Budget 2019: will liquidity infusion in NBFC sector help mutual funds?

The government will provide one time six months' partial credit guarantee to public sector banks for the first loss.

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Mutual fund managers believe the budget proposal to infuse more liquidity into the troubled NBFC sector would indirectly benefit mutual funds. Mentioning the important role of NBFCs in sustaining consumption demand as well as capital formation in small and medium industrial segment, the finance minister said financially sound NBFCs should continue to get funding from banks and mutual funds without being unduly risk averse and proposed a partial credit guarantee to public sector banks.

“For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rs 1 lakh crore during the current financial year, government will provide one time six months' partial credit guarantee to public sector banks for first loss of up to 10 per cent,” said the finance minister in her budget speech.

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“It is a decent good credit enhancement given by GOI. Rs 1 lakh crore on an NBFC size of 12-15 lakh odd crore is a decent liquidity infusion. From an overall sector perspective, it is a big boost. We have been very positive on the sector. Last 6-8 months there have been a few issues which were not able to tap liquidity. It is not that NBFC sector at large is not getting money from capital markets,” Devang Shah, deputy head-fixed income, Axis Mutual fund.


“Any action which eases the liquidity worry for NBFCs does come positive for mutual funds. Mutual funds which are holding these NBFCs will have more relief, they will have an assurance that there is another liquidity supply to NBFCs. So, indirectly it does help,” says Akhil Mittal, senior fund manager, Tata Mutual Fund.

Further, the budget stated that NBFCs which do public placement of debt have to maintain a Debenture Redemption Reserve (DRR) and in addition, a special reserve as required by RBI, has also to be maintained. “To allow NBFCs to raise funds in public issues, the requirement of creating a DRR, which is currently applicable for only public issues as private placements are exempt, will be done away with,” said the finance minister.

Mutual fund managers believe this provision of DRR will also help in easing up the liquidity.
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However, some mutual fund managers are not satisfied with the proposed measures. They believe that the measures are not significantly large and can only help to boost some confidence in the sector.

“The measure on NBFCs where PSU banks buying pooled assets of up to 1 lakh crore from ‘healthy NBFCs’ will be guaranteed of losses up to to 10 per cent (Rs 10,000 crore) seems like a good step to bridge the trust deficit but the amount is small in context to the size of some of the troubled NBFCs and we have to await on what type of assets are allowed under this arrangement. The most stressed NBFCs in terms of not being able to raise funds from the bond and loan markets are those that seem to have a very high exposure to real estate. Whether this government which has tightened the real estate sector will now offer some kind of a bail out to some of those same firms is unclear,” says Arvind Chari, head fixed income, Quantum Advisors.

The budget also proposed to place appropriate proposals to strengthen the regulatory authority of RBI over NBFCs in the Finance Bill. Further the budget speech mentioned that steps will be taken to allow all NBFCs to directly participate on the TReDS platform.


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