prop to several sectors, particularly, real estate and automobile, which are reeling for lack of finance to purchasers/buyers

Source: Budget 2019-20

By jatin July 6, 2019 12:09