Financial sector set on a path towards innovation

The budget outlines several much-needed measures for development of the financial sector. The three notable aspects are the focus on innovation, steps towards structural strengthening, and move to develop various segments of the financial sector.

Other key highlights include steps to channelise savings from physical assets to financial ones, enhance financial inclusion, and remove constraints for foreign investors. Some more, though, was expected for debt markets and public sector banks.

Budget laid a clear emphasis on enhancing innovation in the financial sector. Proposal to set-up Micro Units Development and Refinance Agency (MUDRA Bank) will enable microfinance institutions to lend to individual-run micro-enterprises. Clarity and rationalisation of taxation rules for Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) will pave the way for these new vehicles to be introduced during the year. This will benefit real estate players having lease-generating commercial assets and infrastructure developers with operating projects.

The plan to set-up the National Investment and Infrastructure Fund (NIIF) for taking equity in infrastructure projects will catalyse the infrastructure investments. With the approval for Gujarat International Finance Tec-City (GIFT), India will take baby steps towards developing as a global financial centre. Finally, the planned Trade Receivables Discounting System (TReDS) will help SMEs to reduce their working capital cycle. Once implemented, these innovations have a potential to significantly develop the Indian financial sector to support multiple stakeholders and industries.

On the structural side, to strengthen the sector, the Finance Minister has announced reforms in the bankruptcy law, which will effectively address the non-performing assets challenge for banks in the long term. Allowing large non-banking finance companies (NBFCs) to use the SARFAESI Act will significantly augment their recovery efforts.

The proposed merger of Securities and Exchange board of India (SEBI) and Forward Markets Commission (FMC) will ensure better regulatory supervision of financial markets that are becoming increasingly complex.

The establishment of a Bank Boards Bureau to select heads of government-owned PSU banks and drive their capital management strategies will also strengthen the sector.

Finally, path towards a bank holding company over the medium term will enhance governance practices and allow better visibility of capital for public sector banks.

Another notable push has been given to the alternate asset management, insurance, pension, and asset management sectors.

Alternate Investment Funds have been made pass-through from an income tax perspective and foreign investment has also been allowed.

This has the potential to significantly increase the flow of funds to real estate, start-ups and early stage companies and infrastructure projects through professionally managed specialised structure.

Given the large investment needs, the bond markets and banking sector are expected to play a critical role in providing the necessary debt funding. In this context, greater attention on steps to develop the bond markets would have complemented the investments push of the budget.

Similarly, a higher capital allocation for public sector banks would have prepared them well for growth, as well as to meet their current challenges.

The author is Chief Analytical Officer, CRISIL Ratings.

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Printable version | Dec 1, 2021 2:16:21 AM |

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