By George A Muthoot
Budget 2020 India: A thriving credit market that allows for easy access to cheap capital is really the glue that holds a growing economy together. Over the last 12 months, the Indian credit markets have been witnessing a growing "credit crunch" with financial institutions becoming progressively risk averse and disinclined to lend. The risk averse sentiment continued to prevail despite risk-free rates coming down, leading to a hardening of premiums, rising cost of borrowing and consequently a credit crunch. Needless to say, the tight credit conditions started hurting demand as the cost and supply of credit have a direct impact on working capital, investments and potential growth.
Recognising the fact that credit and GDP growth are unlikely to pick up without "fixing" the financial sector first, the finance minister in the Union Budget 2020 has announced a slew of measures with an intent to give a fillip to the sector and bring about more transparency and trust.
Fuelling the lending sector
The government is fully cognisant that the prevailing liquidity crunch can potentially grow into a wider systemic malaise and has, thus, made it a point to focus on addressing the liquidity constraints for NBFCs and HFCs. Two specific announcements made on this were:
"Enhance partial credit guarantee scheme for NBFCs – currently, under the partial credit guarantee scheme, public sectors banks (PSBs) can purchase high-rated pooled assets from financially sound NBFCs and HFCs with the amount of overall guarantee provided by the government till the first loss of up to 10% of fair value of assets being purchased by banks or Rs 10,000 crore, whichever is lower. The primary objective of the scheme was to address temporary liquidity/cash flow mismatch issues of otherwise solvent NBFCs/HFCs without them having to resort to distress sales of assets in order to meet commitments. Any enhancement in the scheme is a positive for the sector.
"NBFC Eligibility for SARFAESI Act reduced to Rs 100 crore from Rs 500 crore AUM-previously, only NBFCs with assets under management (AUM) worth Rs 500 crore were eligible for debt recovery under the SARFAESI Act while only loans above Rs 1 crore were considered for recovery. A reduction in the AUM limit to Rs 100 crore and reducing the eligibility of loan size to Rs 50 lakh will definitely reduce stress in this sector.
Support to MSMEs and the agriculture sector
Several measures were announced to provide further relief to the MSME sector and fuel demand in the agriculture sector. Key among the latter is an expansion in the scope of the NABARD Refinancing Scheme with the government setting an agriculture credit target of Rs 15 lakh crore for FY21. Considering that NBFCs and cooperatives are active in agricultural lending, this is likely to have a positive impact on the demand dynamics of the sector. In order to boost the growing MSME sector, the FM introduced a slew of measures that included the introduction of a new scheme to provide subordinate debt to MSMEs and the potential launch of an app-based invoice financing loans. MSMEs are a major borrowing segment for NBFCs.
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Governance and financial inclusion
The government continues to be committed to strengthening governance and encouraging financial inclusion. An increase in the insurance cover for depositors from Rs 1 lakh to Rs 5 lakh is a welcome step. The FM also said that the contract act will be amended to ensure that all contracts are honoured.
The financial system is built on a bedrock of trust. An implicit belief that all contracts between parties will be honoured. The budget has to some degree, solidified that trust.
The writer is MD,Muthoot Finance