Budget 2019 responds comprehensively to banking & financial sector, resolves liquidity issues

In the Union Budget presented on July 5, the government took measures to resolve liquidity issues of both banks and NBFCs, which had been reeling under bad loan pressure, by way of capital infusion of Rs 70,000 crore into PSU banks. It would open funding avenues for financially-sound NBFCs and provide partial credit guarantee for public sector banks for the purchase of pooled assets of financially-sound NBFCs.

The government’s move to vest the Reserve Bank of India (RBI) with additional power over NBFCs and Housing Finance companies will streamline regulations and implementations. This is expected to provide more uniform regulatory environment to the lending segment. Steps have been taken through tax measures to bring deposit taking NBFCs and systematically important non-deposit taking NBFCs at par with banks and other public financial institutions. Measures to support financially sound NBFCs and higher regulatory RBI monitoring will lead to drive for consolidation of NBFCs.

The government has proposed several measures to boost debt markets. To enhance the sources for infrastructure financing, it was proposed to set up of Credit Guarantee Enhancement Corporation and have an action plan for deepening the corporate bond repos, credit default swaps etc.

In the tri-party repo market in corporate debt securities, an arrangement to allow AA-rated bonds as collaterals was envisaged. It was proposed to allow 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. These measures should significantly ease liquidity and provide much needed impetus to infrastructure and real estate. Simplified KYC norms for FPI and move to streamline NRI investment are also steps in the right direction.

For the insurance sector, there were announcements with respect to increase in FDI from 49 percent to 100 percent for insurance intermediaries and reduction of the net-owned fund requirement for re-insurers to join IFSC from INR50 billion to Rs 10 billion, This will further encourage more insurance companies to set up operations in India. 100 percent FDI in insurance intermediaries will help in building distribution scale and penetration of insurance. This may also result in strong alternate distribution channel in addition to bancassurance.

True to its commitment to further promote the IFSC, several tax incentives have been announced such as an enhanced holiday scheme with added flexibility, tax exemption for interest paid on external borrowings, relaxation on certain distribution taxes and expansion in scope of securities (including securities held by certain Category III AIFs) eligible for tax exemption on trading in the IFSC. Further, there is a plan to develop an aircraft financing and leasing hub within the IFSC.

A social stock exchange enabling easy funding for social enterprises will give a push to several welfare schemes of the Government, providing much needed impetus to an inclusive economic growth.

Overall, the budget has responded comprehensively to the sector’s requirements by way of adequate fund allocation, better understanding of regulatory shortcomings and streamlining foreign investments into the economy.

(The author is Partner and Head – Financial Services, KPMG in India.)

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