Budget 2017: Banking sector has a lot to gain

Big infrastructure spending push, boost to affordable housing and a fiscal deficit target of 3.2% of GDP came as a big boost to the banking sector

Vishwanath Nair & Gopika Gopakumar, Gopika Gopakumar
Updated1 Feb 2017
The budget has set aside only Rs10,000 crore for bank recapitalization, lower than the Rs25,000 crore figure for the current year. Photo: Hemant Mishra/Mint
The budget has set aside only Rs10,000 crore for bank recapitalization, lower than the Rs25,000 crore figure for the current year. Photo: Hemant Mishra/Mint

Mumbai: A big infrastructure spending push, the boost to affordable housing and a fiscal deficit target of 3.2% of gross domestic product announced in the Union budget came as a big boost to banks. A tax concession on provisions for bad loans also came as a relief for Indian banks which are struggling with gross non-performing assets of around Rs6.7 trillion.

Banking stocks rallied more than the broader market with the BSE Bankex gaining 2.7%, a full percentage point more than the Sensex.

In the budget speech, the finance minister outlined his proposals to create more jobs and boost infrastructure spending, measures which will help increase credit offtake for banks. Government spending on this sector will touch Rs3.96 trillion in the next fiscal. As banks have been struggling with a large number of stressed cases in the infrastructure segment, fresh investments will get the ball rolling and hopefully turn around some of those companies that have been defaulting.

ALSO READ: Budget 2017: Jaitley gives infrastructure a massive push

Other measures that will boost credit growth include affordable housing projects being given infrastructure status and the highest target for farm credit at Rs10 trillion. After the government’s move to withdraw Rs500 and Rs1,000 notes on 8 November, bank credit growth has fallen to around 5%, the lowest in a couple of decades.

Another positive announcement for the banking sector was the government’s comparatively tame net market borrowing figure of Rs3.48 trillion in 2017-18, as compared with Rs4.25 trillion in the current year. The net borrowing figure takes into account the securities that will be bought back, Jaitley said.

Capital expenditure data provided in the budget document reveals that the gross market borrowing is set at Rs5.8 trillion for the new financial year, which is approximately the same as 2016-17.

Jaitley also said the government proposes to increase allowable provision for non-performing asset (NPA) from 7.5% to 8.5%. This will reduce the tax liability of banks, he said. Allowable provision is the amount of bad loan provision that is tax deductible.

ALSO READ: Budget 2017: Affordable housing to be given infrastructure status

“Capital infusion of Rs10,000 crore for recapitalization of PSU Banks will be a morale booster in scenarios where Banks are in dire need of capital for Credit growth and Basel III compliance. Further, the deductions allowed for NPA provisions made by banks have been increased upto 8.5% of the income which will act as a breather in supplementing profitability of banks,” said Ashwani Kumar, chairman and managing director, Dena Bank.

According to another public sector banker who spoke on conditions of anonymity, the increase in allowable provision could have been slightly higher as the banking sector’s NPA troubles are very big.

“With some higher tax deductions, banks could have gotten a higher tax write back and that could have helped the bank books,” the anonymous banker said.

In the budget announcement, the finance minister also talked about allowing asset reconstruction companies (ARCs) to list the security receipts they issue against bad loans on stock exchanges registered with the Securities and Exchanges Board of India (Sebi).

ALSO READ: Union Budget 2017: Key highlights and themes

“This will enhance capital flows in to the securitisation industry and will particularly be helpful to deal with bank NPAs,” the speech noted.

The sour note for banks—the state-owned lenders—was the lower capital infusion plan for the next fiscal. The budget has set aside only Rs10,000 crore for bank recapitalization, lower than the Rs25,000 crore figure for the current year. The Indradhanush scheme says that state-owned lenders will receive Rs70,000 crore by March 2017 as capital infusion from the government to meet their higher capital requirement under the Basel-III regime. Despite that, a gauge of state-owned bank stocks rose 4%.

“Overall it’s a neutral budget. Low fiscal deficit and lack of any populist measures like the farm loan waiver turned out to be positive for the banking stocks. Lower deficit will also ensure that Reserve Bank of India has more space to cut rates. The only negative thing is lower capital infusion in public sector banks,” said Suresh Ganapathy, associate director, Macquarie Capital Securities India.

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