A crucial Budget for banks

The banking sector will always be at the forefront once Budgets are announced. While the government has several means of raising resources, at the end of the day after setting expenditure commitments with the available revenue, the balance, which is the fiscal deficit, has to be sourced largely from the markets in the form of borrowings — where banks are the largest.

Therefore for banks, while issues like capitalisation would be seen as expectations from the Budget, the action starts with the borrowing programme. Typically around two-thirds of the fiscal deficit is financed through net market borrowings and as redemptions are going to be large at over ₹4.5-lakh crore, the gross number will be important. This time the number will be more closely watched as we are in a unique situation where the liquidity surplus in the system has dried up considerably.

Growth in deposits has lagged that in credit and hence a larger borrowing programme can put pressure on liquidity. Right now, some banks are holding excess SLR to the extent of 28 per cent of NDTL (against the requirement of 18 per cent) and some of this have been drawn down to fund credit demand. Therefore, this Budget will be quite important for banking in the coming year.

Banks would also be keen to hear what the Budget has to say when it comes to lending to agriculture and SMEs. These are a part of the priority sector lending sectors. Budgets in the past have set targets for agriculture lending, and given that this is the last year before general elections, emphasis on agriculture lending can be expected.

Support for small units

For SMEs, the Emergency Credit Line Guarantee Scheme has been supportive ever since the lockdown was imposed. Looking ahead, some questions crop up on this front. First, whether it will be extended further through the pre-general elections year. Second, whether the outlay will be increased. This becomes only a contingent liability for the government when it is invoked, and hence is not technically an outlay in the Budget.

Third, whether more sectors would be covered under its ambit. It may be recollected that the hospitality and health sectors were covered at some point of time, though through the monetary policy statements of the RBI. On the lending side, banks will be looking for signals on this score.

Along with these two mandatory segments, banks would also be keen to see whether the government has any further plans on the Production Linked Incentive (PLI) scheme. The progress of this scheme would be highlighted for sure, and the banking sector will also use these cues when they seek to expand their corporate business in the coming year. Here, the outlay for the government will materialise only when the investment and sales targets are realised by the covered companies. But any extension in coverage would mean additional demand for credit from banks during the year.

On the deposits side, one of the repeated pleas to the Finance Minister has been the provision of a level-playing field for bank deposits and debt market instruments. Presently, interest on fixed deposits carry no benefits while the gains on bonds and debentures have an advantage in the capital gains sphere. This has led to some migration in savings from the banking system to mutual funds.

As banks are major investors in government securities as well as providers of finance to industry, a correction in these tax laws would help augment deposits that can be used for these purposes.

Presently, public sector banks (PSBs) do not look like they require capital support from the government. As most banks have turned profitable and the NPA (non-performing asset) levels have come down, this means that provisions for NPAs will come down while the higher profits will add to reserves and hence capital.

The government will, however, evaluate if there is a requirement for any specific bank, which, in turn, can lead to some provisions being made. The banking sector will also be closely tracking the approach taken to privatisation of a now private bank where stake is held by the government and LIC. The government has been examining all alternatives; this has also had SEBI making allowances on the public shareholding front for this bank. The Budget will probably throw more light on this process and quite clearly this is an experiment that will set a template for the future.

Fiscal consolidation

At a broader level, the Budget may be expected to move along the path of fiscal consolidation and the revised estimate of fiscal deficit ratio for FY23 will act as the anchor for that for FY24. We could expect 50-75 basis point improvement from the revised number. The challenges will be that tax revenue and buoyancy will be less encouraging compared with FY23 and the expenditures may have to be fine-tuned to ensure that all classes are placated, in the context of elections.

The fiscal deficit ratio budgeted will also set the tone for the financial markets; it would set the contours of the gross market borrowing programme of the government. While ₹16-17-lakh crore looks reasonable after accounting for switches as well as drawdowns from the NSSF (National Social Security Fund), the present state of liquidity poses a challenge. Banks are the major subscribers of government paper (which includes both Central and State), and are already under pressure on the liquidity front.

Excess liquidity in the system has dried up. The struggle is to raise resources to meet the growing demand for credit. Deposit rates have been increased, and while there has been some increase in the flow of savings, banks have sought recourse to other instruments like CDs (certificate of deposits) and bulk deposits to augment resources.

Banks will be on guard in FY24 to balance demand from the commercial sector with that of the government. Banks are at times liquidating SLRs to finance credit. They face uncertainties with respect to FY24.

The writer is Chief Economist, Bank of Baroda. Views are personal

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