Banking wrap: Budget 2019 lists measures for NBFCs revival, bank recap and corporate debt markets

Banking wrap: Budget 2019 lists measures for NBFCs revival, bank recap and corporate debt markets

Finance Minister Nirmala Sitharaman, in her maiden Union Budget presentation on July 5, announced measures for revival of non-banking finance companies (NBFCs) and a recapitalisation plan for state-run banks.

After this, the Reserve Bank of India (RBI) also eased some liquidity norms to enable lenders to finance the troubled shadow banking sector.

Earlier this week, the Economic Survey had raised concerns over the spill over effects of the NBFC crisis. FM Sitharaman also proposed steps to deepen the corporate bond market in order to facilitate flow of investments to the infrastructure sector.

Nifty PSU Bank index jumped into the green after the finance minister proposed to allocate Rs 70,000 crore for recapitalisation of state-run banks. Public sector undertaking (PSU) banks are likely to see a turnaround in profitability given that most of the pain has been recognised and non-performing assets (NPAs) and credit costs are peaking out. This will lead to an improvement in return ratios, experts suggest.

In a major step aimed at easing the ongoing stress in the NBFCs, the Centre will lend a helping hand to top-rated entities. To enhance liquidity access for the sector, the government will provide one-time six-month partial guarantee of Rs 1 lakh crore to state-run banks for purchasing consolidated high-rated pooled assets of financially-sound NBFCs. This will cover their first loss of up to 10 percent.

In the Union Budget, FM Sitharaman has proposed several measures to enhance participation in India’s debt markets. One of the aims is to direct the much needed flow of investments to the country’s infrastructure sector via debt instruments.

The RBI announced liquidity easing measures on July 5 to improve flow of credit to NBFCs and housing finance companies (HFCs), following steps taken by the government to ease stress in the sector.

The Reserve Bank has front loaded the increase in Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) by a percent. For banks, the RBI has increased the FALLCR by a percent of their NDTL (Net demand and Time Liabilities) to the extent of incremental outstanding credit to NBFCs and HFCs.

The stress in India’s NBFC sector has contributed to slowdown in consumption as lack of liquidity from mutual funds and banks impaired its lending capabilities to the economy. This may continue to impact growth in the current financial year as well.

The improvement in the asset quality of banks over the last financial year is expected to help bring the capex cycle back on track, but concerns remain on sluggish credit growth. “There are signs of continuing resolution of stressed assets in the banking sector as reflected in decline in NPA to gross advances ratio as on December 2018, which should push the capex cycle,” the Economic Survey released on July 4 pointed out.