By Arundhati Bhattacharya
Budget 2019 India: A lot was expected of this budget, and the question being hotly debated is how far it came up to expectations. Well, coming from the banking and financial space, I must say that this space had more of its wishes fulfilled than many others. The government gave a clear signal of its commitment to support both Public Sector Banks as well as Non-Banking Financial Companies. Could it have gone further? Of course, it could, but what has been done is not small by any means. While there have been many voices against recapitalisation of banks, I would say that this is probably one of the best steps that could be taken, because banks can leverage this infusion in the best possible way to improve credit flow to the economy. And, improving credit flow is one of the basic requirements if we need to step up economic activity in the country in order to shift gears for higher growth.
The finance minister Nirmala Sitharaman has also, in passing, referred to more banking reforms to come. My hope is that this will indeed happen, and I think there are already media reports of the regulator beginning deliberations about the holding company structure. I do not posit that this is the magic bullet to cure the issues faced by public sector banks, but it is an incremental step in the right direction. Banks are in the service sector, and the requirement of the right kind of Human Resources cannot be overemphasised. This is difficult in the current setup, and the sourcing of the right kind of specialised manpower remains a major challenge. Towards this end, the holding company structure would be a great enabler—creating a far more level playing field for PSBs.
A commitment was also made to enable customers of these banks to be served at the counters of any Public Sector Bank. This is a new paradigm, and we need to find out what the government intends to do in this area. Does it mean creating a common platform on which all banks log on, as do their customers? That is indeed a radical thought and difficult to envisage. While creating a platform may, indeed, help weaker players for whom technology spends could be a challenge, for the larger banks, it could mean loss of competitive advantage. However, there was already talk about account portability, and therefore, one needs to be ready for disruption of any shape or colour that may occur.
Turning to the NBFCs, there was indeed a sound signal about the government’s support of the sector with the proposal of a first loss guarantee to banks purchasing asset pools from NBFCs. But, more important than this is the move to empower RBI more in the regulation of NBFCs, and shifting the regulation of housing finance companies (HFCs) to the more experienced hands of RBI. It would be great now if the RBI exercised these powers to bring more clarity in the quality of the NBFCs.
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Nothing is more dampening than uncertainty and nothing more dangerous than innuendos and rumours. We need to move past these by sorting the wheat from the chaff as early as possible. Those that are good need to return to business as usual. Those that need strengthening have to be given a roadmap so that they proceed in an orderly manner to do so. The problem can and must be overcome. It is the need of the hour, and if we are to lessen the stress on the small borrowers and SMEs that depended on these NBFCs, we must ensure an orderly process for the same. In a further welcome move, the RBI has already followed up the budget announcements with its announcement of allowing additional lending to NBFCs by Banks against their FALLCR requirements. There was also a line allowing foreign investors to invest in debt papers issued by NBFCs. This should be welcome as the sector revives.
All in all, material steps have been taken in this sector. We now look forward to the finer details and the execution of these plans to determine what impact these will finally have.
The writer is Ex-chairman, State Bank of India.
