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Budget 2022: Banks on a relatively strong footing; capital infusion not expected this time

Union Budget 2022-23: The better earnings prospects of most PSBs today coupled with more than adequate provisions on legacy stressed assets implies there is sufficient internal cash generation to fund near-term growth

To clean up the balance sheet of public sector banks (PSB)s and aid reduction in their net non-performing assets (NNPA), the Government of India (GoI) has been supporting the banks with a capital infusion of Rs 3.36 trillion over the past six years. Accordingly, the NNPAs of the PSBs declined to 2.8 percent as on 30 September 2021, against a peak of 8.0 percent as on 31 March 2018, while the median CET1 improved to 11.5 percent from 8.4 percent over the same period.

The better earnings prospects of most PSBs today coupled with more than adequate provisions on legacy stressed assets implies there is sufficient internal cash generation to fund near-term growth. The demonstration of some of the PSBs raising equity without Government support over the last few quarters makes us believe that the Union Budget‘s capital support to PSBs this time around is unlikely.

Further, a relatively strong investor appetite for Additional Tier-I bonds (AT1) issuances of PSBs reflected from the fact that most PSBs comfortably replaced their AT1s due for call option in FY2022 with fresh mobilisations. Strong and clean balance sheets have improved the earnings outlook of banks and can now be expected to tap capital from market sources for their incremental requirements.

Clarity needed on privatisation of PSBs

Though the GoI announced privatisation of two PSBs in the previous Budget, the progress has been rather slow. With state elections around the corner and the fact that the Banking Laws (Amendment) Bill, 2021 has not yet been introduced in Parliament, seems to suggest that the plans may get further delayed. In this regard, further clarity on the privatisation plans of a few PSBs may provide some direction to the markets.

There is also no regulatory clarity on allowing large corporate houses entry into banking. This may further constrain the available options for the GoI to attract potential investors. With even the smallest of the PSBs having an asset base of over Rs 1 trillion, only buyers with deep pockets may be preferred, and accordingly, RBI’s approval may be required as the new buyer may prefer holding a sizeable stake in the bank initially. Further, if the GoI retains minority ownership in the bank, it also helps maintain depositors’ confidence and aids the new management to grow and attract a new investor base as they focus on reinforcing asset-side strategies.

We also await clarity on the progress of the National Bank for Financing Infrastructure and Develop­ment (NaBFID) and the National Asset Reconstruction Company Limited (NARCL) as the scale-up of these institutions can further augment resources to productive sectors of the economy.

Financial incentives to promote digital payments

The banking sector would hope that the financial incentives to promote digital payments will be enhanced apart from the long-time demand of shorter tenure of tax-saving fixed deposits in line with some of the other financial products. This apart, the third wave of COVID is likely to pose challenges to the debt servicing ability of borrowers impacted by earlier waves.

The emergency credit line guarantee scheme was instrumental in channelising funds to affected sectors, especially MSMEs. The extension of the scheme with a further increase in the guaranteed amount could also help these borrowers to tide over the liquidity crisis.

Lastly, as banks hold a large portion of government securities, the banking sector will keep a close watch on the overall extent of fiscal deficit for FY23 and the GOI’s borrowing programme. Some clarity on funding of the deficit can prevent a sharp rise in bond yields and consequently an adverse impact on the fixed income portfolio for the banks.

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