Banking sector, the key economic sector, eyes the Union Budget 2016-17 scheduled to be presented in the Parliament on 29 February 2015, with high hopes. Banking sector continues to reel under a severe asset quality pressure, which worsened sharply in Q3FY2016, after the Reserve Bank of India (RBI) advised banks to classify certain weak loan accounts as NPAs and make provision as a part of its Asset Quality Review (AQR) of the banking system.
GNPA ratio of the public sector bank have galloped to 7.1%, while that of private sector banks have also inched up to 2.5% at end December 2015 from 5.6% and 2.2% at end September 2015.
The overall GNPA ratio moved up 6% at end December 2015 from 4.8% a quarter ago and 4.4% a year ago. NNPA ratio also moved up to 4.3% for public sector banks and 1.2% for private sector banks at end December 2015.
The scheduled commercial banks credit growth was stable at 11.5% as on 05 February over a year ago, compared with 11.4% growth a fortnight ago. Deposit growth stood at 11.3%, while investment growth improved to 9.9%.
The small and medium public sector are showing sharply below industry level credit growth, while the new private sector banks have maintained healthy credit growth.
Subdued corporate credit demand is weighing up on credit growth of the banking system. The overall weak credit growth for public sector banks is leading to the decline in market share to private sector banks.
Increase foreign ownership (FII/FDI) in PSU banks
The government can also elaborate the plan to increase foreign ownership limit in public sector banks from present level of 20%.
Roadmap for passing Bankruptcy code
The banking sector has witnessed several asset quality pressure, so banks are in need of government support to manage the stressed assets in terms of enactment of newer strong regulation allowing bank for speedy recovery of bad loans. Banks would await the decision on bankruptcy code, the stressed assets fund under National Infrastructure Investment Fund etc in the budget 2016-17. Roadmap for passing Bankruptcy law (part of budget session) would closely awaited in the budget.
Capitalization of PSU banks/ Sops for additional Tier I capital
As per Indradhanush framework for transforming the public sector banks, the government has proposed capital infusion of Rs 70000 crore over four years through FY2019 with Rs 25000 crore each for FY16 and FY2017 and Rs 10000 crore each for FY18 and FY19. The government has already infused Rs 20000 crore in FY2016 so far. However, there is need to front load the capital allocation plan with higher capital allocation.
The banks can be also allowed to use revaluation reserves and well as deferred tax assets under Tier I capital. This would help banks to improve the capital provision buffer and smoothly grow loan book.
Incentives for digital transactions: The government may consider providing incentives for digital transactions in terms of surcharge/ fee waiver with a view to reign in black money generation. This would promote the use of technology, while providing operating leverage to the banks.
Further liberalization of small saving rates: The government has liberalised interest rates on shorter tenor small savings schemes by removing 25 bps spread over G-secs from 1 April 2016, but the spreads for longer tenor and social security schemes have been left unchanged. The complete liberalisation of small saving rates would strengthen monetary transmission as well as banks ability to lower deposit rates
Benefits for infrastructure lending: Currently, Only infrastructure finance companies are allowed to raise tax-free bonds. Banks needs to be allowed to raise tax-free infra bonds. Also, the Priority Sector Lending (PSL) status for fresh infrastructure loans as well as incentivising takeout financing would be very helpful to the banks.
Reduction in lockin period for tax free deposits from 5 years to 3 years: The banks can offer only 5 year tax deposits, while other tax-saving products (ELSS) comes with 3 year maturity and are more attractive. Thus, the reduction in lock-in period for tax saving deposits would make them attractive and also help banks in better ALM management.
Holding company for public sector banks: The government may consider creating a financial holding company for public sector banks by transferring its entire stake in public sector banks to the holding company to be listed on the exchanges. The government may reduce its stake in the holding company up to 51%, while the holding company would recapitalize banks without any budgetary implications.
Key stocks to watch
State Bank of India, Bank of Baroda, ICICI Bank, Axis Bank, Federal Bank
The banking sector would await Union Budget 2016-17 with high hopes in terms of extra capital funds allocation, various reforms to help in managing asset quality, incentivise digital transaction etc. However, the key announcement to watch would be higher than proposed allocation of capital funds to the public sector banks. The government has allocated capital funds of Rs 25000 crore for FY17, while the higher allocation in the range of Rs 35000-40000 crore would be big positive for the public sector banks. The higher capital funds allocation would enable PSU banks to write off bad loans and meet with Basel III capital adequacy requirements.
Illustration: Uttam Ghosh/Rediff.com