Allow tax-free bonds to refinance HFCs: Piramal

MUMBAI: Industrialist Ajay Piramal has called for government intervention to free up lending to non-bank finance companies (NBFCs) by allowing National Housing Bank (NHB) to issue tax-free housing bonds and by providing ‘first-loss’ protection to fund-raising by finance companies.

A first-loss cover default guarantee helps to protect the interest of lenders who provide funds to NBFCs.

With Rs 50,000 crore worth of commercial paper coming up for redemption by mid-November, the industry is worried about potential defaults. A large chunk of commercial paper borrowing is typically rolled over. However, as investors have turned cautious in the wake of the ILFS default, finance companies that have issued commercial paper have come under pressure.

“Unlike 2008 or 2013, banks have adequate liquidity. What is needed is confidence-building measures to encourage banks to lend,” said Piramal speaking to newspersons on Friday. “When liquidity is not an issue, one single failure should not bring down the system,” he added.

While Piramal Enterprises has a significant presence in wholesale and retail lending, the group’s promoter said that his lending business is unaffected by the crisis. “We do not have a problem. We do not provide loans against property. The loans are against cash flows. We have the highest skin in the game with 50% promoter stake,” said Piramal.

Piramal’s second suggestion was increasing the extent of refinance for home loan companies for which resources could be raised by allowing NHB raise up to Rs 1 lakh crore through tax-free bonds.

“Unlike the US before the crisis, there is no problem with housing finance in India. Of the 87 housing finance companies, only 12 have a portfolio of over Rs 10,000 crore. Homes are largely self-occupied and the loan-to-value ratio ranges between 60% and 70%,” said Piramal.

He said that NBFCs were playing a crucial role in lending to small business and applying the 90-day default norm applicable to large businesses cannot be applied to smaller businesses like commercial vehicle operators. “Lending business has to grow by 1.5 times the gross domestic product and this growth cannot only come from banks,” he said.

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