The first budget of the newly re-elected government was placed on July 5, 2019, by the Finance Minister Nirmala Sitharaman. The budget failed to address the real problems of the economy like unemployment, agrarian crisis, healthcare, and debt-ridden banking sector. Economists have also pointed out the discrepanciesin the presented budget figures, in comparison to interim budget’s and previous year’s revised figures. The budget focuses on infrastructure and plans to invest Rs 100 lakh crore in the next five years, with more funds from outside the country. For the first time, India is going to raise funds from the international market through the sovereign bond – which will pose a severe threat to the domestic economy due to increased dependence on the volatile global market.
Our analysis of the budget mainly focuses on the measures announced by the Finance Minister with respect to banking and non-banking sector, mired with multi-faceted problems. The already burdened banking sector is now being asked to cater to liquidity crisis in non-bank sector without taking any definitive steps to resolve the crisis for once and all.
One major challenge facing the Indian economy is the Non-Performing Assets (NPA) crisis of the Public Sector Banks (PSBs). The government hasn’t come up with a concrete measure to prevent the reoccurrence of the crisis. PSBs are burdened with massive NPAs and NBFCs are not able to raise funds after the failure of two big NBFCs – Infrastructure Leasing and Financial Services (IL&FS) and Dewan Housing Finance Limited (DHFL). Credit growth is not picking up as banks are being cautious.
Instead of identifying problems, the government seems to be keen on painting a rosy picture at the cost of the economy. With all the existing issues in the domestic financial sector, Finance Minister, in her budget speech, stated that NPAs are going down, Insolvency and Bankruptcy Code (IBC) has helped banks in recovering bad loans, ‘financially-sound’ NBFCs will not face any difficulty in raising funds from banks. Further, a fresh infusion of Rs 70,000 crore in public sector banks was announced by the minister.
The NPAs, as per the budget speech, got reduced by Rs 1 lakh crore in the previous year. But there is no clarity on the amount of new loans that turned bad, amount of loans recovered and the amount written off in the same financial year. Finance Minister also proposed the consolidation of public sector banks, without any assessment of bank mergers done last year. The recent merger of Bank of Baroda, Dena Bank, and Vijaya Bank has led to the closure of branches in many areas. While the merger adds up the capital of all the banks, it also adds up their bad loans. As small banks cater to regional banking needs, they are less susceptible to outside threats. The NPA crisis can’t be solved by merging banks but needs structural reforms in the banking system. The formation of big banks to compete in the global market also comes with a threat of “too big to fail.”
The government has once again claimed IBC as the panacea for NPA crisis while completely ignoring haircuts and time of resolution process. In the IBC resolution process, barring a few cases, banks are forced to accept haircuts in the range of 50 per cent to 80 per cent. Also, the resolution process is taking longer than the required 180-270 days.
While there was no capital infusion announced in the interim budget, Finance Minister, announced a fresh injection of Rs. 70,000 crores in the PSBs. With five banks still under Prompt Corrective Action, recapitalisation would help PSBs to lend with some ease.But the infusion of capital alone will not solve the banking crisis unless attempts are taken to improve the overall condition of the sector. As both the Economy Survey and budget mention the revival of the investment cycle to kick start the economy, PSBs would be required to lend the credit to spur growth in the economy. With no reforms like strengthening of regulation, supervision and proper viability assessments of the projects, in lending mechanisms, PSBs will again face the NPA crisis. These reforms also become pertinent when banks are transferring the burden of bad loans to the depositors as charges for various services.
With regard to the non-bank sector, the finance minister announced incentives for PSBs to buy high rated assets of sound NBFCs. The one-time six-month partial guarantee, of Rs 1 lakh crore to banks for buying high-rated pooled assets of financially sound NBFCs, would ease out the liquidity crunch faced by NBFCs. To support the government’s move, RBI also offered additional liquidity of Rs. 1.34 lakh crore to banks, against excess government securities, to lend to NBFCs. Rather than announcing a straight forward incentive to PSBs, the government should have ordered RBI to have a full inspection of all the NBFCs as blind dependence on rating agencies has led to a disastrous situation many times.
Although quite very late, the proposal for RBI to have more regulatory powers over NBFCs and to bring Housing Finance Companies under the purview of RBI is undoubtedly a welcome step. With more than 9,000 NBFCs in India and with a drastic increase in the loans issued by them, it becomes pertinent to consider them as important as banks. The government should have taken these measures in advance and not in the aftermath of the failure of two large NBFCs. Regular monitoring of NBFCs and HFCs will keep a check on them. However, the RBI and government are yet to come up with a roadmap to prevent the domino effect in case NBFCs fail.
The budget for FY 2019-20 failed to come up with a long-term vision for a stable financial system. The government has only tried to control the damage that has already been done. The measures like recapitalisation of PSBs, RBI possessing more regulatory powers over NBFCs & HFCs, incentives to banks for buying assets of NBFCs would delay the crisis in the financial sector. The lasting solution would only be achieved by additional tightening of lending practices and issuance of loans with due diligence.