Putting money in the hands of banks

The Union Budget for FY2023 targets expanding and revamping infrastructure across various sectors. The Government has significantly increased its capital expenditure budget for FY2023 by 35.4% to Rs 7.5 trillion.

With subdued private sector appetite, the measure should trigger a multiplier effect and help improve the private sector investment appetite. Effective implementation would provide growth opportunities for the banking sector, which otherwise has been witnessing single-digit credit growth for the last many years.

Public sector banks (PSBs), which account for almost two-thirds of the banking sector credit, had their own challenges during the last few years thereby constraining their ability to supply credit. However, with capital infusion of Rs 3.36 trillion during the last six years, and significant cleaning up of their balance sheets, these banks are relatively much better placed to support the credit demand.

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The optimism in the strength of these banks is also reflected in reduction in budgeted capital for FY2022 to Rs 150 billion from Rs 200 billion earlier. Further, in line with our expectations, no capital infusion has been budgeted by Government of India (GoI) for FY2023, and it will be for the first time in over a decade, that the GoI will not be infusing capital into PSBs in a given year.

Covid has posed significant challenges to the banking sector and various regulatory and fiscal measures have eased the pain for the banking sector. The GoI’s Emergency credit guarantee line scheme or ECLGS was instrumental in providing the requisite liquidity support to Micro Small and Medium Enterprises (MSMEs) with disbursements of Rs 2.3 trillion of bank credit. While the third wave had limited impact on economic activities, the hospitality sector has been adversely impacted by the ongoing third wave.

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Hence the budgetary proposal to facilitate Rs 500 billion of additional credit for hospitality and allied sectors under the ECLGS will aid the asset quality of lenders, including banks. Further, the proposal to channelise credit flow of Rs 2.0 trillion to MSMEs by infusion of funds to Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme will also aid the credit growth for the banking sector.

Apart from proposals to enhance fresh credit flow, the proposal to amend the Insolvency and bankruptcy code (IBC) to address the complex corporate structures with overseas assets, is likely to aid the resolution and recoveries for the banks. Many of the stressed assets have failed to achieve desired resolution plan and value because of complex corporate structures and overseas assets.

(The author is Senior Vice President & Group Head - Financial Sector Ratings, ICRA Ltd)