As cash-strapped MSMEs continued to be the focus of the Centre, banks should now breathe a huge sigh of relief
As the banks are sitting on higher liquidity, the measures in this budget aimed to get them out of their “risk aversion” phase and to deploy credit to the sectors that needed it. In the second half of calendar 2021, industrial credit picked up, albeit at low numbers, after years of negative growth. The Centre’s focused efforts on public and private investment should help further stimulate industrial credit growth.
As cash-strapped MSMEs continued to be the focus of the Centre, banks should now breathe a huge sigh of relief. With the new variant of the Coronavirus on tour, the banks again feared failures in collections due to sporadic blockages. The financial stability report presented by the RBI also indicated the likelihood of increased stress from the SME segment. This problem is now mitigated by the continuation of fiscal stimulus measures that ease the finances of MSMEs.
In addition, the Emergency Credit Line Guarantee Scheme (ECLGS), which in its two previous versions helped SMEs reeling from the adverse effects of the pandemic, is further extended until the end of March 2023. This aside, the higher allocation of ₹50,000 crore, allocated under the hospitality SME scheme, is a step in the right direction. TransUnion CIBIL’s recent report on ECLGS disbursements made through FY 2021 reveals that the tourism, hotel and restaurant sector received only 3.7% of loans disbursed.
These measures, while helping on the one hand to sustain the growth of bank credit to industries, also help to control bank defaults, on the other hand.
In addition, the FM announced that the necessary amendments would be made to the Insolvency and Bankruptcy Code to facilitate the resolution of cross-border insolvency. That said, Indian banks have limited overseas exposure. For example, the share of foreign loans is only 5% of total loans of ICICI Bank and 7% in the case of Axis Bank. However, banks have experienced strains in their overseas portfolios in the past and are streamlining their exposure to this segment.
digital thrust
The budget also focused on improving the digital payments infrastructure by continuing its budget allocations. While the announcement of the banks setting up 75 digital banking units awaits further clarity, it signals the Centre’s intention to continue its push for digital payments, loud and clear on this front. This is a bright spot for payment providers that have recently debuted in secondary markets. Further hinting at his push on digital payments, the finance minister also announced the launch of a central bank digital currency. If it ventures there, digital currency could also help boost the ease and use of digital forms of payment. It will be interesting to watch how this plays out.
Published on
February 01, 2022
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