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Expectations From Financial Services Industry

This budget would be a great opportunity to give impetus on long term reforms which can help development of the financial market and can positively impact the underserved, MSME, SME and mid-market corporates which are the backbone of our economy

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This would be a historic year in many ways, for the first time the budget will be presented at the beginning of February instead of the last. This itself is an exceptional forward thinking by the government. Any large organisation, whether public or private needs beforehand planning to start its new financial year. Prior planning gives an organisation time to adjust to new goals for the forthcoming year. Government and its different arms should also have ample time to adjust to new budgetary goals and financial allocations. While, the timing is somewhat difficult, wherein government on one hand would have the state assembly election on their mind, which would restrict them to take harsh non-populist measures, on the other hand they cannot announce too many freebees given the restriction placed by election commission on them. I find this a stark contradiction, an opportunity wherein the policy makers can present a budget which is balanced and focused on long term transformational measures.

On the backdrop of demonisation which in short run has created massive liquidity in banking system at the same time it has disrupted the financial markets. This budget would be a great opportunity to give impetus on long term reforms which can help development of the financial market and can positively impact the underserved, MSME, SME and mid-market corporates which are the backbone of our economy.

Banking: While in last couple of years’ government has unveiled the reform agenda for public sector banks, however it is time that it delinks the management and control in public sector banks. This would be the most appropriate time to covert the ‘Indradhanush’ plan into some hard policy measures. My expectation from the budget is that the ‘Bank Board Bureau’ is converted into a ‘Bank Holding Company (BHC)’ and the entire shareholding of public sector banks are folded under this holding company. This holding company should issue long term government guaranteed bond, which should be used to capitalise the public-sector banks appropriately. This BHC should segregate the entire stress assets pool of PSU banks under a government owned Asset Reconstruction Company at fair value and the security receipt should be held by the Holding Company rather than the banks themselves. The capital gap in the banks can be funded by the proceeds of the bond issue. The Management of this ARC should be outsourced to most suitable distress managers globally and they should be paid only based on recovery driven performance matrix. The bonds can be redeemed over a long run from recovery as well as from an increase in the value of listed equity of various banks, under the BHC. The holding company should have complete flexibility of bringing new management teams in public sector banks, additionally from the cut-off date of transferring these banks under BHC they should be outside the preview of CBI or CAG. These measures in itself could propel the GDP by 2 per cent by end of this government’s tenure.

NBFC \ Micro Finance \ Housing Finance Companies: We all are aware that the MSME and SME today suffer serious capital starvation. As per various industry estimates currently the gross SME output is approximately $ 586 Billion and expected to reach $ 1081 Billion by 2020. Even if the revenue / capital intensity remains constant, the capital need of this sector is expected to grow from $529 Billion to $ 994 Billion by 2020. Approximately 70 per cent of this capital need is today funded by SMEs from their own sources. Their balance capital needs are funded by financial institutions. While NBFCs are best suited to serve the need SMEs, today they constitute only 9 per cent of the total pool. Large Banking institution are structurally not suited to serve the credit need SMEs, given their credit appraisal process.

However, the niche NBFC and new generation Fintech lenders have innovative models which can effectively fill this gap. Unfortunately, they do not have requisite equity capital or sources of borrowing to effectively fund the sector funding demand. While extending the credit guarantee scheme to NBFC is a step in the right direction, there is an emergent need for public financial institution to provide Equity Capital, Tier II Capital and Specialised Lending lines to help growth of small NBFC, Alternative Lenders and Micro Finance Institutions. Government through budgetary allocation should provide for at least $ 1 Billion of funding through established institutions (SIDBI, IFCI and others) and partner with multilateral agencies, insurance companies (both public and private), global and domestic pension and sovereign funds to match government contribution and create capacity of at-least $ 2 Billion of capital pool. This would exponentially grow MSME and SME sector. This capital can be used to provide a small portion as Equity Capital, Tier II Capital, Structural Credit enhancement solutions and specialised borrowing lines. Additionally, this capital should also be used to provide similar, capital and debt solution to affordable housing finance company. Interest rates for affordable housing sector need to be brought down from the current levels of 12.5 per cent - 18 per cent. We all are aware that housing finance companies in India serve total $60 Billion of mortgage loan stock, of which top 3 HFC account for 90 per cent and 85 per cent loans today are given only salaried employees. There is a long tail of other 80 plus HFCs, which have small capital base of $ 8 Million - $30 Million. Despite innovative credit models of these affordable HFCs, there low capital base lead to higher borrowing cost eventually leading to higher housing interest rates for bottom of pyramid home buyer. If we were to achieve the governments mission of generating employment through SME sector and home for all, then unveiling changes of these natures would surely achieve Prime Minster Modi’s vision of establish an India whose future would be prosperous and healthy. I sincerely hope that this budget is used to create allocations that would consequently make these systemic changes.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

Shachindra Nath

The author is an early stage investor and mentor for start-ups in financial services as well as fintech’s through his investment vehicle Poshika Financial. Till recently he was Group CEO of diversified financial services group Religare Enterprises Limited of which he was a founding team member.

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