Budget 2017: A soothing balm for banks but no lasting cure
The budget’s direct measures did fall short for the banking sector but the knock-on effects of other steps will eventually help banks
Bank recapitalization has been kept at Rs10,000 crore for FY18, the amount recommended under the Indradhanush Scheme in 2015. Additional capital will be made available if needed.
Banks can now deduct provisions made for non-performing assets (NPAs) up to 8.5% of total income for tax purposes. This was 7.5% so far.
Listing and trading of security receipts issued by asset reconstruction companies (ARCs) to banks will be allowed on stock exchanges.
Affordable housing will be given infrastructure status, and a higher allocation of Rs23,000 crore has been made to the rural Pradhan Mantri Awas Yojana.
Systemically important non-banking finance companies (NBFCs) to be categorized as qualified institutional buyers (QIBs) by the Securities and Exchange Board of India, or Sebi, to participate in the initial public share offers.
In a digital push, all cash transactions above Rs3 lakh will be rendered invalid.
Yet again the government’s allocation of funds to recapitalize banks it owns has fallen short of what analysts deem adequate. The Rs10,000 crore is unlikely to help public sector lenders that are hamstrung currently to meet loan demands. Some may even find it difficult to meet the regulatory minimum.
The relief on allowable provision for NPAs to 8.5% of total income should help lenders reeling under a massive pile of bad loans. However, the benefit is limited as the demand from the industry was that the entire provisioning towards NPAs be allowed as deduction for tax purposes.
ARCs in India have been struggling to raise funds to cater to the rising pile of bad assets. Trading of security receipts could be one avenue to raise money for ARCs.
The push to affordable housing is expected to boost credit demand, and banks as well as housing finance firm are already competing for a slice of the pie.
NBFCs can now participate in IPOs (initial public offers) as QIBs. This helps NBFCs looking to diversify their business and also in building a strong source of other income.
Banning cash transactions above Rs3 lakh will prompt individuals and firms to use more of digital channels through banks.
Stocks in focus:
Public sector banks were clear winners as the relief on allowable provision of NPAs blunted the lack of capital from the government. Although banks did not get direct benefits, the push to affordable housing, infrastructure spending and rural schemes is bound to boost credit disbursal.
The BSE Bankex rose 2.76% with the biggest gainer being Bank of Baroda, followed by Federal Bank. NBFC stocks such as Dewan Housing Finance Ltd, Mahindra Finance, and Bharat Financial Inclusion Ltd surged as the push towards rural spending and affordable housing sectors would translate into more loan offtake.
The budget’s direct measures did fall short for the banking sector but the knock-on effects of other steps will eventually help banks.