Re-activate NBFCs to re-boot the economy

By all counts, the upcoming Budget will be a watershed in more ways than one.

First, it will send out a clear message as to how the new Modi-dispensation proposes to find a cure for the ailing economy and put it back on track.

Second, it will test the new Finance Minister Nirmala Sitharaman’s reformist credentials and ability to come up with big ideas like the Direct Benefit Transfers and JAM trinity that the earlier the Budgets were known for.

Third, with a precarious fiscal situation and international oil prices not showing any signs of softening, Sitharaman will be expected to do a tough balancing act on revenue projections while eschewing fiscal populism. With the disinvestment story being muted in the last two years, there is hope that Sitharaman will introduce some fresh thinking on the aspect of unlocking value in state-owned enterprises.

Fourth, the banking system continues to be in a comatose state and the mess in the non-banking finance companies’ (NBFCs) space will require some focused approach to reactivate it. It is well known that the banking sector was down in the last four years and NBFCs were filling up the space.

Simply put, Sitharaman’s plate for reforms agenda is quite full, especially in the banking sector, which has been reeling ever since former RBI Governor Raghuraman Rajan showed the mirror in the form of Asset Quality Review (AQR). With nearly half of the public sector banks (PSBs) under RBI’s Prompt Corrective Action, banks have been more than circumspect in taking fresh exposure. Sitharaman is widely expected to drive consolidation in the banking system as part of the overhaul of the sector. It will not be surprising if the upcoming Budget has announcements on one or two big bank mergers on the lines of Bank of Baroda-Vijaya Bank—Dena Bank consolidation.

Performance evaluation

Another key reform that is eluding the public sector banking system is the introduction of performance evaluation standards for the bank boards. Time is ripe for the Centre to bring new standards and put the senior management (managing Directors and Executive Directors) to rigorous evaluation tests. Absence of good governance at the top is clearly telling on the weak balance sheets of the public sector banks.

As the owner, the Centre has clearly taken care of the capital needs of the public sector banks, making them in a better position to lend. However, the banks’ taking up lending or not is an activity that the Government needs to take care of. The Government has to ensure that confidence is built among the bankers to lend, especially when the economy is in a downward spiral. After the spate of bank scams including the much talked about Nirav Modi-perpetrated scam, there is very little confidence among the top brass of PSBs to take up big-ticket exposures.

NBFC woes

Unless the NBFCs are reactivated, economic recovery will be a long drawn process. In the last four years, NBFCs have filled in the shoes of the banking system. Most banks have nearly 10 per cent of their overall loan book to NBFCs. Banks advances in the last four years were growing by lending to NBFCs. But now NBFCs are in trouble, which means banks’ books are also affected. So what is the way out? This may call for a Government intervention in the form of a fund to buy the toxic assets of NBFCs.

The Government has to take care of the unorganised sector (through NBFCs) — otherwise dissent will only increase. The big question before Sitharaman is should the taxpayers’ monies be used to put together a fund to buy toxic assets of NBFCs or should the Government stay completely out of it even if it were to hurt the economy. Industry representatives feel the Government would do well to intervene rather than be an observer. However, there are many economy watchers who feel the Government should not intervene as the NBFC problem is more a solvency one and not liquidity issue.

Thomas John Muthoot, CMD, Muthoot Pappachan Group, told BusinessLine : “A lot of hope is residing on this Budget given the dismal shadow cast on the NBFC sector. We are looking forward to measures ensuring that policy rate cut benefits are passed on to NBFCs and end-consumers. There has to be transparent, structured and process driven framework for NBFCs to be able to access credit from banks”.

Natural disasters

Tapan Singhel, Managing Director & CEO, Bajaj Allianz General Insurance, suggested that the upcoming Budget should encourage home insurance for protection against natural disasters. This could be done through tax breaks.

Home insurance is a step towards protecting one’s home against uncertain natural disasters which help safeguard not only the structure of the house but also the contents, he said. Providing home insurance to the lower strata of society can help alleviate them from poverty resulting from natural disasters such as cyclones, floods, storms and earthquakes, according to Singhel.

In India, penetration of home insurance continues to be low at less than 1 per cent which is a large disparity compared to countries like the US, which are similarly prone to disasters, he said.