Axis Bank CEO Amitabh Chaudhry’s six-point guide on how to build a robust credit ecosystem
They are now well placed to provide credit to support investment plans. The gross NPA ratio (GNPA) had fallen to 6.9% of advances in September 2021 from a peak of 11.6% in March 2018. 6% against 13.8% during the same period.
In addition, corporate balance sheets are also healthier, with gradual deleveraging over the past two years. Debt of listed companies, for example, had shrunk by 5%, or about ₹2 lakh crore less. Therefore, enterprises will now be able to absorb more credit for capacity expansion as investment plans gradually result in capacity expansion. For starters, political authorities should consider further expanding the reach of some of the measures that were part of an exceptional response to support severely strained cash flow and liquidity during the pandemic.
Macroeconomic policy will help set the context for a high-potential growth path. Monetary policy, for example, will facilitate currency and interest rate stability, which is important for domestic investment decisions in an environment where India will face much tighter external financial conditions. The US Federal Reserve and other G10 central banks are expected to aggressively raise policy rates in 2022.
Fiscal policy, on the other hand, will need to focus more on stimulating growth and accelerating the recovery. The Union’s budgetary strategy has turned resolutely towards investment. Capital expenditures increased from ₹4.3 lakh crore in FY2021 to a target of ₹6 lakh crore in FY2022 and ₹7.5 lakh crore in FY2023 .
The impact of these macroeconomic policies on growth can be further enhanced by sectoral and sectoral measures. Facilitating a strong credit ecosystem to fund these ambitious initiatives remains a key issue. MSMEs have become a key segment both to support growth and as a pool to absorb bank credit. The FY2023 budget, recognizing the importance of this segment, provided for expanded credit guarantees and targeted interventions for MSMEs – including the Emergency Line of Credit Guarantee (ECLGS) scheme, the Credit Guarantee for Micro and Small Enterprises (CGTMSE) and improving and accelerating the performance of MSMEs. (RAMP). To strengthen these programs, certain additional measures will make it possible to amplify their effectiveness.
First, the Goods and Services Tax Network (GSTN) is extremely reliable and helpful for underwriting and credit reporting. As of now, this data is available to lenders through borrower-specific consent. However, this consent must be provided each time a new credit facility is required and is burdensome for both lender and borrower. A new process should be developed where the borrower could provide a “standing instruction” consent, allowing the lender to obtain GST information on a regular basis, until the consent remains valid.
Second, invoice discounting platforms such as the Trade Receivables Discounting System (TReDS) have enabled smooth cash flow through early payment of receivables. Encouraging wider adoption and use of these platforms will further improve cash flow for more MSMEs. For example, encouraging public sector enterprises (PSUs) to use TReDS. Advance payments of MSME receivables from government entities will also ensure that receivables remain short-term and can be financed by banks through working capital.
Third, improve coverage of priority sector loans (PSLs) to include segments more relevant to current economic activity – such as Kisan Urja Suraksha evem Utthaan Mahabhiyan (KUSUM) loans and other small-scale green credits. Fourth, improve the eligibility criteria for affordable housing so that a larger pool of assets is eligible. It will channel the savings from the creation of new jobs into real sector activities.
Five, allow the forthcoming National Finance Bank for Infrastructure and Development (NaBFID) to sell its assets after a gestation period of 4-5 years. Securitization of infrastructure finance will improve the liquidity and risk appetite of infrastructure assets. Sixth, there is an urgent need to establish a roadmap to simplify, harmonize and streamline the income tax system through a comprehensive review of the different types of entities and remove anomalies and arbitrage between them.
In a broader context, the financial inclusion agenda is crucial for a broad-based recovery. The excellent ‘Anytime Anywhere Post Office’ program can link all 1.5 lakh post offices with basic banking solutions, thus enabling banks to distribute products through this huge network.
Exploring synergies for the multiple initiatives being considered and implemented by GoI, private companies and financial intermediaries can go a long way in maximizing opportunities.