Union Finance Minister Nirmala Sitharam is going to present her second Union Budget on February 1, 2020. Talking about the recession, challenges and opportunities ahead for the financial sector, in particular, Thomas John Muthoot, CMD, Muthoot Pappachan Group says that the 2020 budget should directly address the slowdown which will uplift the market sentiment in terms of private consumption, investments and exports.
He further writes:
- The Slowdown – As per the IMF’s World Economic Outlook 2020 at the World Economic Forum 2020, growth in emerging markets and developing Asia, like India, are forecasted to slightly increase to 5.8 percent in 2020 which is a 0.2 percentage point lower as compared to the previous estimate last year. This markdown is being attributed to the “slow domestic demand which was due to stress in the non-banking financial sector and a decline in credit growth”. As 2019 was turbulent for the entire market along with a worrisome effect of the consumer inflation that has risen to a 16-month high of 4.6 per cent, the government should focus on bringing structural changes including partial credit guarantee scheme, permission to banks to provide partial credit enhancement, increase in single borrow limit on exposure to NBFCs and relaxation of securitisation guidelines – and how the growth-inflation dynamics will develop.
- NBFCs key driver of last mile funding – As per a report by CRISIL, the NBFC sector will continue to play a fundamental role in the Indian financial sector with 18% of share in the credit pie providing last-mile credit to the Indian customers. As Public Sector banks still grapple with their NPAs, private banks have outshone them in credit growth. It should, however, be noted that the reach of private banks isn’t as good as that of gold loan NBFCs. The last mile customers, to which PSU banks earlier catered, are now being served by gold loan NBFCs.
While the RBI has cut rates by 135 bps in five moves over the last year, banks have been steadily hesitant to pass these cuts on to NBFCs. Instead, to build the momentum the government should announce many such measures to improve the liquidity and fiscal situation. The 2020 budget should directly address the slowdown which will uplift the market sentiment in terms of private consumption, investments and exports.
- Stress in the NBFC sector
With the IL&FS defaulting, stress on the NBFC sector has raised serious concerns amongst many lenders. The crisis has increased the cost of funds for NBFCs and the RBI has not been able to reduce the cost proportionately even after multiple rate cuts. NBFCs that are into wholesale lending and Housing Finance Companies (HFCs) have been most affected by the liquidity crisis. However, gold loan NBFCs have beaten the estimate as they were projected to grow 8-10% in FY20 but many have already achieved that number. Some measures taken by the RBI have positively impacted us, like introducing a new funding source in the form of securitization (for Direct Assignment and Pass-Through Certificate transactions). This can also be observed in a CRISIL report, titled The NBFC reset – Re-orienting business models amid headwinds, as the off-book growth is faster and securitization as a funding source has also increased.
In addition to this, the removal of banks from the Prompt Corrective Action (PCA) framework has allowed more banks to lend to us. Extension of partial credit guarantee (PCG) scheme as well as an extension on the relaxation of minimum holding period (MHP) criteria for NBFCs/HFCs for another six months to June 2020 would support the securitisation market and therefore stabilise the liquidity situation. The RBI has been taking steps in the right direction but there is still a long way to go to reduce the stress in the sector speedily.
- Boosting the real estate sector – There is a requirement to provide a stimulus for the real estate sector by pushing investments, relaxing income tax slabs and assisting the private sector. Liquidity, of course, will provide impetus to ease consumer spending and enhance sentiment. The AIF also needs to be executed on a priority basis in order to provide immediate relief to developers reviving the affordable housing sector.
- Transmission of RBI’s repo rate cut – There is an urgent need for banks to expedite the transmission on non-repo linked loans. While the external benchmark system was introduced to link the banks’ lending rates to the repo rate of the central bank, the limited benefit has been passed on to the customers. The transmission of rate cuts, therefore, becomes imperative for the longevity of the stability of the economy and liquidity.