Jo dar gaya so mar gaya is a refrain that has been made iconic, first through Bollywood and then through the innumerable reiterations and inspiring-cum-funny usage over the years. However, this could well be the favorite refrain for Indian bankers going through the storm that the sector has been weathering for the last couple of years now. Everything from the credit crunch to liquidity to the looming number of NPAs and major setbacks like the Jet Airways episode or even the PNB fraud has impacted most of India’s banking institutions, particularly in the public sector.
These PSBs were anyway scraping through with the assistance extended by the Central Government last year in terms of funds. Now, with the same BJP-led Central Government elected to power for another 5-year term, Indian public sector banks will be hopeful of some continuity in banking reforms along with another major bail-out. Of course, the sector needs a serious revamp (rescue operation in fact as some would say) this time around.
Union Finance Minister Nirmala Sitharaman and her team of officials are well aware of the needs of the banking sector and what needs to be done to clear the messes accumulated in the past. However, it remains to be seen how much actually can be done when the Union Budget is announced on the 5th of July, 2019. Sitharaman will have core agendas to cater to including creating more employment, industrial and trade growth and also bailing out affected farmers along with taking a look at some of the expectations of the Indian banking sector.
What the banking sector may get in the Union Budget
Indian bankers will be hoping for sweeping reforms including mergers and creation of larger banks along with recapitalization drives for PSBs and affordable housing sops. The business sector is hopeful of several reforms being introduced by Prime Minister Narendra Modi’s Government for driving the economy once again. There are welfare schemes being anticipated by several sections of the society while others are hopeful of an increased emphasis on tackling farmer distress and the water crisis.
For the banking sector, here are some of the sops/relief measures that may be announced in the upcoming Union Budget for this financial year.
- Funds may be allocated by the Union Budget for the recapitalization of public sector banks.
- Growth requirements of four banks under the PCA (prompt corrective action) mechanism of the RBI (Reserve Bank of India) may be met through higher capital.
- These four banks will have to be recapitalized with proper allocation of funds by the Government. They have limitations on growth and these banks have not been able to garner suitable funding for adhering to capital needs. The Government may bail out these four banks as an immediate solution according to experts.
- NBFCs (Non-Banking Financial Companies) have been badly impacted by the overall liquidity crisis and hence PSBs are scaling up overall lending operations in a bid to fill up the gap in the market which has been left open by these NBFCs who lent money to a large chunk of MSMEs and other start-ups.
- Banks require capital for pursuing future market and sources of capital such as deposits and global and capital markets are usually subject to overall market conditions. However, the Government may chip in this time again, enabling these banks to pursue growth.
- The interest part of affordable housing may also be hiked. The current limit is Rs. 1.5 lakh and this may be increased, especially for the affordable housing category.
- The Union Budget may have provisions for consolidating PSBs through mergers which will create bigger banks.
- The Government is expected to continue its quest for mergers after the successful SBI (State Bank of India) mergers with associate banks and the merger of Dena Bank and Vijaya Bank with Bank of Baroda.
- PSBs currently under PCA may be merged with bigger banks.
- Capital of close to Rs. 35-45,000 crore may be infused into PSBs as a result of all these moves.
- This will enable better growth of domestic credit to the tune of 12-13% for FY2019-20 as per experts along with enabling mergers.
- Core equity capital improved considerably for public sector banks, standing at 9.2% as of March this year with Rs. 1.96 lakh crore being infused in FY2018 and FY2019.
- Financial incentives may be taken for enabling higher growth of housing loans including full exemption of interest that is paid on second home purchases.
- This exemption may be selectively implemented in order to keep speculation at bay.
- This could lead to better cash flow for real estate developers which may lead to a reduction of the liquidity stress on NBFCs.
These are some of the key measures that could be taken by the Government in the upcoming Union Budget in order to spur growth in the banking sector.