If there was one sector to which this budget has made a deep difference, it is the banking and financial services sector. The budget has made an attempt to help banking both from a macro and micro perspective. This sector becomes crucial because it forms the fulcrum of the economy and the health of the economy is eventually equivalent to the health of the banking system. This becomes all the more relevant in the light of the mountain of bad debts that PSU banks are contending with. Here are 10 key takeaways from the Union Budget for Banking and Financial Services companies.…
10 Ways the Budget has impacted Banking and Financial Services companies…
- One can argue that the allocation of Rs.10,000 crore for bank recapitalization may not be sufficient considering the Basel III deadlines. But the government has maintained its commitment to provide Rs.70,000 crore in all as budgetary support over four years. More importantly, the Finance Minister has made it explicit that there will be no upper limits for capitalization in case of banks that are deserving candidates and who are showing signs of a turnaround. This should be a big positive for PSU banks.
- The decision to restrict the fiscal deficit at 3.2% may appear to be a macro decision but could have far reaching repercussions for the banking sector. Firstly, it means that the RBI is likely to maintain a dovish monetary policy which will be conducive to loan growth for banks. Secondly, falling yields will be positive for the long term bond portfolios of PSU and private banks.
- Affordable housing may be a game changer for banks. The Infrastructure Status accorded to affordable housing could change the entire economics of lending to affordable houses and make it more profitable. Also these loans have traditionally had the lowest levels of defaults and can substantially de-risk the balance sheets of banks.
- The big consumption boom could help banks shift their underlying portfolios in favour of retail assets. One of the reasons private banks managed to elude the problem of bad assets was that they were more focused on funding retail assets. PSU banks, on the other hand, had a strong corporate focus and hence were sucked into the vagaries of business and sectoral cycles. This consumption boom will give PSU banks an opportunity to diversify into the retail consumption theme and create a value proposition for such banks.
- The big digitization thrust could be a silent boon for Indian banks. With the big boost to digitization hardware, digitization software and to the last mile connectivity, it gives an opportunity for banks to unbundle their banking operations and payment services. With the government focus on digitization, there could be a multi-billion dollar Paytm hidden inside each of the major banks. This digitization may give banks and opportunity to get better valuations on the back of the sum-of-parts argument.
- The Budget has also taken some key measures to help banks in better NPA management. Budget has increased the allowable provision for NPAs from 7.5% to 8.5%. Additionally, interest on NPA accounts will be taxed on actual receipt basis instead of accrual basis. This will be a relief in case of NPA delays that banks face. The Budget has also given a boost to securitization of receivables by classifying such notes receivables as securities. This will also boost the creation of a secondary market for NPA trading and reduce the burden on the bank balance sheet.
- From a more micro standpoint, the CENVAT Credit Rules 2004 have are also proposed to be modified. As per the proposal, banks and financial institutions including NBFCS, MFIs and HFCs that are engaged in the business of advances, loans and deposits under the ambit will be excluded from the ambit of CENVAT rules. This brings about a lot of clarity for banking and financial services companies both from the point of simplicity of operations and cost and economics of operating.
- The decision to divest 25% stake in the five PSU insurers is a major step in helping insurance companies find a more market driven valuations. Apart from helping these PSU general insurers to growth faster, this move will also help private insurers to get a better benchmark for valuations. This will support large banking groups that have life and general insurance as key subsidiaries but their SOTP value is not exactly getting factored into the bank valuations.
- Higher allocation in the budget to railway infrastructure, road building, metro projects will assist a revival in the capital cycle. Some of the key industries that are creating stress for PSU banks include capital goods, power, telecom and infrastructure. These sectors could benefit from the turnaround in the capital cycle and that could reduce the stress on banks.
- Lastly, the budget has also mooted the idea of a bad bank or a “Bank of banks” to address the issue of NPAs in PSU banks. This body can either take over the NPAs of PSU banks like a typical bad bank or can work as a nodal agency to help banks negotiate better long term restructuring arrangements with industry. While these ideas are at an embryonic stage, a start has surely been made in this budget.
Banking industry has been under tremendous stress due to a mix of thinning margins, rising NPAs and weak loan demand. The budget has, at least, made an earnest attempt to address these pressing issues of the banking sector.