Budget 2019: How does the Union Budget need to address the current NBFC situation, prevailing cash crunch?

Published: June 19, 2019 11:03:14 AM

The NBFC crisis has had wide-ranging implications on a string of sectors in the Indian financial market. Here is what the FM can do in the Union Budget 2019 to ease the situation.

budget 2019, union budget 2019 India, NBFC crisis, Modi 2.0, Finance Minster  Nirmala Sitharaman, expectations from Budget 2019India Budget 2019: An important step that the government can take, besides injecting funds to shore up liquidity in the market, is to crate a favourable environment for NBFCs to access funds through alternate channels.

Union Budget 2019: The Indian NBFC crisis, which was essentially incited after the collapse of IL&FS, has had wide-ranging implications on a string of sectors in the Indian financial market. Several mutual fund houses, banks, corporate entities and insurance firms had put their chips on IL&FS before the firm plunged into financial ruin and eventually ended up defaulting on debt obligations, costing investors and the Indian economy at large significant discomfort. The government has since then intervened to resolve IL&FS’s debt problems, as defaulting on payments – a particularly concerning scenario – cast a heavy shadow of doubt on the future of NBFCs who’d bet heavily on the past fortunes of blue-chip infrastructure heavyweight IL&FS.

The government has already taken a wave of measures to prevent insidious fallouts from the crisis, and recent measures have quite evidently prevented a full-blown NBFC crisis. In effect, making budgetary allocations will most certainly continue to aid the sector as far as refinancing of liabilities and setting-right balance sheets are concerned. The cause of the crisis can be traced back to some serious misadventures, creating a formidable mismatch in liabilities and assets. Well, nobody saw this coming initially, as IL&Fs was often considered a blue-chip infrastructure giant, having massive holdings in infrastructure assets with several more ongoing big-ticket infra projects across the globe.

The IL&Fs crisis, among other unfavourable outcomes, translated into a severe liquidity crunch amongst NBFCs – these companies basically didn’t have enough money to lend. Well, this, in essence, can be identified as a big setback to the economy, as NBFCs not having money to lend severely chokes the flow of credit in the economy. Additionally, this has a cascading effect on economic growth, trickling down to borrowers who invariably end up defaulting due to shunted economic development (this includes both retail borrowers and business enterprises).

Going back to understanding what the government can do to ease the situation, here are some points:

The Reserve Bank of India, in the previous financial year, purchased government debt worth Rs 3 lakh crore, to be given to banks to on-lend to Non-Banking Financial Institutions. The RBI has also significantly injected funds into the market through its popular Open Market Operations. Owing to the liquidity crisis and the risk-quotient that comes with it, NBFCs are now being forced to borrow at higher interest rates, as banks have also faced significant exposure from IL&FS’s crash.

An important step that the government can take, besides injecting funds to shore up liquidity in the market, is to crate a favourable environment for NBFCs to access funds through alternate channels such as External Commercial Borrowings, Sale of Assets (this would involve government entities purchasing stakes in NBFCs to ease their financial position and refinance liabilities), and issuing public debt bonds.

Finance Minster  Nirmala Sitharaman can also continue to infuse funds to the sector to ease the balance sheets of the struggling NBFCs so that their overhauled books position them decently enough to raise money at comparatively lower rates of interest.

(By Aditya Kumar, Founder & CEO, Qbera.com)

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