Budget 2020: Things to watch out for the banking sector

Apart from bank recapitalisation that the government has already prioritised for the merging lenders, there may not be much in store that could directly impact the sector in Budget 2020.

“Banks are a function of the economy. If the economy picks up, banks will benefit,” said Shyam Srinivasan, MD and CEO, Federal Bank, adding that the room for big announcements seem modest.

However, due to the banking sector’s linkages to all other sectors in the economy, they may be affected by the Centre’s decision on sectors where they have a reasonable exposure. And there could be more downside risks than benefits due to these measures.

“The government’s moves should be aimed at putting the economy back on track. If this fails and we are looking at job losses going ahead, banks with exposure to unsecured loans directly or through non-banks may be at risk,” said a senior official at a state-run bank.

While most banks turned conservative on wholesale banking in absence of good quality credit demand, they have been aggressive on retail lending to fill the gap. “There is no concern on home loans or vehicle loans as such, even if some borrowers default, since there is security. But if personal loans repayments are affected, there may be a problem,” said another official.

Personal loans include credit cards dues, loans taken for medical emergencies, weddings or to fund small businesses etc. In fact, this is the only segment that has shown stable growth when other loans shrunk over the past year. As per central bank data, credit card outstanding grew 24 percent while other personal loans grew 21 percent in November 2019 as compared to last year.

Also, banks face risks from measures like loan waivers or increase in limits on Mudra loans to SMEs, which would further add to the pile of bad loans. However, any steps taken to boost the housing sector would be a boon to banks as well.

Emkay Global expects increase in allocation for Alternative Investment Fund (AIF) for stalled housing projects over and above Rs 25,000 crore. “This increase in size of the fund would support the relatively larger projects and thus help revive the sector as well as contain stress for BFSI sector,” said Sunil Tirumalai, Analyst at Emkay Global.

The budget would also set the tone for next monetary policy review that is scheduled on February 6. Last month, the Reserve Bank of India (RBI) took a breather after cutting policy rates for five consecutive reviews, citing risks from inflation and to see what the government has in store for the economy.

“The next Budget is due for presentation in about two months and it will provide greater clarity about the further measures that the government may initiate. It is imperative that monetary and fiscal policies work in close coordination,” the December policy meeting minutes quoted RBI Governor Shaktikanta Das as saying.

For non-banking finance companies (NBFCs), the government may extend the partial guarantee scheme (PCG) that was announced to increase flow of credit from banks.

Thomas John Muthoot, CMD, Muthoot Pappachan Group, said extension of PCG scheme as well as extension on relaxation of minimum holding period criteria for NBFCs/HFCs for another six months to June would support the securitisation market and therefore stabilise the liquidity situation.

The PCG scheme that was launched last year hit a roadblock due to issues like minimum rating requirement etc and had failed to take off. Bankers said if the issues are resolved, they will still need more time to meet the government’s target of Rs 1 lakh crore.