Good liquidity-fix, wait for reforms PDF Print E-mail
Thursday, 14 May 2020 00:00
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Shobhana column


If MSMEs and NBFCs are relieved liquidity is on the way, middle-class households must be sorely disappointed the FM didn’t give them any tax breaks. The big gainers from Nirmala Sitharaman’s announcements on Wednesday, though, are the errant state discoms who are being bailed out with taxpayer money for the nth time and that too without any commitment to reform. The fiscal impact of the first round of measures of the Rs 20 lakh crore financial package is very, very modest; much of the roughly Rs 6 lakh crore or so of stimulus, would be in the nature of bank credit, though, of course, backed by a sovereign guarantee.

It is likely Reserve Bank of India (RBI) will come up some more schemes—à la LTROs and TLTROs—to channel the Rs 8 lakh crore of surplus cash that banks are sitting on into specific sectors as it has already been doing. That is not bad thinking since the fiscal deficit for FY21 is already nudging 5.5%, and even otherwise, the government cannot be the risk-taker for the corporate sector.

To be fair to the FM, though, the largesse to the discoms apart, Sitharaman has nicely balanced empathy with prudence. The chunky Rs 3 lakh crore of emergency funding for viable MSMEs, with a 100% backing from the sovereign on the principal and interest, and 12 months of moratorium on repayments, was the need of the hour. To be sure, a big chunk of these loans may never be repaid and, at some point, the government will need to capitalise the banks—the fiscal costs will be felt in that year—but there is a strong case for attempting to keep these 45 lakh units solvent and saving close to 2 million livelihoods.

More pertinently, the disbursements can be sped up since banks are already lending to MSMEs on an automated portal with sanctions approved within the hour. The subordinate debt corpus of Rs 20,000 crore—to be ‘facilitated by government’—is a lot trickier and less likely to take off because this comes with only a partial guarantee; the idea of giving promoters loans to capitalise their businesses is never a good one, but these are very difficult times. Even with assistance in e-marketing and an advantage while bidding for tenders of up to Rs 200 crore, MSMEs are not going to find it easy.

Which is why it is hard to see the fund-of-funds plan, with its ambitious Rs 50,000 crore pie-in-the-sky target to fund equity capital infusion in MSMES, take off. If the government is going to provide the initial corpus Rs 10,000 crore, that is taxpayer money unlikely to be recovered. There is no doubt whatsoever that the bulk of small units in the country have been badly bruised—first by demonetisation, then by GST and, now, by Covid-19, and it is quite possible the government views this as an investment in a very big vote bank. But, it may not be easy to prudently invest more than Rs 2,000-3000 crore, which is also not to be sneezed at.

In today’s environment, any liquidity is welcome, especially since banks have been completely risk-averse. Given how they have been reluctant to lend to the weaker NBFCs and MFIs, the 20% partial guarantee scheme, for a targeted amount of Rs 45,000 crore, might be slow to take off, unless RBI offers some kind of forbearance. The funds are intended to be invested in various products—NCDs and Commercial Paper—and banks might not be willing to take on the risk. The FM must be congratulated for limiting the guarantee because, with a risk level of 80%, lenders will be forced to exercise greater discretion; again, if banks are not confident of lending, they should be coerced into doing so.

On the other hand, there is a corpus of Rs 30,000 crore, which is fully-backed by government guarantees. This is earmarked for investments in primary and secondary market transactions in investment-grade paper of NBFCs, HFCs and MFIs. Critically, banks are likely to be asked to buy paper—not just of very high quality—but even those that just about make investment grade. This is the government’s gift to the NBFC, MFI and HFC space, at one level clearly creating a moral hazard.

The bigger moral hazard, of course, is the one created by the big Rs 90,000 crore loans for discoms that will be bailed out by the already over-leveraged REC and PFC. Although it would give gencos and IPPs liquidity, this is regressive because the liability shifts from the discoms to PFC and REC; in UDAY, the banks took the risks. The loans will be backed by state governments, but how strong these guarantees are, and whether they will be honoured, is a serious question given many of them are in a precarious position financially. State governments must reform their respective SEBs and discoms. Unfortunately though, in the interim, both PFC and REC are likely to become even more leveraged and their stressed balance sheets will compel them to cough up higher rates in the bond markets. At some point, the government will need to capitalise them.

Those wondering about the prime minister’s talk of reforms, to make India self-reliant and give the Make-in-India plan a boost—or what is being called the 1991 moment—must wait for the next round of announcements in the areas of land, labour and law. Wednesday’s chapter dealt with the immediate liquidity needs.


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