Liquidity lifeline 

#GS3 #Economy 

The Finance Minister did well to try and break the confidence logjam in the credit market 

  • From an overall perspective, the first tranche of announcements made by Finance Minister under the Atmanirbhar Bharat Abhiyan is impressive indeed.  
  • There are, and will be, many issues in the details but taken as a whole, the measures announced will go a long way in lifting the spirits of the two key and troubled sectors of MSMEs and non-banking finance companies.  
  • While for the former it is an existential crisis, for the latter it is one of liquidity.  
  • The massive ₹3-lakh crore collateral-free assistance handed out to MSMEs will help them crank up their operations.  
  • FM has done well in extending a sovereign credit guarantee for the complete amount as banks may otherwise have been reluctant to support troubled borrowers.  
  • India is now entering the monsoon season when activity is traditionally dull, so it is not clear how many borrowers will get the benefit.  
  • The ₹20,000 crore partially guaranteed subordinated debt programme and the ₹50,000 crore fund of funds scheme will help boost the equity portion on MSME finances but again, the finer details need to be clear. 
  • NBFCs, housing finance firms and micro finance entities get a much required liquidity boost in the form of a ₹30,000 crore scheme wherein their debt paper will be fully guaranteed by the government. 
  • With this, and the partial credit guarantee scheme of ₹45,000 crore, the government has broken the logjam wherein banks were unwilling to extend credit despite the RBI’s strong push.  
  • The Minister has also done well in addressing the liquidity issues of power distribution companies through a ₹90,000 crore infusion that will be securitised on their receivables and backed by a State government guarantee.  
  • While the headline numbers appear big, the reality is that the government will be called upon to bear the liability only if the economic situation becomes hopeless; it may not come to that.  

This is the signal that MSMEs and their lenders needed as liquidity was always there but only for the most credit worthy of borrowers. 

 

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