Budget Provisions:

Non-Banking Financial Companies (NBFCs) are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment. NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk averse.

For purchase of high-rated pooled assets of financially sound NBFCs, amounting to a total of Rupees one 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%.

Reserve Bank of India (RBI) is the regulator for NBFCs. However, RBI has limited regulatory authority over NBFCs. Appropriate proposals for strengthening the regulatory authority of RBI over NBFCs are being placed in the Finance Bill.

It is proposed to permit investments made by FIIs/FPIs in debt securities issued by Infrastructure Debt Fund - Non-Bank Finance Companies (IDF-NBFCs) to be transferred/sold to any domestic investor within the specified lock-in period.

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.

To bring more participants, especially NBFCs, not registered as NBFCs-Factor, on the TReDS platform, amendment in the Factoring Regulation Act, 2011 is necessary and steps will be taken to allow all NBFCs to directly participate on the TReDS platform.

Efficient and conducive regulation of the housing sector is extremely important. The National Housing Bank (NHB), besides being the refinancer and lender, is also regulator of the housing finance sector. This gives a somewhat conflicting and difficult mandate to NHB. Its proposed to return the regulation authority over the housing finance sector from NHB to RBI. Necessary proposals have been placed in the Finance Bill.

Government has announced its intention to invest 100 lakh crore in infrastructure over the next five years. To this end, it is proposed to set up an expert committee to study the current situation relating to long-term finance and our past experience with development finance institutions, and recommend the structure and required flow of funds through development finance institutions.

Non-banking financial companies play an increasingly important role in India's financial system. With the enhanced levels of regulation they are subjected to by the Reserve Bank of India, there is a need to provide greater parity in their tax treatment vis-à-vis scheduled banks. Currently, interest income on bad or doubtful debts made by NBFCs is charged to tax on accrual basis. However, in cases of scheduled banks, public financial institutions, state financial corporations, state industrial investment corporations, cooperative banks and certain public companies like housing finance companies, interest on bad or doubtful debts is charged to tax on receipt basis. To provide a level playing field, it is proposed that interest on bad or doubtful debts in the case of deposit-taking NBFC and systemically important non deposit-taking NBFC shall be charged to tax on receipt basis. It is also proposed to provide that deduction of such interest shall be allowed to the payer on actual payment.

In order to encourage resolution for companies whose board of directors have been suspended by National Company law Tribunal (NCLT) and new Directors have been appointed by NCLT on the recommendation of the Central Government, it is proposed that the conditions of continuity of shareholding for carry forward and set off of losses shall not apply to such companies. It is also proposed to provide that for the purposes of computation of Minimum Alternate Tax (MAT) liability of such companies, the aggregate of brought forward losses and unabsorbed depreciation shall also be allowed as deduction.

In order to incentivize purchase of affordable house, it is proposed to provide a deduction upto Rs 1.5 lakh for interest paid on loan taken for purchase of residential house having value upto Rs 45 lakh. This shall be in addition to the existing interest deduction of Rs 2 lakh.

The government has allocated Rs 350 crore for 2019-20 for 2% interest subvention (on fresh or incremental loans) to all GST-registered MSMEs, under the Interest Subvention Scheme for MSMEs.

The government aims to cut its fiscal deficit target to 3.3% of GDP in 2019-20 against 3.4% estimated earlier.

India's sovereign external debt to GDP is among the lowest globally at less than 5%. The Government would start raising a part of its gross borrowing programme in external markets in external currencies. This will also have beneficial impact on demand situation for the government securities in domestic market.

Stocks to watch

HDFC, LIC Housing Finance, Mahindra and Mahindra Financial Services, Indiabulls Housing Finance

Outlook

The Union Budget 2018-19 has further emphasized the role of NBFCs as a powerful vehicle for delivering loans. The sector has received much needed liquidity support from the public sector banks on government guarantee. The budget 2019-20 has also ensured the parity for NBFCs with bank on tax treatment.