A month after the finance minister Nirmala Sitharaman presented Budget 2019, she is back with a rollback, frontloading capital for public sector banks (PSBs), loan restructuring for Micro, Small and Medium Enterprises (MSMEs), faster authentication for fintech non-banking financial companies (NBFCs) and supporting infrastructure. "We will be coming with one more announcement soon," announced Sitharaman. Let's understand the implication of each measure:
Rollback of surcharge - a sentiment booster
The much-criticised surcharge on foreign portfolio investors (FPIs) and domestic investors on capital gains, the announcement of which pulled down stock market indices in last few weeks, has been withdrawn. The much-awaited decision would surely improve sentiments in the short-term, but longer-term issues in the economy remain. The economy has been slowing down with the gross domestic product (GDP) plunging to 5.8 per cent in the March quarter of financial year 2018-19 (FY19). There are expectations of GDP recording a 6 per cent growth in the first quarter of FY20. There were talks of stimulus, but it is now clear the government is unlikely to go ahead with it. The revenue implication for removing surcharge would be Rs 1,400 crore, says the finance ministry. The focus should now go back to sectoral issues that are structural in nature.
Capital infusion for PSBs - banks are risk averse
The finance minister has decided to frontload the capital of Rs 70,000 crore right away in PSBs. It will not only ease liquidity for PSBs, but also pull out some of weak banks from the prompt corrective action (PCA) framework of the RBI. This capital has the potential to expand the credit by Rs 4 lakh crore. But, it is easier said than done. Currently, only the retail engine is growing and within retail, the focus has been on unsecured credit. These funds would go for buying pooled assets of only good NBFCs. Currently, there are many weak NBFCs (in term of asset liability mismatches), which need urgent capital infusion.
The budget had come out with a Rs-1 lakh crore insurance of sort, where the government had given a 10 per cent guarantee for any loss in the pooled assets for the first six months. The additional liquidity support from National Housing Bank (NHB) will also help the housing finance companies.
The corporate lending has not been happening. So, these new funds won't go to risky sectors such as real estate, NBFCs, infrastructure and Gems & jewellery. There is also a likelihood of money going for provisioning of non-performing assets (NPAs). The NPAs are still not going down. There are surprises every day.
Repo-linked borrowing - immediate scale up unlikely
The repo-linked borrowing by banks will help the new borrowers, but it is unlikely to scale up in a big way. The deposits rates have to come down first as repo rate borrowing is marginal. Existing borrowers are also not getting any benefit of repo rate cut. Are banks ready to reduce deposit rates? In addition, they are not passing on the benefits of lower cost of funds to existing borrowers.
Bonanza for MSMEs; haircuts for banks
The MSMEs have been a pampered lot as there has been a policy push from the government to banks to support MSMEs. The RBI had earlier announced a restructuring package for MSMEs where the aggregated loan was Rs 25 crore. The FM has now announced a one-time settlement (OTS) for MSMEs. Banks were reluctant to OTS because of CVC / CBI fear, but now they can freely do the OTS. But, the OTS will eat away capital because of haircuts by banks. Are banks ready to take haircuts? The bankruptcy code or window was already available to banks with MSME promoters also allowed to participate in the bidding, but the new OTS window will encourage banks to avoid the bankruptcy code.