With capital infusion of Rs 2.53 trillion in public sector banks (PSBs) during its previous regime, i.e. FY2015-2019, the central government has continued with large capital support for PSBs in its new regime as well. The budget announcement of providing PSBs with capital of Rs 70,000 crore for FY2020 is a significant positive and higher than our initial estimates for the current fiscal.
In our view, with this, all the PSBs under PCA should be able to exit the PCA framework and pave the path for further consolidation. Further, even if PSBs are unable to raise equity capital from markets, they should be able to report credit growth of over 12-13% following the proposed government support. With improved growth in advances, we expect PSBs to report profitable operations during the current fiscal after four consecutive years of losses and also reduce the Gross NPAs and Net NPs below 8.0% and 3.5% respectively by March 2020.
The proposals have not only addressed the capital issues for PSBs, but also attempted to address the liquidity issues for NBFCs by providing PSBs with a one-time six months’ partial credit guarantee for first loss up to 10% for purchase of pooled assets of NBFCs. In addition, an additional deduction of up to Rs 1.5 lakh for interest paid on affordable housing loans borrowed up to March 31, 2020, is likely to boost home sales and improve developers’ cash flows.
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The removal of DRR requirement for public issue of debt and applicability of section 43D on NBFCs would further help liquidity and profitability. While providing support, the regulatory supervision for NBFCs is expected to increase; additionally, regulatory authority over housing finance companies moving to RBI from National Housing Bank would lead to greater parity of regulations.
The proposal to allow 100% FDI in insurance intermediaries will benefit the insurance companies and insurance aggregator channels. The lowering of net worth requirements for foreign branches of re-insurance companies should foster more branches in India and would benefit the general insurance companies in getting more competitive re-insurance treaties, and subsequently enabling higher underwriting bandwidth.
Hence largely, the Budget largely augurs well for the Indian Financial sector. However, the absence of any capital infusion plan for the public sector general insurance companies, most of whom require capital to avoid breaching regulatory solvency ratio stood as one key negative.
Group Head, Financial Sector Ratings, ICRA