The discipline and sensitivity with which the government and the Reserve Bank of India (RBI) has worked towards managing the impact of the Covid-19 crisis in India has clearly led to setting India on a path of economic recovery and India has also emerged much stronger versus the rest of the globe in handling the crisis well. The World Bank has reported that India is better positioned to navigate global headwinds and handle global spill overs, as compared to other major emerging economies. This, coupled with the uptick in demand during the festive season makes us optimistic about India economic recovery.
The upcoming Budget is one of the most anticipated events in India as it sets the tone for the economic growth of the country. As the risk of another wave still continues, the expectations from the upcoming Budget are high. Broadly, the expectations from the Budget would be to put the Indian economy on a steady state of recovery resulting in sustained long-term economic growth. The areas for the government to focus would be to boost capex, new announcements to support investment activities and to help the sections which were most impacted during the pandemic like the MSMEs, small businesses individual borrowers, women borrowers etc.
NBFCs (Non-Banking Financial Companies) in India are expecting the Budget to provide relief in the form of exemptions, liquidity support and other measures to help them tide over the current economic crisis slowly gripping the entire world. The specific expectations from the Budget 2023-24 would be:
Granting Priority Sector Status for eligible gold loans
Restoring the priority sector status to eligible gold loans, including microloans, loans to farmers, and loans to microbusinesses. Lending gold NBFCs primarily serve those at the bottom of the pyramid, whose borrowing needs are frequently less than Rs 50,000 (equivalent to roughly 20 grams of gold as collateral) for brief periods of less than a year. Farmers, microbusiness owners, and shopkeepers use gold loans to meet seasonal working capital needs or other urgent needs that are typically not covered by the banking system. One of the most typical and pervasive sources of funding for MSMEs is the gold loan against household jewellery. When MSMEs need short-term working capital, a significant portion of gold loans are given to them.
While gold loans provided by NBFCs are not considered priority sector lending, gold loans provided by banks to farmers are. To make all micro gold loans (i.e., loans under Rs. 50,000) eligible for priority sector lending status, this anomaly may be removed. This will make it possible for NBFCs that offer gold loans to raise more money for subsequent
loans to vulnerable groups and to more effectively monetize unused household gold for economic growth. Only 500 tonnes of the estimated 25,000–30,000 tonnes of household gold in India have been able to be monetized by NBFCs, although the potential for gold loan NBFCs to significantly expand their businesses is enormous. 2
Allowing securitization of short-term assets
The industry hopes that the government will now permit the securitization of short-term gold loans without the minimum holding period (MHP) requirement but with a minimum retention requirement (MRR) of 20 per cent of the book value of the loans being securitized/20 per cent of the cash flows from the assets assigned. Similar to how credit card receivables are consolidated, regulations should permit the securitization of loans with bullet payments that are due in less than a year.
For asset-backed securities to be issued and traded easily, large-scale securitization of gold loan NBFC assets is required. This will add liquidity to otherwise illiquid balance sheets. The debt market in India will enlarge and deepen as a result, and it will be able to significantly supplement the banks as a source of long-term funds. For retail investors seeking higher returns but who might not want to lock their money away for longer periods, short-tenured debt instruments would be a desirable investment option (which exposes them to credit risk, interest rate risk, and liquidity risk among others.
Views are personal. The author is MD, Muthoot Finance.