Budget 2020: Sitharaman will need to revive NBFCs, but how?

Could a 'fund of funds' solve the NBFC crisis?

33-Fundamental-fillips-2 Representational image | File

Finance Minister Nirmala Sitharaman knows well enough that the travails of the banking sector, especially that of the non-banking financial companies (NBFCs), are at the root of the present economic slowdown. This is why there will be much attention given towards what will she offer the troubled sector in her first full-fledged budget.

Improving cash flow in the system will be the mantra, but how the finance minister will go about this is anyone's guess. Last year, the Reserve Bank of India (RBI) cut lending rates by 135 basis points, though many banks, burdened by heavy NPAs, did not pass the benefits on. One of the stimulus measures to revive the economy was also a re-capitalisation of banks to the tune of Rs 70,000 crore.

But, with no stark uptick being noticed, and an increasing realisation that the liquidity crunch amongst NBFCs post the IL&FS debacle could be one of the biggest reasons for the present slowdown, the budget’s focus could well turn to these lenders who provide loans to small businesses and start-ups.

“Most NBFCs are under a huge liquidity crunch, which has a direct impact on the economic activities, resulting in financial pressure,” points out Niranjan Hiranandani, president of the industry body ASSOCHAM.

Adds Rachit Chawla, founder and CEO of the financial services company Finway, “There is a strong connection between the health of NBFCs and the health of micro, small and medium enterprises (MSMEs). The financial goals of the latter depend a lot on the financial stability of the former, and their collective growth is an index to economic growth.” With that playing on every mind, many believe 'a fund of funds' aimed at the MSMEs could be on the anvil.

ASSOCHAM has also called for an RBI-supported panel to address the NBFC situation on a 'war footing', and has also proposed that large NBFCs be converted into banks to better serve MSMEs and the informal sector.

Bank ownership is another (if a bit touchy) topic, with calls from some quarters to reduce initial ownership to 26 per cent—in other words, to invite foreign equity. Whether Sitharaman will bite this dodgy bullet will be interesting to look forward to.

With the government promoting RuPay and BHIM vigorously, there is also a belief that further measures to boost digital payments, like last budget's cutting of MDR rates on cashless transactions, may be announced. “The government should establish data centres in rural areas to aid digital payments,” proposes Hemant Vishnoi, co-founder of EnKash, a fintech company.

The Financial Insurance and Deposit Insurance Bill, withdrawn after being tabled in Parliament in 2018, could make a comeback in a new form, or at least as a policy announcement. The bill had created a furore among the public because of a clause that allowed the use of deposits in the bank by the general public to bailout a bank in distress. Keeping in mind the recent imbroglio at Punjab and Maharashtra Co-operative Bank, many believe this would be an apt time to put in force an updated version of the bill's other provisions to regulate and protect depositors' money.