While FY22 was thought of as a year of resurgence for financial institutions, the second Covid wave brought more economical turbulence with it than anticipated. While lenders, grappling with sporadic lockdowns, had to deal with volatile collections, loan restructuring permitted by the RBI helped calm asset quality stress to a large extent. However, banks continued their phase of risk aversion and credit growth remained tepid at 6.7 per cent (bank credit growth as of December 2021), largely led by RBI’s continuing efforts to walk banks out of their risk aversion phase.

The credit growth largely stemmed from agricultural and retail loans — with consumers making the best of a low interest rate regime and following the fad of ‘Buy Now Pay Later’. The second half of calendar year 2021 also saw industrial credit pick up — though in low single digits — after years of negative growth.

Hence, much of the Budget wish list hovers around measures to enhance credit growth. For instance, any increase in home loan-related deductions (in personal taxes) would help keep the home loan demand intact. Further, more concentrated efforts on public and private capex can help spur credit growth in the industrial segments too. A thrust on investments and reforms in key sectors such as infrastructure, power and realty will augur well for large banks such as SBI, HDFC Bank, ICICI Bank and Axis Bank, which have strong capital base.

The Financial Stability Report from RBI indicates higher stress in SME and micro finance portfolios of the lenders. Hence any cash doles and tax reliefs, or other monetary incentives for MSMEs, can help run a check on bank delinquencies, besides easing their cash flows – thereby lowering the credit risk quotient of such enterprises.

For NBFCs, while an interim credit tap was opened by the RBI during the pandemic, a long-drawn continuous source of funds could help shadow banks cater better to the Centre’s financial inclusion dreams.

No more hard blows

The last couple of Budgets sort of dealt a hard blow to the insurance industry — a new tax regime sans the deductions on life and health insurance and a tax on higher contributions in ULIPs. However, with the pandemic having brought home the need to be prepared for contingencies, new business premiums grew at a healthy pace for the listed life insurance players (30 per cent plus growth in the first nine months of FY22). ICICI Pru Life and SBI Life, 50-82 per cent of whose product mix flows from ULIPs too, seem to have weathered the impact of the tax hike well – average premium earned from ULIPs grew by 35 and 47 per cent respectively, in the first nine months of FY22.

Besides, the new personal tax regime found very few takers, according to private tax filing websites. If the alternate regime is popularised in any manner, the demand for life and health insurance products may take a hit.

The insurance industry’s demands to the Centre also include rationalisation of the GST rates on health and life (protection plans) insurance – currently at 18 per cent, which could aid growth in business.

Keeping up on promises

A guideline on PSU Bank recapitalisation and divestment targets would be key numbers to note in this Budget as well. The Finance Minister had announced the privatisation of 2 PSBs and one general insurance company in 2021. However, these measures never saw the light of the day and more clarity on the same with specified deadlines is likely in this Budget.

Though speculations of LIC being listed by end of March 2022 are widespread, the process may be stretched if the Centre is keen on attracting foreign investments. This is because, while FDI through direct route in insurance business is permitted up to 74 per cent (announced in last Budget), the LIC Act still needs amendments. The Centre’s divestment targets and ambitions in foreign investments could be the likely factors in deciding the timing of the much-awaited IPO.

With retail investors now owning a piece of cash management companies and fintech firms (that were listed recently), any proposal that can impact the transaction fees or intermediary charges, relating to retail payments, also need to be watched out for in the Budget.

Key expectations
Improving capex can help spur credit offtake
Measures for SMEs can help improve their risk profile
Thrust on digital pyaments may augur well for fintech players
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