Evolving Economy
Multiple Opportunities for Banks to Grow Despite the backdrop of articulation of a clear vision to
increase the size of the economy to US $ 3 trillion by 2020, US $ 5 trillion by 2025 on its way to reach US $ 10 trillion by 2030 as envisaged in the interim budget, union budget and followed by reinforcing policies, there is a marked slowdown of GDP to 5 percent in Q1 of the current fiscal obfuscating such aspirations. Notwithstanding such near term disruptions, the potential spurt in the size of the economy would open up multiple opportunities to different sectors, more importantly, to banks that are meant to undertake speedy and efficient financial intermediation. Banks can take a cue from the most important intentions, and aspirations were set out beginning with the economic survey, union budget, series of stimulus packages and more significant is the proposed mergers among the Public Sector Banking space. These could pose both challenges and opportunities to the banks to move to a higher growth trajectory. But the realisation of growth objectives will be contingent upon coordinating synergy of a large number of players that have an umbilical connect with banks such as nonbanks,fintech companies and peer-to-peer lenders and so on. Going by the same logic, deposits of the banking system now at INR 127 trillion and bank credit at INR 97 trillion (September 13, 2019) should be close to double its size by 2025. The stronger and fewer Public Sector Banks (PSBs) in new dispensation can look forward to handling business size far higher than they handle today. The capacity needs to be increased with improved human resource productivity and synergy of technology. With consolidation and big banks in the fray, better economies of scale can be attained. The 27 PSBs at one point of time now turning into 12 should be able to make them more capable of handling a larger chunk of business. But to tap such newer opportunities, organisational preparedness requires a granular analysis of impending scope to work out growth strategies for different lines of business. 1. Opportunities for banks To start the journey of the uphill trek to reach the GDP target of US $ 5 trillion, the road map and resource algorithm in union budget and stimulus packages (UB&Sps) are well-calibrated with continued thrust on fiscal prudence with an avowed objective to peg fiscal deficit at 3.3 percent of the GDP. It is the right opportunity for banks, more importantly, the stronger and bigger PSBs whose market share has been declining after the asset quality review (AQR) of the Reserve Bank of India (RBI) and its aftermath. PSBs need to reinstate their strategic role in supporting the economic growth and help attain the sustainable development goals set out by Niti Ayog. Overcoming the near term disruptions, achieving a sustained real GDP growth of 8 percent per annum will be necessary to inch up close to the long term growth objectives. It may look to be a tough challenge to realise the broad vision of growth, but banks can sense huge opportunities in the new measures of relief. In a bank-led economy, the efficiency of the financial sector will be critical for ensuring seamless monetary transmission and flow of credit. Many thoughtful measures built in the set of UB&Sps for strengthening the banking sector and rescuing Non-Bank Finance Companies (NBFCs) can lead to the development of a robust financial sector ecosystem. The upfront infusion of INR 70000 crores of capital into selected PSBs can shore up capital adequacy and create more lending space. The impact of these relief measures on how the financial sector groaning under the weight of ailing NBFCs and continued asset quality woes will be able to work will depend on the strategies designed andimplemented with full vigour. To unleash such opportunities, banks will have to work out strategies to overcome the series of shocks and collateral damage caused to the financial sector. It began with Infrastructure Leasing and Financial Services (IL&FS) fiasco in September 2018 with its ramifications on Dewan Housing Finance Limited (DHFL) and other interconnected NBFCs. It exacerbated with the fallout of fraud in Punjab and Maharashtra Cooperative Bank (PMCB) perpetrated in connivance with Housing Development Infrastructure Limited (HDIL). These adverse developments weakened the sentiments in financial intermediation impeding the growth. 2. Consolidation of PSBs When 18 PSBs eventually converge into 12 large and more capable PSBs, they can compete with large private peers and pose a challenge to other financial intermediaries. In the process, the customers can look forward to improved quality of customer service with fine-tuned risk-based pricing policies. Realising the need for a strong capital base to comply with Basel – III standards by March 2020, the government has infused capital in many targeted PSBs assessing the needs. It is in addition to INR 2.5 trillion already provided to PSBs in the last five years. The enhanced capital allocation can restore lending appetite.
The slowdown in credit growth in the last three years due to large-scale bad loans is also being tackled by amending several clauses of Insolvency and Bankruptcy Code -2016 (IBC) to make it strong and pragmatic. Near term disruption in the working of 10 PSBs to be formed into four large banks cannot be ruled out, but it needs to be minimised with a suitable plan of action. But more important is to derive the synergy of amalgamation in the long term. With boards of PNB, Union Bank, Canara Bank and Indian bank approving the amalgamation plan, the process has moved to the next stage to obtain formal approval of the government. Out of the newly carved outset of PSBs, six of them will be bigger in size and reach, and their role will be significant to decide the future course of financial intermediation. The 10 PSBs under merger plans have a total business share of INR 55.56 trillion with a branch network of 37663. They together wield significant clout on the banking system. It will be challenging for them to minimise the disruption in the working. The process of amalgamation should not be allowed to mar the prospects of their growth in the intervening period. Formation of separate teams for rolling out amalgamation plans and hiving off lines of responsibilities will be essential. Cordoning the disruption from stretching to operations need to be pursued by enhancing the levels of follow up and monitoring of regular performance. 3. Policy impact on banks Policies are getting aligned to work out the methods to prevent other people (other than account holder) from depositing money into a bank account. This has become necessary after the large-scale deposit of funds by the third party into the account belonging to someone else during demonetisation that impacted the efficacy of the process. It will help banks check the menace of money laundering. It will further scale down cash transactions. As part of the ease of living for customers, PSBs are expected to harness technology and increase the offer of personal loans online and can roll out doorstep banking. Senior citizens and people needing special assistance and differently-abled would get preferred attention of banks as a part of the transformation. Liquidity relief is provided to the NBFCs that have caused huge collateral damage to the financial system after IL&FS collapse and its aftermath. The lingering liquidity shortfall continues causing successive default in honouring their financial commitments. Under the new arrangement, the government will now encourage PSBs to buy highrated pooled assets of the sound NBFCs up to INR 1 trillion for which the government will provide a one-time six-month partial credit guarantee for the first loss of up to 10 percent. Banks are also incentivised to support the NBFCs by using one percent of their Net demand and time liabilities (NDTL) to be treated as high-quality liquid assets for computing their liquidity coverage ratio (LCR). This extra liquidity can be used to extend fresh funding to NBFCs and Housing Finance Companies (HFCs) effective July 5, 2019. NBFCs will also be treated at par with banks in respect of tax breaks on interest received. They will now be able to handle taxes on losses arising out of Non- Performing Assets (NPAs). Government has proposed an amendment to Section 45-IA of the RBI Act 1934 to empower the central bank to supersede the board of NBFCs and enable resolution of financially troubled NBFCs through merger, restructuring or splitting them into viable and non-viable units known as bridge institutions. RBI can now remove auditors, call for audit of any group company of an NBFC and can even decide upon the compensation of senior management. Such comprehensive empowerment can improve public confidence in the NBFC sector. RBI will now regulate HFCs, a power so far vested with National Housing Bank (NHB). Out of the 82 HFCs, top five HFCs have a marketshare of over 90 percent that is more important to be brought under robust regulations. 4. Scope for increased flow of credit Despite hefty repo rate cuts by the RBI in the current rate cycle beginning February 2019, the role of banks in transmitting policy rates has remained subdued. The weighted average lending rates (WALR) on fresh rupee loans hardly decreased by 29 basis points (bps) and the WALR on outstanding loans increased by seven bps.
Further drilling down the WALR trends will indicate that foreign banks, private banks and PSBs have brought them down by 66, 48 and 25 bps respectively. Similarly, the market share of fresh rupee loans of private banks has gone up to 49.3 percent as against 39.8 percent of PSBs during the fiscal up to August 2019. Such trend reflects a more aggressive role of private banks compared to PSBs that are struggling with the high volume of toxic assets. The rest of the market share of 10.9 percent of fresh rupee loans goes to other sectors of banks. Since the bulk of the beneficiaries at the bottom of the pyramid are with PSBs, the flow of credit may not have reached the wider section of the society limiting the revival process. However, with an increasing market share of private banks and enhanced lending activism, the benefit is beginning to impact the larger segment of borrowers even at the lower rung of the society. Even an overall trend of credit growth of banks does not augur well to push growth prospects. The year-on-year (y-o-y) bank credit growth has been tepid at 10.3 percent as on September 13, 2019 as against 13.5 percent recorded during the corresponding period of the previous year that reflects marked slowdown in credit off-take during current fiscal 2020. Banks can work on new opportunities to increase credit flow based on the recent additional tax concessions extended up to INR 1,50,000 on interest on affordable housing loans. The increased allocation under Pradhan Mantri Awas Yojana (PMAY) will open up more scope for the retail lending sector. Similarly, the tax concession on home loans now at INR 2 lacs will go up to INR 3.5 lacs. The added tax concession will be available only to fresh loans to be granted during the financial year 2020. It will increase the sudden demand for home loans. With the Real Estate Regulatory Authority (RERA) institutionalised in many states, the construction / housing sector will be better regulated, protecting the rights of buyers. With a target of 1.95 crore housing units to be constructed in a record time of next two-three years to move towards the objective to provide housing for all by 2022, the sector will get a boost, and banks can tap this source which has a high cross-selling opportunity. Similarly, the income tax concession on interest on loans taken to buy electric vehicles can create additional demand for car loans. Eventually, even the auto industry may gradually shift towards manufacturing electric vehicles to fall in-line with green initiatives. With hardly one percent of the people opting for electric vehicles as of now, there will be a spurt in buyers in higher tax bracket who can save more. Increase in retail loan portfolio could be possible with the new dispensation. The infrastructure sector will be under focus with an expenditure outlay of INR 1 trillion to be spent in the next five years. Allocation of INR 80250 crores for phase-III of Pradhan Mantri Gram Sadak Yojana (PMGSY) for the upgradationof 1.25 lac kilometres of road in the hinterland will activate many interdependent businesses to boost rural infrastructure. Similarly, under ‘National Rural Drinking Water Mission’, all rural households are to be provided piped water supply by 2024. Presently, 18 – 20 percent of the households have such facility. This will also bring up many rural activities right from laying pipelines, construction of overhead tanks, civil works, job works, and sale of hardware accessories along with the job creation. Every such activity brings increased bank collaboration. Proposals to increasingly use the Public-Private Partnership (PPP) model by railways and privatisation of some of its activities when seen together with increased capital expenditure (capex) spent by the government will benefit many sectors. The proposal to raise foreign currency resources from overseas will open up new opportunities for many sectors of the economy. 5. Increased thrust on MSME Since MSME and ‘Startups’ are known to be critical employment-intensive sectors, measures are proposed to increase the flow of credit to unleash its potentiality. The angel tax has been addressed, and a two percent interest subvention is allowed on fresh loans to be granted to Goods, and Service Tax (GST) registered MSMEs for which an allocation of INR 350 crores is made in Union Budget 2019-20. Rationalisation of labour laws can help them accelerate the formalisation of the economy. The corporate tax rate is brought down to 25 percent for the firms having a turnover of up to INR 400 crores, raised from INR 250 crores which will provide relief to 99.3 percent of the 1.5 lac companies incorporated so far according to the data of Ministry of Corporate Affairs (MCA).
To reinforce ‘Make in India’ campaign to pump prime manufacturing activity, the import tariffs are calibrated to boost local manufacturing. Increase in customs duty of certain automobile components and electronic devices will increase local manufacturing activities and more so when loans are made
available with interest subvention. MSME units will be encouraged to increase production by taking benefit of concessions using digital mode. When these budgetary sops are seen together with the key recommendations of the recent report of the ‘Expert Committee on MSME (Chairman: U K Sinha)’, it will provide further insight on the emerging potentiality of the sector. Among many far reaching recommendations, the game changing proposals relate to (I) formation of Stressed Asset Fund of INR 5000 crores for the units impacted by change in external environment beyond the control of the entrepreneur; (ii) setting up an apex National / State level council for MSMEs; (iii)doubling of limits of collateral free loans under Pradhan Mantri MUDRA Yojana and Startup India to increase flow of funds; (iv)expansion of scope of Small Industries Development Bank of India (SIDBI) to be the fulcrum to steer the sector to the next level of growth; (v) creation of incentives and disincentives to the lenders by introducing Rural Infrastructure Development Fund (RIDF) scheme requiring the banks to deposit shortfall in achieving MSME targets; (vi)making it mandatory to source 25 percent of Public Sector Undertakings (PSU) needs from MSME units through Government e-Marketplace (GeM) portal; (vii) expansion of number of MSE Facilitation Council (MSEFC) to help address the delayed payment conundrum of the sector along with strengthening Trade Receivables electronic Discount System (TreDS) platform. At the same time, the government has also directed PSBs to assign credit availability aspects of MSME sector to GM level executive for accelerating the flow of credit. It also suggested a well-calibrated monitoring mechanism to institutionalise weekly feedback in a bid to improve accountability for performance. Despite several expert committees providing guidance and policy interventions from time to time, the plight of MSME continues to be weak. To energise the sector, the government had earlier rolled out 12-point MSME outreach initiatives in November 2018. One of the most important initiatives was the introduction of ‘in-principle’ sanction of loans to MSME units up to INR 1 crore in just 59 minutes. The intending borrower should log into a dedicated website – ‘psbloansin59minutes’ which will collect borrower’s details online from various digitally connected sources such as income tax department, GST and other sources to provide an in-principle sanction with which the potential borrower can approach any PSB to get the loan. These are some early efforts to speed up credit delivery, if implemented well may facilitate the borrowers. The demand for external credit of MSME sector is estimated to be in the range of INR 37 trillion in 2018 as against formal credit flow of INR 14.5 trillion that hardly meets half its needs. Bank credit to MSME sector was INR 11.7 trillion in March 2015 that could reach INR 15.77 trillion by March 2019 working out an annualised growth of 6.9 percent far below the banking industry credit growth. Because of these developments, banks can work towards increasing exposure to the MSME sector in a big way and pursue inclusive development.
Multiple Opportunities for Banks to Grow Despite the backdrop of articulation of a clear vision to
increase the size of the economy to US $ 3 trillion by 2020, US $ 5 trillion by 2025 on its way to reach US $ 10 trillion by 2030 as envisaged in the interim budget, union budget and followed by reinforcing policies, there is a marked slowdown of GDP to 5 percent in Q1 of the current fiscal obfuscating such aspirations. Notwithstanding such near term disruptions, the potential spurt in the size of the economy would open up multiple opportunities to different sectors, more importantly, to banks that are meant to undertake speedy and efficient financial intermediation. Banks can take a cue from the most important intentions, and aspirations were set out beginning with the economic survey, union budget, series of stimulus packages and more significant is the proposed mergers among the Public Sector Banking space. These could pose both challenges and opportunities to the banks to move to a higher growth trajectory. But the realisation of growth objectives will be contingent upon coordinating synergy of a large number of players that have an umbilical connect with banks such as nonbanks,fintech companies and peer-to-peer lenders and so on. Going by the same logic, deposits of the banking system now at INR 127 trillion and bank credit at INR 97 trillion (September 13, 2019) should be close to double its size by 2025. The stronger and fewer Public Sector Banks (PSBs) in new dispensation can look forward to handling business size far higher than they handle today. The capacity needs to be increased with improved human resource productivity and synergy of technology. With consolidation and big banks in the fray, better economies of scale can be attained. The 27 PSBs at one point of time now turning into 12 should be able to make them more capable of handling a larger chunk of business. But to tap such newer opportunities, organisational preparedness requires a granular analysis of impending scope to work out growth strategies for different lines of business. 1. Opportunities for banks To start the journey of the uphill trek to reach the GDP target of US $ 5 trillion, the road map and resource algorithm in union budget and stimulus packages (UB&Sps) are well-calibrated with continued thrust on fiscal prudence with an avowed objective to peg fiscal deficit at 3.3 percent of the GDP. It is the right opportunity for banks, more importantly, the stronger and bigger PSBs whose market share has been declining after the asset quality review (AQR) of the Reserve Bank of India (RBI) and its aftermath. PSBs need to reinstate their strategic role in supporting the economic growth and help attain the sustainable development goals set out by Niti Ayog. Overcoming the near term disruptions, achieving a sustained real GDP growth of 8 percent per annum will be necessary to inch up close to the long term growth objectives. It may look to be a tough challenge to realise the broad vision of growth, but banks can sense huge opportunities in the new measures of relief. In a bank-led economy, the efficiency of the financial sector will be critical for ensuring seamless monetary transmission and flow of credit. Many thoughtful measures built in the set of UB&Sps for strengthening the banking sector and rescuing Non-Bank Finance Companies (NBFCs) can lead to the development of a robust financial sector ecosystem. The upfront infusion of INR 70000 crores of capital into selected PSBs can shore up capital adequacy and create more lending space. The impact of these relief measures on how the financial sector groaning under the weight of ailing NBFCs and continued asset quality woes will be able to work will depend on the strategies designed andimplemented with full vigour. To unleash such opportunities, banks will have to work out strategies to overcome the series of shocks and collateral damage caused to the financial sector. It began with Infrastructure Leasing and Financial Services (IL&FS) fiasco in September 2018 with its ramifications on Dewan Housing Finance Limited (DHFL) and other interconnected NBFCs. It exacerbated with the fallout of fraud in Punjab and Maharashtra Cooperative Bank (PMCB) perpetrated in connivance with Housing Development Infrastructure Limited (HDIL). These adverse developments weakened the sentiments in financial intermediation impeding the growth. 2. Consolidation of PSBs When 18 PSBs eventually converge into 12 large and more capable PSBs, they can compete with large private peers and pose a challenge to other financial intermediaries. In the process, the customers can look forward to improved quality of customer service with fine-tuned risk-based pricing policies. Realising the need for a strong capital base to comply with Basel – III standards by March 2020, the government has infused capital in many targeted PSBs assessing the needs. It is in addition to INR 2.5 trillion already provided to PSBs in the last five years. The enhanced capital allocation can restore lending appetite.
The slowdown in credit growth in the last three years due to large-scale bad loans is also being tackled by amending several clauses of Insolvency and Bankruptcy Code -2016 (IBC) to make it strong and pragmatic. Near term disruption in the working of 10 PSBs to be formed into four large banks cannot be ruled out, but it needs to be minimised with a suitable plan of action. But more important is to derive the synergy of amalgamation in the long term. With boards of PNB, Union Bank, Canara Bank and Indian bank approving the amalgamation plan, the process has moved to the next stage to obtain formal approval of the government. Out of the newly carved outset of PSBs, six of them will be bigger in size and reach, and their role will be significant to decide the future course of financial intermediation. The 10 PSBs under merger plans have a total business share of INR 55.56 trillion with a branch network of 37663. They together wield significant clout on the banking system. It will be challenging for them to minimise the disruption in the working. The process of amalgamation should not be allowed to mar the prospects of their growth in the intervening period. Formation of separate teams for rolling out amalgamation plans and hiving off lines of responsibilities will be essential. Cordoning the disruption from stretching to operations need to be pursued by enhancing the levels of follow up and monitoring of regular performance. 3. Policy impact on banks Policies are getting aligned to work out the methods to prevent other people (other than account holder) from depositing money into a bank account. This has become necessary after the large-scale deposit of funds by the third party into the account belonging to someone else during demonetisation that impacted the efficacy of the process. It will help banks check the menace of money laundering. It will further scale down cash transactions. As part of the ease of living for customers, PSBs are expected to harness technology and increase the offer of personal loans online and can roll out doorstep banking. Senior citizens and people needing special assistance and differently-abled would get preferred attention of banks as a part of the transformation. Liquidity relief is provided to the NBFCs that have caused huge collateral damage to the financial system after IL&FS collapse and its aftermath. The lingering liquidity shortfall continues causing successive default in honouring their financial commitments. Under the new arrangement, the government will now encourage PSBs to buy highrated pooled assets of the sound NBFCs up to INR 1 trillion for which the government will provide a one-time six-month partial credit guarantee for the first loss of up to 10 percent. Banks are also incentivised to support the NBFCs by using one percent of their Net demand and time liabilities (NDTL) to be treated as high-quality liquid assets for computing their liquidity coverage ratio (LCR). This extra liquidity can be used to extend fresh funding to NBFCs and Housing Finance Companies (HFCs) effective July 5, 2019. NBFCs will also be treated at par with banks in respect of tax breaks on interest received. They will now be able to handle taxes on losses arising out of Non- Performing Assets (NPAs). Government has proposed an amendment to Section 45-IA of the RBI Act 1934 to empower the central bank to supersede the board of NBFCs and enable resolution of financially troubled NBFCs through merger, restructuring or splitting them into viable and non-viable units known as bridge institutions. RBI can now remove auditors, call for audit of any group company of an NBFC and can even decide upon the compensation of senior management. Such comprehensive empowerment can improve public confidence in the NBFC sector. RBI will now regulate HFCs, a power so far vested with National Housing Bank (NHB). Out of the 82 HFCs, top five HFCs have a marketshare of over 90 percent that is more important to be brought under robust regulations. 4. Scope for increased flow of credit Despite hefty repo rate cuts by the RBI in the current rate cycle beginning February 2019, the role of banks in transmitting policy rates has remained subdued. The weighted average lending rates (WALR) on fresh rupee loans hardly decreased by 29 basis points (bps) and the WALR on outstanding loans increased by seven bps.
Further drilling down the WALR trends will indicate that foreign banks, private banks and PSBs have brought them down by 66, 48 and 25 bps respectively. Similarly, the market share of fresh rupee loans of private banks has gone up to 49.3 percent as against 39.8 percent of PSBs during the fiscal up to August 2019. Such trend reflects a more aggressive role of private banks compared to PSBs that are struggling with the high volume of toxic assets. The rest of the market share of 10.9 percent of fresh rupee loans goes to other sectors of banks. Since the bulk of the beneficiaries at the bottom of the pyramid are with PSBs, the flow of credit may not have reached the wider section of the society limiting the revival process. However, with an increasing market share of private banks and enhanced lending activism, the benefit is beginning to impact the larger segment of borrowers even at the lower rung of the society. Even an overall trend of credit growth of banks does not augur well to push growth prospects. The year-on-year (y-o-y) bank credit growth has been tepid at 10.3 percent as on September 13, 2019 as against 13.5 percent recorded during the corresponding period of the previous year that reflects marked slowdown in credit off-take during current fiscal 2020. Banks can work on new opportunities to increase credit flow based on the recent additional tax concessions extended up to INR 1,50,000 on interest on affordable housing loans. The increased allocation under Pradhan Mantri Awas Yojana (PMAY) will open up more scope for the retail lending sector. Similarly, the tax concession on home loans now at INR 2 lacs will go up to INR 3.5 lacs. The added tax concession will be available only to fresh loans to be granted during the financial year 2020. It will increase the sudden demand for home loans. With the Real Estate Regulatory Authority (RERA) institutionalised in many states, the construction / housing sector will be better regulated, protecting the rights of buyers. With a target of 1.95 crore housing units to be constructed in a record time of next two-three years to move towards the objective to provide housing for all by 2022, the sector will get a boost, and banks can tap this source which has a high cross-selling opportunity. Similarly, the income tax concession on interest on loans taken to buy electric vehicles can create additional demand for car loans. Eventually, even the auto industry may gradually shift towards manufacturing electric vehicles to fall in-line with green initiatives. With hardly one percent of the people opting for electric vehicles as of now, there will be a spurt in buyers in higher tax bracket who can save more. Increase in retail loan portfolio could be possible with the new dispensation. The infrastructure sector will be under focus with an expenditure outlay of INR 1 trillion to be spent in the next five years. Allocation of INR 80250 crores for phase-III of Pradhan Mantri Gram Sadak Yojana (PMGSY) for the upgradationof 1.25 lac kilometres of road in the hinterland will activate many interdependent businesses to boost rural infrastructure. Similarly, under ‘National Rural Drinking Water Mission’, all rural households are to be provided piped water supply by 2024. Presently, 18 – 20 percent of the households have such facility. This will also bring up many rural activities right from laying pipelines, construction of overhead tanks, civil works, job works, and sale of hardware accessories along with the job creation. Every such activity brings increased bank collaboration. Proposals to increasingly use the Public-Private Partnership (PPP) model by railways and privatisation of some of its activities when seen together with increased capital expenditure (capex) spent by the government will benefit many sectors. The proposal to raise foreign currency resources from overseas will open up new opportunities for many sectors of the economy. 5. Increased thrust on MSME Since MSME and ‘Startups’ are known to be critical employment-intensive sectors, measures are proposed to increase the flow of credit to unleash its potentiality. The angel tax has been addressed, and a two percent interest subvention is allowed on fresh loans to be granted to Goods, and Service Tax (GST) registered MSMEs for which an allocation of INR 350 crores is made in Union Budget 2019-20. Rationalisation of labour laws can help them accelerate the formalisation of the economy. The corporate tax rate is brought down to 25 percent for the firms having a turnover of up to INR 400 crores, raised from INR 250 crores which will provide relief to 99.3 percent of the 1.5 lac companies incorporated so far according to the data of Ministry of Corporate Affairs (MCA).
To reinforce ‘Make in India’ campaign to pump prime manufacturing activity, the import tariffs are calibrated to boost local manufacturing. Increase in customs duty of certain automobile components and electronic devices will increase local manufacturing activities and more so when loans are made
available with interest subvention. MSME units will be encouraged to increase production by taking benefit of concessions using digital mode. When these budgetary sops are seen together with the key recommendations of the recent report of the ‘Expert Committee on MSME (Chairman: U K Sinha)’, it will provide further insight on the emerging potentiality of the sector. Among many far reaching recommendations, the game changing proposals relate to (I) formation of Stressed Asset Fund of INR 5000 crores for the units impacted by change in external environment beyond the control of the entrepreneur; (ii) setting up an apex National / State level council for MSMEs; (iii)doubling of limits of collateral free loans under Pradhan Mantri MUDRA Yojana and Startup India to increase flow of funds; (iv)expansion of scope of Small Industries Development Bank of India (SIDBI) to be the fulcrum to steer the sector to the next level of growth; (v) creation of incentives and disincentives to the lenders by introducing Rural Infrastructure Development Fund (RIDF) scheme requiring the banks to deposit shortfall in achieving MSME targets; (vi)making it mandatory to source 25 percent of Public Sector Undertakings (PSU) needs from MSME units through Government e-Marketplace (GeM) portal; (vii) expansion of number of MSE Facilitation Council (MSEFC) to help address the delayed payment conundrum of the sector along with strengthening Trade Receivables electronic Discount System (TreDS) platform. At the same time, the government has also directed PSBs to assign credit availability aspects of MSME sector to GM level executive for accelerating the flow of credit. It also suggested a well-calibrated monitoring mechanism to institutionalise weekly feedback in a bid to improve accountability for performance. Despite several expert committees providing guidance and policy interventions from time to time, the plight of MSME continues to be weak. To energise the sector, the government had earlier rolled out 12-point MSME outreach initiatives in November 2018. One of the most important initiatives was the introduction of ‘in-principle’ sanction of loans to MSME units up to INR 1 crore in just 59 minutes. The intending borrower should log into a dedicated website – ‘psbloansin59minutes’ which will collect borrower’s details online from various digitally connected sources such as income tax department, GST and other sources to provide an in-principle sanction with which the potential borrower can approach any PSB to get the loan. These are some early efforts to speed up credit delivery, if implemented well may facilitate the borrowers. The demand for external credit of MSME sector is estimated to be in the range of INR 37 trillion in 2018 as against formal credit flow of INR 14.5 trillion that hardly meets half its needs. Bank credit to MSME sector was INR 11.7 trillion in March 2015 that could reach INR 15.77 trillion by March 2019 working out an annualised growth of 6.9 percent far below the banking industry credit growth. Because of these developments, banks can work towards increasing exposure to the MSME sector in a big way and pursue inclusive development.
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