How NBFCs Can Play A Pivotal Role In Economic Recovery In India

Much before COVID-19 struck us, market researchers had predicted a decline in the global economic output. Since then, the macroeconomic and financial landscape of global markets, including those that are emerging has deteriorated. Clearly, no emerging economy can grow at its normal pace and India is no exception.

India’s Finance Minister recently announced a financial stimulus package of ₹20-lakh-crore. This is a step in the right direction as it sets into motion the country’s vision of a self-reliant India or Atmanirbhar Bharat. These much-awaited measures will give the Indian economy a boost, helping it get back into track with five key pillars of growth: Economy, Infrastructure, Technology Driven System, Vibrant Demography and Demand. Specifically for NBFCs, the recent announcement of Rs.45,000 crore Partial Guarantee Scheme 2.0 can be a game changer.

The consumer finance provided by NBFCs is an important element of the economy 

The sudden ‘dead stop’ of the global economy is leading to the loss of livelihood for millions of people who will need to start from a scratch. It may take them years or even a decade to fathom a life with countable financial reserves.

The World Bank estimates that micro, small and medium-sized enterprises represent about 90% of businesses globally and more than 50% of employment worldwide. Many of these businesses and their employees are excluded from conventional sources of finance in the formal banking system and are at risk given they lack sufficient savings to tide them over during the shutdown.

In India as well, lakhs of households are hoping for government schemes and measures to wriggle them out of this crisis. Even after the lockdown is eased it is important to understand that liquidity stress will still exist for many households. Indeed, many households may need to restructure their debt as they rebuild their liquidity.

NBFCs therefore, must rise to the occasion and take up the daunting task of spearheading the economic recovery process drawing successful and immediate parallels from other emerging markets.

Deferring payment of loan instalments

NBFCs have offered debt moratoriums to aid with household cash flow. The sector stands ready to extend these measures for the duration of the liquidity stress. India has followed international best practice by allowing opt in for the moratorium thus targeting needy households without imposing disproportionate costs on weakened financial institutions.

Globally, key policy measures for helping households include government subsidies of wages, transfers of cash to replace lost income and measures to reduce outgoings, such as payments to the government. Importantly governments in many countries are also taking steps to allow households to defer repayment of loans. Asia’s other emerging economies are in the same boat as India, grappling with pandemic led economic crisis, albeit with varying degrees.

Countries like Thailand have already committed a total of $80bn to shore up vulnerable parts of the economy — an amount equal to 16 per cent of GDP — and Malaysia has announced a package of $59.6bn, also equal to 16 per cent of GDP. 

In some countries, which are exiting the lockdown, vouchers are being used to stimulate spending with, for example, China providing consumers with e-vouchers to give impetus to consumption.

What is urgently needed is a system of incentives to get credit flow into the economy

Globally we are also seeing reduced capital requirements, reduced risk weights and regulators urging the use of the flexibility embedded in the accounting and regulatory frameworks to be fully used by institutions. Liquidity is being injected by central banks through, for example, repo interventions as well as by reducing certain requirements through regulatory forbearance such as lowering liquidity coverage ratios for banks.

In India if NBFCs are to sustain the debt moratorium and be able to continue to advance funds in a responsible way, it is essential they have access to funds from banks and capital markets. Yet this is proving increasingly difficult as aversion to risk pervades local banks and investors.

To address the above, the recent announcements by the FM comes as a lifeline for the NBFC sector. As per the new policy, AA rated and unrated papers will all be eligible for loan which will in turn will ease the funding pressure from the NBFCs and other lending institutes to develop funding sources. In addition, the Rs. 30,000 core Special Liquidity Scheme including investment grade debt papers and fully guaranteed by the Government which too is a much-needed breather for the sector. Overall, these measures will boost the NBFC sectors’ credit availability and in turn help in providing lending support to individuals/entrepreneurs who fall under the high risk group.

The government can also consider allowing deduction of interest on debts raised from non- resident enterprises. This step would allow Indian NBFCs to access overseas debt markets, deepening the pool of funding to aid consumption in the economy and yet transferring risk outside India.

Conclusion

To conclude, the coronavirus pandemic is the most serious challenge to banks and NBFCs in nearly a century as they will be coping with a long-term slowdown.  For an Atmanirbhar Bharat or self-reliant India, a robust NBFC sector can act as a strong lever for economic growth. The sector not only plays a critical role in fueling consumption demand in sectors like auto, consumer durable and electronics but also lends to the ecosystem of micro entrepreneurs and financially under-served individuals. The Government’s recent intervention in the sector will give a big boost to credit flow and generate much-needed consumer confidence in the market.

- Ondrej Kubik, CEO, Home Credit India

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