Heeding 'capital structure'
Why an efficient financial system is crucial to consumption ecosystem
Access to the financing of the right quality and quantity is critical for the growth of companies, industries, and economies. In benign financial markets, the aphorism "A rising tide lifts all boats" holds. It is only when market volatility appears that the quality of various businesses can be truly deciphered.
For India to truly boost its consumption-driven economy on the back of a growing middle class, a robust financial system is essential. Recent events, such as emerging markets volatility and decline in share prices, point to the need for companies to pay more attention to their "capital structure".
India has seen growth across the consumption spectrum. Everything from healthcare, consumer goods, and financial services has seen growth over the last few decades, especially since 1991. While the economy has grown extensively and consumption patterns have seen remarkable changes, there are still significant gaps in the economy that make for attractive investment opportunities.
For instance, the hospital beds per person in India is still abysmally low at 0.9 per 1,000 people versus a developed economy such as the US which has 3.1 hospital beds per person. There is a need for more hospitals to provide both secondary and tertiary care. There is also an urgent need for educational institutions to impart requisite skill-sets to doctors and nurses. Moreover, rapid urbanisation has led to a rise in chronic diseases. Facilities that can cater to all the above needs create opportunities for investors, regulators and the public alike.
The most critical aspect of the healthcare ecosystem is that financing is needed for both infrastructure creation and facilitating consumption. For instance, from a healthcare perspective, financial markets need to provide the right amount of capital and the appropriate capital structure to create hospital infrastructure. Also, financial instruments and markets need to help the end-consumer access healthcare.
Thus, the entire ecosystem needs to function efficiently. Infrastructure creation, insurance markets, and consumer-lending markets need to perform in unison for the multiplier effects to accrue from healthcare.
If adequate capital is available for creating hospital infrastructure, however, access to healthcare for end-consumers is restricted due to a lack of financing options, then the hospital infrastructure will both struggle from an investment perspective and fail to deliver economic value in the long run. Thus, for schemes such as "Ayushman Bharat" to provide value, the entire ecosystem needs access to the optimal level of financing.
The need for a robust financial backbone is not limited to the healthcare sector alone. All consumer-driven industries function on the same dynamics implying that commercial banks, Non-Banking Financial companies (NBFCs), and other financial market participants are critical for economic growth.
While short-term solutions to address immediate needs are critical, the greater focus must be on long-term structural changes. The issues that NBFCs specifically, and credit markets in general, face demand a need for creating a robust wholesale finance market. While a deep corporate bond market along with a secondary market for loans is critical, it will evolve gradually.
The structural changes needed most urgently are twofold. India needs to reassess the credit rating framework. Unless we find a more robust and foolproof mechanism to reflect credit risk through constant changes to credit ratings, market disruptions through a jump to default scenarios will be unavoidable. There is a need for a more transparent credit rating mechanism from the various agencies that can be a better indicator for embedded credit risk.
Additionally, as regulators mull over new regulations for NBFCs, there is scope to limit what sort of an asset-liability mismatch NBFCs can undertake. An NBFC that borrows from the wholesale market to lend to credit markets needs to be restricted regarding how much short-term borrowings can finance long-term lending. The eventual aim is to create a functional "securitisation" market, whereby the NBFCs can pass on some of the term risk and premium to the institution lending to the NBFC.
A more robust credit rating system along with restrictions that lead to better management of "term risk" is essential for the financial system to deliver value.
Structural changes that can create financing and flow of credit across the ecosystem are the need of the hour, especially with an eye on boosting the consumption-driven economy. Each component of the ecosystem merits attention.
(The author heads Development Tracks, an infrastructure advisory firm. The views expressed are strictly personal)