The Union budget for 2011-12 highlights the Indian government’s continued thrust on supporting growth, which could be quite beneficial in the short to medium term, as far as the asset financing industry is concerned.

However, the higher inflation risks and the probability of a slowdown are the factors to watch out for as we progress.

On fresh banking licenses and insurance amendment bills, which were among the issues most keenly awaited for a long time, the budget says that Reserve Bank of India is planning to come out with the guidelines for fresh licenses before the close of this financial year 2011. Hopefully the wait for at least the guidelines will come to an end on March 31, 2011. Also one has to wait for the contents of the insurance amendment bill, which is going to be tabled in the current session of the Parliament.

Overall, it is a status quo for the asset financing Non Banking Finance Companies (NBFC). For infrastructure financing companies, though, there could be some impact, as the budget proposes enhanced foreign institutional investment (FII) in corporate debt issued by infra companies by additional $20 billion and also permission to invest in unlisted bonds with a minimum lock-in period of three years.

This measure could have also included infrastructure-financing companies (NBFC infra), which would have lead such NBFCs, theoretically, to have an additional source of funding. But, in practical terms, it may not mean much for a number of structural and technical reasons. For instance, much of foreign investment in corporate debt (allowed so far) has been at the short end of up to one to two years only. Foreign institutional investors have evinced interest only in short tenors for a number of structural and technical reasons such as illiquid markets, low yield on long tenors in comparison to the short tenors. However, infrastructure and infrastructure financing companies will basically need funding for the long term. This situation is not going to change in the foreseeable future. Therefore, the budget proposal on enhanced foreign investment in corporate debt is not likely to mean much in our view.

Overall, the financial system and banking system liquidity may continue to remain under pressure for the following reasons. High government borrowings of some Rs 345,000 crore against Rs 335,000 crore last year.

Though this is budgeted at nearly the same level as last year, other borrowers would have found real comfort with a notable reduction. Credit growth in the system continues to be quite robust. On an overall basis, we feel that deposit growth in the system could continue to lag behind the credit growth and overall asset growth (credit + investments). While deposit growth is around 15 per cent, credit growth is running at 22 per cent on a year-on-year basis currently. This large mismatch seems here to stay.