Capital infusion in public sector banks unlikely in the Budget

With the Indian banking sector stable plank with the ghosts of non-performing assets (NPA) vanishing -- at least for now - there may not be any major announcements by Union Finance Minister Nirmala Sitharaman as to capital infusion in public sector banks or even their disinvestment in the upcoming Union Budget, observe experts.

With the credit off-take being good while deposit mobilisation lags behind, the Centre may announce something to increase bank deposits, they added.

"The banking sector -- government and private -- is stable now. We don't expect any capital infusion announcement by the Minister for the public sector banks," Sanjay Agarwal, senior Director, CARE Ratings, said.

He added that there may not be any announcement relating to disinvestment of the public sector banks.

"Privatisation of IDBI Bank is moving ahead. The government may wait and watch post this development in relation to disinvestment in public sector banks. The process of privatisation of government banks has to be streamlined," Agarwal added.

According to a report by Emkay Global Financial Services, the government may name the two banks that would be privatised.

The report also said the banking sector witnessed slight moderation in credit growth to 15 per cent year-on-year (YoY) for the fortnight ended December 30, 2022 (it was 17.4 per cent in the previous fortnight), mainly due to the base effect (heavy lending to oil PSUs last year), while underlying growth in absolute terms remained robust.

"Deposit growth continued to be laggard, at 9.2 per cent YoY, which remains a concern amid the tight liquidity situation, resulting in most banks turning aggressive in raising deposit rates in the last quarter," Emkay Global said. "Interest on deposits has to be hiked by the banks. The budget may have some announcements on credit or tax support for bank depositors," Agarwal said.

According to Emkay Global, the banking industry would look for growth boosters in the budget like:

1. Announcement of large infra/power and defence projects with private participation, to revive capex demand;

2. Increase in bad-debt-provision deduction, under Sec 36(1)(viia) from the current 7.5 per cent of adjusted total income plus 10 per cent of average aggregate advances made by rural branches, can be expected;

3. Increase in the FPI/FII limit for public sector banks, which though looks unlikely, given there is already enough headroom;

4. Update on the Central Bank Digital Currency (CBDC), post the initial pilot run by the Reserve Bank of India (RBI), and measures to further boost digital adoption;

5. Tax relief on merger/de-merger transactions, to facilitate implementation of a holding company structure.

According to CARE Ratings' Agarwal, the budget may have an announcement relating to support to micro small medium enterprises (MSME).

"Introduction of new incentives to encourage domestic production targeting MSMEs would help us move towards becoming Atmanirbhar. This would promote domestic economy, employment and help us avoid importing of low value-add products," opined Venkatraman Venkateswaran, Group president & CFO, Federal Bank.

"We anticipate that the government will establish an export promotion fund to help MSMEs expand their footprint globally. Additionally, developing a broad-based interest equalisation or subsidy schemes for exporters, along with measures for simplifying taxation, incentives towards ESG spending and tax incentives linked to employment generation can help re-energise the small business ecosystem," said Sudarshan Chari, Executive Director & Head, Business Banking, DBS Bank India.

On non-banking finance companies (NBFC), Agarwal said that the government may extend provisions of the SARFAESI regulations.

In a survey, conducted by CARE Ratings, NBFC officials had wished that the government would bring their sector at par with banks, small finance banks and housing finance companies in terms of SARFAESI regulations, wherein they are also allowed to apply for loans above Rs one lakh as against the present cut-off of Rs 20 lakh.

"Gold loans provided by NBFCs are not considered priority status and hence, specifically to gold loans NBFCs we expect restoring priority sector status to eligible gold loans, including microloans, loans to farmers and micro-businesses. We also hope that the government will permit securitisation of short-term gold loans without the minimum holding period (MHP) requirement but with a minimum retention requirement (MRR) of 20 per cent of the book value of the loans being securitized or 20 per cent of the cash flows from the assets assigned," said George Alexander Muthoot, MD, Muthoot Finance.

Agarwal stated that Sitharaman may not announce anything relating to disinvestment in its insurance companies while the three general insurers need additional capital infusion.

It should be said, the government owned four general insurers - The Oriental Insurance Company Limited, National Insurance Company Limited, The New India Assurance Company Limited and United India Insurance Company Limited - are in the process of implementing the rejig measures that have been suggested by consultancy firm EY.