Budget expectations: Banking sector

13 Jan 2022 , 03:07 PM

“With a capital infusion of Rs. 3.36 trillion during the last six years from the GoI, public banks have significantly cleaned up their balance sheets with their net non-performing advances (NPAs) reducing to 2.8% as on September 30, 2021 from the peak of 8.0% as on March 31, 2018. With high provisions on legacy stressed assets, the earnings outlook for public banks also seems healthy as we expect most public banks to incrementally remain profitable and generate growth capital requirements internally. Moreover, recoveries from legacy NPAs as NARCL becomes operational could aid the bottom lines of the banks in the coming years.

Public banks were also able to roll over their additional tier I bonds that were due for a call option in FY2022, reflecting strong investor appetite for their issuances. Hence, this bodes well for their future issuances. With cleaner balance sheets and an improved earnings outlook, banks can also raise capital from market sources as they have done in recent years. Accordingly, for the first time in over a decade, we do not expect any capital to be budgeted by the GoI for public banks despite the enhanced regulatory capital requirements.

Considering the sizeable nature of the NBFC sector, which accounts for 25% of the credit exposure in the country, and its systemically critical position, the Budget can re-examine a permanent NBFC refinance window from the Reserve Bank of India (RBI) or the designation/creation of an institution as a backstop for NBFCs. We expect the Budget to continue with some of the liquidity and guarantee schemes to ensure near-term funding availability for NBFCs (non-infra) and to provide guidance on the medium-term support framework for the sector, which could boost investor confidence and would be key for a sustainable revival.

With the focus on infrastructure spending expected to continue, the demand for infra-focused NBFCs is expected to increase, though most of this demand is expected to be met by public sector undertakings (PSUs). The establishment of institutions, which can extend long-term funding to infra-NBFCs as well as banks for

Source: ICRA

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