Providing Succour

The Budget will lower to a large extent the liquidity stress in the financial sector.

- Anand Adhikari And Rashmi Pratap

Half a dozen weak public sector banks (PSBs) under the Reserve Bank of India's (RBI's) prompt corrective action (PCA) framework will soon be able to re-start lending. Union Budget 2019/20 has announced a Rs 70,000 crore capital infusion for state-owned banks, which control two-third of the banking system's deposits and advances. Also, strong non-banking financial companies (NBFCs) will now have a ready window to sell retail assets to banks to raise resources. The government has offered to protect the first set of losses (up to 10 per cent) that banks will suffer if these investments turn bad. Similarly, the government's bold decision to tap overseas markets for borrowings to bridge the fiscal deficit will ease pressure on banks to buy government securities. This will give banks more room to support India Inc. and lower long-term interest rates. This is, of course, risky too, as foreign currency volatility has the potential to increase the governments debt servicing burden drastically. Finally, the task of regulating housing finance companies has been taken away from the National Housing Bank and given to the RBI. The RBI is in a much better position to regulate the segment and ensure financial stability, which was threatened after last year's IL&FS and Dewan Housing crises.

Given the liquidity and solvency issues, there was an urgent need to fix the many gaps in the financial system. The Budget tries to do just that. While many of the above-mentioned measures will go a long way in strengthening the system, there is a need for improving governance, re-visiting many business models, encouraging new ones like payments and small finance banks and keeping a check on different market segments such as mutual fund, insurance, non-banks and banks due to their strong inter-connectedness.

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