The Union government has undertaken multiple initiatives to ease liquidity flow in the market but any major NBFC-specific reform measures or policy change is unlikely, Shachindra Nath, executive chairman at UGRO Capital, told CNBC-TV18.com in an interview.
The Union government has undertaken multiple initiatives to ease liquidity flow in the market but any major NBFC-specific reform measures or policy change is unlikely, Shachindra Nath, executive chairman at UGRO Capital, told CNBC-TV18.com in an interview. Edited excerpts:
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What are the major themes that will play out in 2020?
Although the economy has bottomed out, the NBFC (non-bank financial company) sector will witness increasing regulatory framework as well as the overhaul of the existing government policies. The recent asset-liability management (ALM) and liquidity coverage ratio (LCR) framework for NBFCs issued by the RBI (Reserve Bank of India) is a step in that direction. Moreover, the NBFCs with competent management and leadership teams and with stringent corporate governance framework will continue to differentiate themselves from the pack; because of their strong business fundamentals, debt will continue to flow to those professionally-managed and well-organised NBFCs.
What are your expectations from the budget? Are you expecting a big boost for the NBFC space in Budget 2020?
Over the last few months, the government has undertaken multiple initiatives to ease the liquidity flow in the market such as recapitalisation and consolidation of public sector banks, partial credit guarantee schemes for the NBFCs and HFCs (housing finance companies), securitisation of the loan portfolios of NBFCs and relaxation of the securitisation guidelines for NBFCs. The government has been continuously addressing the issues affecting the NBFC sector. Therefore, in the upcoming budget, we do not expect any major NBFC-specific reform measures or policy change. Nevertheless, the budget may announce some minor yet impactful modifications in the policies and regulatory norms, in line with the stress-alleviating measures undertaken by the government for the NBFC sector.
How are you reading the sharp disconnect between market movement and the macro environment? How long, do you think, will it take for the macros to improve?
The markets are scaling new peaks because there is an increased liquidity flow into the Indian market as the central banks across the world have injected liquidity to stabilise the vital economic parameters. In India, on the other hand, the liquidity flow into SIP is increasing month-on-month. However, instead of debt funds, the liquidity is going into large caps. In the last year, the increase in the share price movement took place only in the large caps, as there are only a handful of companies with strong business fundamentals. Smallcaps and midcaps, meanwhile, witnessed sharp corrections. The markets saw a valuation disconnect only in the largecaps. All in all, the liquidity will continue to follow the same pattern and, as a result, the disconnect between the market movement and the market movement will persist.
The economy seems to be moving from a cyclical downturn to a structural downturn—primarily due to a lack of appreciation of the tactical measures which have been taken by the government. On its own, it would take at least a few years for the growth momentum to come back. However, if the government decides to start large capex through its own mechanism into sectors that can generally lift the demand cycle, you may see a fast revival.
What is your view on the government’s fiscal policies?
In the recent past, there have been multiple initiatives by the government to ease the fiscal stress like a corporate tax rate cut, direct beneficiary scheme, etc. The reported fiscal deficit is 3.4-3.5 percent for the current financial year. If one takes into account the government-run organisations like NHAI (National Highways Authority of India), FCI (Food Corporation of India), etc. the actual fiscal deficit goes up to 8.9-9 percent. So there is very little scope for the government to announce further fiscal stimulus.
If the government decides to borrow to finance the fiscal deficit, the decision may hurt growth by crowding out private sector organisations from borrowing. So the ambit of incremental fiscal stimulus is extremely limited. However, for India maintaining a growth trajectory is more important than just maintaining fiscal deficit and there has to be a bold move to generate income through large divestments and redirect the resources towards capital expenditure. We have to remember that there has to be a balance between direct social benefit scheme and the generation of employment through structural reforms.
What are the key concerns to keep an eye out for in 2020?
Globally, one of the key concerns is the outcome of the US-China trade talks which will have a far-reaching effect on the global economy as well as the domestic economy. Impact of Iran oil sanctions on the Indian economy and its inflationary effect is another cause for concern. Whereas in the domestic economy, the key focus would be the tightening of the corporate governance norms by the government to keep things under control.
Will the Reserve Bank of India face any difficulties in cutting rates amid an apparent sign of stagflation?
The RBI has cut repo rates quite a number of times to boost the economy. However, public sector banks and banks, in general, haven’t been able to pass on the repo rate reduction to the borrowers because of their stressed balance sheets. The benefits of the repo rate cut need to percolate down to the ultimate beneficiaries. There is no need for the RBI to cut the repo rate further.
Meanwhile, the overall risk in the market has increased. Therefore, in order to address that risk, a structure has to be put in place to provide comfort to the bank. In order to inspire confidence among the banks and NBFCs, a thorough asset-quality review is required so that people concerned are able to size the quantum of the problem. Quantifying the problems will give confidence to the investors to fund banks and NBFCs.
What is your outlook for 2020? What should investors do?
NBFCs that are specialised, retail-focused and equipped with efficient management teams with a proven track record of execution will continue to do well. The India growth story is still intact. The macro-economic narrative hasn’t changed. Credit under-penetration is still a challenge for SMEs in India. In order to drive growth, NBFCs have to explore those opportunities. Prominent PE investors like Sequoia, TPG, CDC Group, Blackstone, etc. are continuing to invest in lending platforms and financial services firms with a long-term perspective. Their faith in the India growth story will boost the confidence of the investors.
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First Published: Jan 6, 2020 9:37 AM IST