Tax breaks for investments in property can spur job creation, help economy: Federal Bank CEO

Bank credit growth languishing at single-digit levels is a big cause for worry. Investments and consumption have taken sharp knocks, impacting the growth in the economy and in turn banks’ lending activity. What can the Budget do to revive the banking sector and the investment activity? Shyam Srinivasan, MD & CEO, Federal Bank, believes that instead of putting more cash in individuals’ hands, the Centre will need to ensure that money flows into the economy, say, for buying property, making investments in real estate, long-term infrastructure financing, etc. This will help lubricate the system, in turn spurring construction and real estate activity, and offering the much-needed fillip to the economy and job creation.

Excerpts:

Spurring demand, kick-starting investments and infrastructure activity are imperative to revive the banking sector. Hence, the Centre will have to focus on unlocking long-term funds for infrastructure ― insurance and pension funds could be one way. Giving tax breaks and putting more money in the hands of individuals can help revive consumption, but I believe the government will also want to ensure that the money goes into bona fide consumption. The issue with existing bank credit growth is that we are seeing robust growth in some segments of retail which is not necessarily a healthy trend. Unsecured loans that are growing at a fast pace needs a watch. Past experience has shown that such large build-up of unsecured loans leads to risk. While we are definitely better off in assessing the risk through credit bureaus, uncertainty over the credit behaviour of first-time borrowers can be a worry. It is always important to be mindful of the end use of loans.

Hence, instead of giving more cash in hand for individuals, the Centre will need to ensure that money flows into the economy, say, for buying property, making investments in real estate, long-term infrastructure financing, etc. This will help lubricate the system, in turn spurring construction and real estate activity, and offering the much-needed fillip to the economy and job creation. Hence, measures such as tax breaks for investments in property, instead of putting more money in the hands of individuals for near-term consumption, will be imperative.

In short, given that the banking sector is a reflection of the economy, the government’s focus on reforms, unlocking capital and infrastructure will help the sector.

There is very limited wiggle room on the fiscal front. Hence, if the Centre were to slip on the fisc, then it should be for the right reasons and to ensure long-term pay-offs. Like I said, if the focus is on ensuring long-term sustainable growth, channelling funds into infrastructure and real estate development, building capacity and triggering job creation, then some slippage on fiscal deficit may be acceptable to the market.

It is true that banks (aside from the very big ones with deep pockets) may not rush into lending for infrastructure. But there are second order benefits that will accrue to banks, as they will support related activities such as construction, real estate, etc. So the challenge is raising long-term money which can be done in the form of external borrowings, foreign investments, insurance, big banks, bonds, etc. Hence triggering ‘long-only’ investments is the biggest task for the Centre.

More than capital, I believe that the real concern for most bankers is about where to deploy the capital/funds. If the money is lent, will it come back? Lending to the same few corporates or individuals is not going to help. Currently, banks are growing their loan book by eating into others market share or refinancing. We need to expand the pie. And for this, demand, job security and growing income levels are imperative. Liquidity or capital is not the core issue.

The narrative across banks have been similar during the quarter. Much of the slippages have come from known stress in certain accounts, say, in the housing finance space. It appears that much of the stress has been recognised, of course, company-specific events can still trigger some slippages. Telecom is one sector that banks are watchful of, as the collateral impact of the Supreme Court’s judgment on the sector, is still unknown.For Federal Bank too, the stress during the December quarter has come from these specific events. But our stressed book as a percentage of total assets slipped to a multi-quarter low of 1.59 per cent. We also do not have any exposure to stressed telecom companies.

COMMENT NOW