As the Finance Minister was reading the Budget speech, it was the Nifty Bank index that was outdoing the market. But as details started surfacing after the speech, bank stocks gave up all the gains in sync with the market. There were a few positive takeaways such as the fiscal deficit target maintained at 6.4 per cent, which shields the bond market from untoward swings. Likewise, the thrust on digitalisation has further increased, and there is more emphasis on this front, which, in the long term, will aid lowering the cost of operation (measures as cost to income ratio) for banks. In fact, in the last 5-8 years, the cost to income ratios of top five private banks, has reduced from 47-50 per cent to less than 45 per cent due to increased adoption of digital means.

But beyond these and the overall impetus on infrastructure spends, the Budget doesn’t hold much for the sector unlike the previous ones, which saw extension of ECLGS schemes or certain tax-related reliefs for the sector. If any, banks, which are one of the largest bancassurance partners to their life insurance subsidiaries, have something to worry. Will their fee income earned by selling life insurance products take a hit starting April 1?

For life insurance companies the hit on their financials is unavoidable as the Budget is a double whammy for the sector. First, there is a push towards the new tax regime, which doesn’t have the benefits of Chapter-VI A. Nearly 30 per cent of premiums is earned by life insurance companies during the JFM period — between January, February and March. The industry is still very much tax sops-dependent. If that’s snatched, the impact on top line is unavoidable. Added to this, premium paid towards traditional plans such as savings, guaranteed returns or moneyback plans over ₹5 lakh becomes taxable from the upcoming fiscal. Both points together could hurt life insurance players’ revenue by 10-15 per cent on an annual basis.

It could likely percolate to 5-7 per cent cut on net profits. No doubt then stocks such as Max Financial Services, SBI Life, ICICI Prudential and HDFC Life shed 9-10 per cent reacting to the development. LIC stock was hit by 8.4 per cent. Within the listed stocks, HDFC Life (leader in the large-ticket premium bulge) and I-Pru Life have maximum exposure to HNI customers and, hence, will have to recalibrate their business strategies faster than peers.

Mixed bag for banks

Meanwhile, banks earn 7-10 per cent of their fee income, which is about 60-70 per cent of other income, from distributing insurance plans. HNI customers are often the low-hanging target and, hence, they, too, will have to sit down with their life insurance partners to mitigate the hit. Also, with the blow coming in at a time when fee income is beginning to add up materially for banks, this could be quite detrimental to their FY24 earnings, just like as life insurance companies.

But banks could also see this as an opportunity to shore up their deposits. Given that tax sops on other investments are being phased out, this could be a good time to jack up deposit rates and pool them in faster to be growth ready for the next phase of lending.