Budget 2019: Government Banks On Increased Credit Flow To Revive The Economy

The Indian government’s decision to step up capital infusions into public sector banks, while also providing some support to stressed non-bank lenders will help improve the flow of credit to the economy.

The decisions, announced as part of the Union Budget on Monday, come at a time when the economy is slowing. While staying away from any large fiscal stimulus through direct spending, the government decided to infuse a larger-than-expected Rs 70,000 crore into public sector banks.

“Having addressed legacy issues, public sector banks are now proposed to be further provided Rs 70,000 crore capital to boost credit for a strong impetus to the economy,” finance minister Nirmala Sitharaman stated in her speech.

The capital infusion will not only address regulatory capital requirements but also provide growth capital to banks, said Anil Gupta, head of financial sector ratings at rating agency ICRA.

Gupta also expects the capital infusion to enable all public banks to exit the Reserve Bank of India’s Prompt Corrective Action Programme, which restricts the lending abilities of these lenders.

Outstanding bank credit rose to Rs. 86.3 lakh crore in the fourth quarter of the last financial year, rising by 12.3 percent over last year. However, incremental credit growth has been led by private banks as most public sector banks remained constrained for capital.

The fresh capital infusion will help boost credit and give a strong impetus to the economy, while removing some of the weak banks from RBI’s PCA norm, said SBI Economic Research in a report on Friday. The report added that there is a high correlation between recapitalisation and credit growth.

Apart from infusing capital directly into public sector banks, the budget also provided support to stressed non-bank lenders.

The government said it would provide a one-time six-month partial credit enhancement to high-rated pools of NBFC loans. In a simultaneous announcement, the RBI said that a liquidity pool of Rs 1.3 lakh crore would be made available to banks for on-lending to NBFCs and HFCs.

The government also gave the RBI greater supervisory powers over NBFCs, by giving the regulator powers to supersede the board of a non-bank lender if the need arises.

Together, these steps are intended to give confidence to investors lending to NBFCs and reverse the slowdown in lending from this segment.

Poor credit growth in NBFCs brought into question the goal of a $ 5 trillion economy, said Arun Singh, chief economist, Dun & Bradstreet. The proposals can help address some of the funding issues impacting investments, said Singh. The real impact, however, remains to be seen, he added..

Madan Sabnavis, chief economist at CARE ratings said the announcements intended to boost liquidity for NBFCs are expected to help the sector and send a positive signal to investors. However, demand is only likely to pick up after a lag.

Data released by the Finance Industry Development Council, a self-regulatory organisation for NBFCs, shows that fresh lending sanctions from NBFCs worsened in the fourth quarter of FY19. NBFCs sanctioned loans worth Rs 1.96 lakh crore in Q4 FY19 compared to Rs 2.1 lakh crore in the preceding quarter. Fresh sanctions contracted by 30.8 percent year-on-year in the January-March 2019 quarter, steeper than the 16.7 percent decline in the third quarter, according to the data.