Spurring credit flows central to first tranche of stimulus package

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Published: May 14, 2020 6:30:21 AM

MSMEs, NBFCs get support, budgetary outflows seen minimal, scope still for spending rejig, fiscal room for balance package might necessitate RBI support.

Any real enhancement of the fiscal component of the package might necessitate additional debt creation for the Centre or the RBI stepping in to monetise part of the debt.Any real enhancement of the fiscal component of the package might necessitate additional debt creation for the Centre or the RBI stepping in to monetise part of the debt.

As even the unconventional liquidity steps taken by the RBI over the past few weeks haven’t de-clogged the credit pipeline much, the government is seeking to use a good part of its extra fiscal firepower gathered via a strenuous debt route to ease the flow of liquidity across the key economic agents.

The most vulnerable in the pandemic-hit economy namely MSMEs, weaker NBFCs and HFCs, MFIs, real estate firms, electricity discoms, LLPs, professionals lacking fixed income, government contractors and low-earning workers in the unorganised sector could see moderate to meaningful impact on their hard-hit finances, thanks to the slew of steps announced by finance minister Nirmala Sitharaman on Wednesday.

The additional fiscal support ingrained in the latest steps are much smaller than the nearly Rs 6 lakh crore that the credit and other facilities aimed at leaving more cash with businesses and individuals like EPF/TDS/TCS reliefs, quicker refunds and payment of various dues to businesses, add up to. A fair amount of fiscal maneuvering room – read expenditure rejig – is available with the government. There is however, not much extra fiscal space with it, given that the Rs 4.2 lakh crore additional market borrowings unveiled for FY21 will roughly be equal to the likely revenue shortfall in the year.

Any real enhancement of the fiscal component of the package might necessitate additional debt creation for the Centre or the RBI stepping in to monetise part of the debt.

Watch video: Modi’s Rs 20 lakh cr package: FM Sitharaman’s boost for MSMEs, EPF relief impressive

Including the latest tranche and the Rs 1.7 lakh crore PM Garib Kalyan package announced immediately after the nationwide lockdown, the government has already unveiled support to the economy to the tune of Rs 7.5 lakh crore. If the nearly Rs 4.5 lakh crore of liquidity boost by the RBI is added, the support becomes Rs 12 lakh crore, leaving room for another Rs 8 lakh crore aid.

When asked about the size of fiscal component of the stimulus and how this will be financed, the minister said these would be clear, “after I finish all my announcements in the various tranches”. Given that the government has altered the borrowing schedule, she said, “it is clearly one of the ways in which we are also expecting to finance the package”.

MSMEs, which have 30% share in the economic value created and a far larger share in job creation, were the most addressed lot, as the minister came out with the first set of details of the grandiose ‘Rs 20 lakh crore economic package’ announced by the Prime Minister on Tuesday.

With the government providing 100% credit guarantee cover, a special Rs 3,00,000 crore window of ‘collateral-free automatic loans’ will be available to MSMEs struggling to restart business. The emergency credit line, most of which anyway would have been there in normal course, will have interest capped, and be open till October 2020. Also, helped by a Rs 4,000-crore support – possibly from the budget, a Rs 20,000-crore subordinate debt facility will be extended to the stressed MSMEs.

The minister also announced Rs 50,000-crore equity infusion in promising MSMEs via ‘fund of funds’, by leveraging a likely budget outlay of Rs 10,000 crore. A revision of the MSME criteria is expected to allow thousands of units to continue to enjoy assorted benefits of the tag, without being mindful of their growing size.

For NBFCs, an extra Rs 75,000 crore being provided in the form of guarantee and partial-credit enhancement for the lower-rated firms, a move that will boost their borrowing capacity. This step won’t have any immediate fiscal impact as the cost of such guarantees add to contingent liabilities.

The existing partial credit guarantee scheme, under which state-run banks would be able to purchase high-rated pooled assets from financially-sound NBFCs and HFCs – with the amount of overall guarantee being limited to first loss of up to 10% of fair value of assets being purchased by banks, or Rs 10,000 crore, whichever is lower –will be extended to cover borrowings such as primary issuance of bonds/commercial papers of such firms. The first 20% of loss will now be borne by the government.

For the struggling electricity discoms whose over-dues to gencos are now a whopping Rs 80,000 crore, a fresh credit line of Rs 90,000 crore is being given by state-run PFC-REC. While these loans are again are guaranteed by the sovereign, it is not clear whether and how much the lenders will borrow for this. The other measures are aimed at helping the contractors, real estate companies and taxpayers.

While banks apparently remaining risk-averse and preferring to park their funds with the RBI’s reverse repo facility than lend to the needy businesses, the minister said the new guarantees for loans would encourage banks to lend aggressively. “Banks are not hesitant to give loans. Loans have been sanctioned, but most customers have requested banks not to disburse loans till lock-down is lifted. That is the reason why banks were parking excess liquidity with RBI through reverse repo,” she said.

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