In the last few months, the entire spectrum of emerging markets has re-experienced scarcity of inflows or abundance of outflows. Here's what can be done.
By Gaurav Anand
In the last few months, the entire spectrum of emerging markets has re-experienced scarcity of inflows or abundance of outflows. India is a typical emerging market, by definition, it implies running twin deficits (current account and fiscal). Still, the majority population is dependent on the agrarian sector, semi-liquid currency and small proportion in the global trade market.
What was unique this time was that the fund outflows (mainly equity funds) also triggered the liquidity crunch in the Indian lending market due to default by IL&FS and credit/lending freeze by some of the larger NBFCs in the Indian MSME market.
Increasingly, the NBFCs have played a major role in MSME lending in the last two decades and have contributed almost 25% of the new credit to the MSME segment, the rest being provided by the Private and PSU banks.
Already credit parched segment of MSME, which has been reeling under low credit growth in the last 2 years (down from 5.9% to 4.5% since October 2015), got severely sidelined resulting in one of the most lackluster Diwali in the last four years.
What can be done immediately here?
Temporary tax breaks for the MSME segment, thus reducing the working capital burden (difficult political ask, GST collections are already lower for the month of October, indicating the stress in the overall economy.
Well funded banks can explore the option of extending credits to MSME by further extending the loan tenors, without taking the call on the credit quality or higher LTVs. Typical loan tenor on mortgage loans (staple loan product for MSMEs is 10 years vis.a.vis home loan with a 15-20 years tenors)The quick revival of the NBFCs to fill up the void left due to a liquidity squeeze
What can be done in the intermediate term here?
Deepen secondary credit market, enabling more securitizations and secondary portfolio sales by lenders to avoid maturity mismatch on the short end and lower the premium on long-term CPs (at least portion the liquidity premium can come off a bit)
Do not loosen on the reforms streak, broadly, Emerging markets will continue to be questioned on the fundamentals amidst the slowing global growth, trade war rhetoric and risk-off environment
To conclude, the lack of remedial action now will lead to reduced job creation (MSME segment is one of the largest employment sectors after Agri), no capital formation and erosion of initiatives like ‘Make In India’. This will have a clear impact on the coming general elections.
(Gaurav Anand is Chartered Financial Analyst and Co-Founder, Namaste Credit. The views are the author’s own.)