Little to bank on

The change

With the Centre doing away with the suspense on recapitalisation and consolidation of PSBs, the wishlists for the sector were more around the setting up of a ‘bad bank’ and big government spending to kickstart investments. The Budget has, instead, focussed on kickstarting reforms in PSBs, signalled future measures to encourage them to approach the capital market and sell the holding in IDBI Bank. It has also extended the restructuring of MSME loans and stated that it would continue to support the partial credit guarantee scheme for the purchase of high-rated pooled assets of NBFCs/HFCs.

As expected, the focus of the Budget was on the farm sector and, hence, agriculture lending target was increased to ₹15 lakh from ₹13.5 lakh in the previous year.

Background

Currently, the report card on banks’ performance hardly lends comfort. For listed private sector banks, loans have grown by 16 per cent CAGR (between FY14 and FY19), but profits have shrunk 4 per cent due to the 30-40 per cent annual rise in bad loans. For PSBs, modest growth in loans (6 per cent CAGR) and the over 30 per cent rise in delinquencies have hit earnings. So far, the performance of banks this fiscal is equally dismal. Bank credit growth, which had climbed to 12 per cent in March 2019, has slipped to 7 per cent as of December. Stress from company and sector-specific events have impacted banks, including big lenders such as SBI, ICICI Bank, Axis Bank and Bank of Baroda.

The verdict

In January last year, the RBI had allowed a one-time restructuring of existing loans to MSMEs (exposure not exceeding ₹25 crore). This was subsequently extended to March 31, 2020. With economic growth plummeting in recent months, the further extension of this scheme should offer some respite to banks.

Last year’s Budget had also proposed that for the purchase of high-rated pooled assets of financially sound NBFCs the government would provide six months’ partial credit guarantee (PCG) to PSBs for first loss of up to 10 per cent. This was done to ease the liquidity conditions for NBFCs. The Centre ensuring further support to the NBFC sector is welcome. However, these measures are unlikely to aid banks significantly. Earnings are likely to be under pressure, especially for PSBs. While the Centre signalling reforms at PSBs is a positive, they will be long-drawn and how they are executed will be critical. The increased agri lending target can lead to a further rise in bad loans, which is a concern. For instance, SBI’s NPAs in agri loans is 13.8 per cent (as of December 2019), while for Bank of Maharashtra, the agri NPA ratio is 22.6 per cent.

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