FM has leveraged banks and PSUs to deliver the goods

Madan Sabnavis, chief economist, CARE Ratings (Photo: PHOTO CREDIT: Kamlesh Pednekar)
The Prime Minister boosted market confidence by announcing on Tuesday a Rs 20 trillion package. The composition of the same was always going to be a point of interest. The economic relief package was expected to be in some tranches, and hence, the Finance Minister (FM) will have something for the market players in the next couple of days. The FM has spoken of 15 odd measures in Round 1 with focus on micro, small and medium enterprises (MSMEs), non-bank finance companies (NBFCs) and power sector, which is significant. This is in keeping in mind both the importance of the tenet of ‘Make in India’ and going local.

The credit angle is interesting for them as the Rs 3 trillion to be disbursed by banks would go as collateral free debt for four years with a 12-month moratorium. This will help them to access funds to meet requirements for payment of salaries and raw materials. For the units under stress, Rs 20,000 crore support is to be provided as subordinate debt. The ones which are viable, Rs 50,000 crore of equity infusion is to be created from a fund of funds, or Rs 10,000 crore, so as to enable them to grow and get listed on SME exchanges. Hence, the flow of funds will improve for the SMEs. It would, however, need to be seen whether banks would go beyond the priority sector stipulation over here, as there are loans being given even today to the SMEs under MUDRA, and hence the delta involved would be interesting to watch.

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The alteration of the definition of MSMEs is definitely good for them. So far, there was an incentive to remain small due to the benefits to be drawn by being so classified. However, now they could grow to higher levels as specified, which will help to build scale. On-time payments will help them to get their dues from government agencies.

The other big announcement pertains to the NBFCs, which do not have a good rating. For this, there are two measures. The first is guaranteeing Rs 30,000 crore of debt and giving 20 per cent first loss guarantee of Rs 45,000 crore. These, as can be seen, would be contingent liabilities for the government and hence not really add to the fiscal deficit until invoked.

The third big measure is for Discoms for Rs 90,000 crore, which will be funded by Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC) against receivables of these distribution companies. This move will ensure that the Discoms can make payments to their suppliers, which would be the generators and transmission companies. Hence, this is good move for the power ecosystem.
These two big measures would involve around Rs 3 trillion from banks, Rs 30,000 crore from the budget for subordinate debt and equity support (it can be assumed that Rs 40,000 crore of the Rs 50,000 crore would be funded by private players), and Rs 75,000 crore as contingent liability. The third is being supported by the public sector undertakings (PSUs), which would probably have to use their reserves or borrow from the market. Given their good credit rating, they would be in a position to do so at a lower cost. Quite clearly, these big measures have been kept outside the direct ambit of the Budget as of now and involves other agencies like banks and PSUs providing the funding.

Given that around Rs 7.5 trillion of relief was provided by the Reserve Bank of India (RBI) and government earlier, the balance Rs 12.5 trillion was to be expounded on. Wednesday’s measures are for around Rs 5.85 trillion (including Rs 50,000 crore in TDS, which is not a give-away as it has to be paid at the end of the day). Another Rs 6.5 trillion or so would probably be announced over the next few days. We need to wait and watch.

(Madan Sabnavis is chief economist at CARE ratings. Views are personal.)


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