With a clear focus on investments in infrastructure, the budget has laid the foundation for various reforms that will augment the flow of long-term capital into the sector. The objective behind the creation of the Development Financial Institution (DFI) or privatisation of two public-sector banks is to enhance the credit flow into the economy. This apart, the capital allocation for public-sector banks, largely in line with our estimates, will address the near-term growth capital requirements of these banks.
Apart from the fresh credit flow from lending institutions, the proposal for asset monetisation through Infrastructure Investment Trusts (InvITs) of roads, railways and power transmission assets is also a positive move and can help attract long-term capital in relatively less risky assets.
While these enablers for improved credit flow are welcome, a delayed resolution of stressed assets has hurt the lenders and investors and increased their risk aversion towards fresh lending. In this context, the proposal to set up an Asset Reconstruction Company (ARC) and Asset Management Company (AMC) to consolidate stressed assets can help banks focus on expanding their operations and also lead to a possible improvement in their financials. The ownership and management of the ARC/AMC and the operational modalities remain key to the success of this model.
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The need for a deeper debt market that can provide long-term funding cannot be understated as we look at the huge investment requirements needed for building infrastructure assets in the country. Here, the proposal to create a permanent institutional framework to enhance the confidence of market participants in corporate bonds, especially during stressful periods, by purchasing debt securities in secondary markets is a significant development. If executed well, these measures can provide a significant fillip to the domestic bond markets given the strong linkages between the primary and secondary markets.
NBFCs, being the largest debt issuers, are likely to be one of the key beneficiaries of the above measures despite there being no specific announcements on improving their access to funds. The relaxation in the threshold under the SARFEASI Act will also help the NBFCs as it can facilitate recovery from stressed books.
With a focus on reviving growth by boosting government spending, the gross market borrowings of GoI are budgeted to remain high at Rs 12 lakh crore for FY2022 or 6.8% of GDP as against an estimated borrowing of Rs 13.1 lakh crore or 9.5% of GDP for FY2021. Given the large borrowing programme for FY2022, the RBI will need to facilitate GoI borrowings next year too as the yield on 10-year benchmark securities has tightened by 0.11% to 6.06% after the announcement of borrowing. The near-term yields may continue to remain higher despite the GoI's guidance to rein in fiscal deficit at under 4.5% of GDP by FY2026.
Lastly, the higher foreign direct investments limit of 74% (from 49% at present) in the insurance sector will also open up the domestic insurance sector to long-term players and attract more capital and possibly further improve insurance penetration in the country. This can also increase the long-term funds available with insurance companies for further deployment in the infrastructure sectors.
Overall, the budget announcements are hugely positive for the banking and financial sector. That said, the execution of these proposals will remain the key factor in ensuring their success.
Karthik Srinivasan is Group Head Financial Sector Ratings, ICRA