Analysis | Budget 2021 ticks right checkboxes for NBFC revival, but implementation remains key

The expansionary and growth-focussed Budget 2021-22 is an attempt to provide the much-needed impetus to the economy, following the slowdown induced by the COVID-19 outbreak. Non-banking financial companies (NBFCs, including housing finance companies), have a vital role to play in the revival process given their disperse and diverse presence affects many key segments of the economy. In this regard, the Budget proposals while trying to address the key concerns faced by the NBFC sector also pave way for a sustainable reversal in its growth trends.

Given that the NBFCs are the largest net borrowers from the financial system (as defined by the RBI), the proposal to set up a permanent institutional framework to facilitate purchase of debt securities during the stressed and normal times augurs well for the sector, which was faced with funding constraints over the last two years. Such a permanent institutional framework should lead to an improved liquidity in the secondary bond markets and revive the overall demand for primary issuances; it could also act as a backstop during stressed situations. The recapitalisation of public sector banks by about Rs 20,000 crore is expected to improve their lending capacity and free-up limits for taking further exposure towards NBFCs.

The key target segments namely micro, small & medium enterprises (MSMEs)/small business, housing and infrastructure would benefit from increased outlays and extension in tax rebates. The MSME outlay has been increased to Rs 15,700 crore vis a vis about Rs 5,600 crore in the 2020-21 RE, with the increase largely being towards the Guarantee Emergency Credit Line (GECL) scheme for eligible MSME borrowers. “Housing for All” continues to be the focus area; tax sops for buyers in the affordable housing segment have been extended by one more year (i.e. till March 2022), which should revitalise demand. Also, to keep the supply adequate, the tax holiday for builders operating in this space has been extended till March 2022. The PMAY outlay for the next fiscal is lower than the 2020-21 RE; the reduction is seen in the PMAY-Urban budget while allocation is stable for PMAY-Rural. Overall, the commitments towards existing schemes and extension of benefits/sops would positively impact demand and bolster borrower level cash flows.

Budgetary provision for capital expenditure has been increased by about 26 percent vis a vis 2020-21 RE. Capital outlay towards key infrastructure segments – roads and highways, railways, etc. has been increased significantly. In view of the above, the budget also proposes setting up of a Development Financial institution (DFI) with an initial capital infusion of Rs. 20,000 crores. The DFI is expected to have a credit portfolio of about Rs 5 lakh crore in three years. Further, NBFC-IDFs, as per the budget proposal, can issue zero-coupon debentures, which would help widen their investor base. The above initiatives would facilitate long-term financing to NBFCs lending to the infrastructure and related segments. The voluntary scrappage policy for commercial vehicles and personal vehicles could give a fillip to the replacement demand, which would require financing. The proposed tenures for scrappage are fairly high and a large part of these vehicles would already be under replacement process, the impact of this proposal would hinge on the incentives and implementation mode.

The voluntary scrappage policy for commercial vehicles and personal vehicles could give a fillip to the replacement demand, which would require financing.

Overall, the budget tries to address the key issues faced by the sector post the pandemic, though execution remains to be the key. Also, while some of the measures may take time to fructify, the direction is positive and would bolster the sector.