Budget 2019: Expectations from the financial sector

By Anil Gupta

Key points for improving financial sector

• Capital infusion of Rs 350-450 billion to support 12-13% domestic credit growth for banks
• Merger of PSBs with PCA banks being merged with relatively better PSBs
• Increased refinancing for NBFCs including HFCs
• Fiscal incentives to spur demand for the housing sector

With a large capital infusion of Rs 1.96 trillion during FY2018 and FY2019, the core equity capital position of public sector banks (PSBs) improved to 9.2% as on March 2019 compared to 8.4% as on March 2018. However, in our view, the PSBs will still require growth capital, which shall remain at around Rs 350-450 billion during FY2020. This, however, will be driven by the GoI’s intention to take five PSBs (including IDBI bank) out of the RBI’s prompt corrective action framework (PCA), in the absence of which the GoI’s capital obligation is likely to reduce significantly.

Moreover, the GoI has stated its intention of merging the various PSBs to create relatively larger sized banks and in such a case, the PSBs under the PCA is likely to be merged with other relatively better ones. Hence, if the GoI was to go along with its plan for consolidation of the PSBs, we expect the GoI to announce a capital infusion of Rs 350-450 billion in its upcoming budget. This capital infusion, we hope will enable the merger of some of the PSBs and support a domestic credit growth of 12-13% for FY2020, enabling them to meet the enhanced regulatory capital requirements.

These apart, the recent funding issues for non-banking financial companies (NBFCs) have impacted their ability to disburse fresh loans, which is also reflected in the slowing consumer demand, which is likely to affect the growth of the other sectors. Though banks, including the PSBs, have supported many of the NBFCs (including housing finance companies) by funding them against the purchase of their retail loan portfolios, however, additional measures need to be taken to provide refinancing lines for the sector.

Additionally, fiscal incentives for spurring housing demand by allowing full exemption of the interest paid on the purchase of a second house could be considered, even if it is for a temporary period. Such exemption can be extended on a selective basis to prevent speculation by considering the exemption for fully completed houses or with other suitable caveats. This may improve the cash flow of various real estate developers, which in turn can reduce the funding stress being witnessed by the NBFCs (including the HFCs).

Anil Gupta is vice president & sector head (financial sector ratings) of ICRA Ltd.