Budget 2022: Proposals on increased infra capex, MSMEs, to largely benefit banking sector

The multiple Budget announcements pertaining to increase in capital expenditure on infrastructure as also incentives for the MSME sector, besides others, are likely to prove largely beneficial for the banking sector going forward.

The significant increase in capital expenditure budget for FY2023 by 35.4 percent to Rs 7.5 trillion is expected to be spent across various infra sectors. This is expected to trigger a multiplier effect and improve the private sector investment appetite which currently is low. The banking sector will benefit, from increased infra spending as it has been witnessing single digit credit growth for past many years.

The public sector banks (PSBs) typically constitute for almost two-third of the banking sector credit. However, headwinds during last few years had constrained their ability to supply credit. The situation turned around upon capital infusion of Rs. 3.36 trillion during last six years, leading to significant cleaning up of PSBs balance sheets and measures like banks consolidation. Today, PSBs are on a relatively stronger wicket and in a position to support the credit demand.

The fact that there has been a reduction in budgeted capital for FY2022 to Rs 150 billion from Rs 200 billion earlier, also reflects PSBs improved credit profile. Further, as per ICRA’s expectations, the Budget has not made provisions for capital infusion for FY2023. It will be for the first time in over a decade, that no Government of India (GoI) capital infusion will be happening into PSBs during a given year.

Private sector participation in infrastructure being low, the GoI plans to grow the same through multiple steps such as applying global best practices and balanced risk allocation. Further, proposals to use innovative financing instruments such as blended finance, sovereign green bonds will provide a boost to the overall credit ecosystem. The government’s intent towards meeting its COP26 commitments is reflective in its plans to issue sovereign green bond.

The above measures will not just revive the private sector appetite but also afford growth opportunities for the banking sector.

In recent times, COVID posed significant challenges to the banking sector which have been eased through various regulatory and fiscal measures.  The Emergency Credit Guarantee Line Scheme (ECLGS) was the flagship announcement that provided requisite liquidity support to Micro Small and Medium Enterprises (MSMEs) with disbursements of Rs 2.3 trillion of bank credit.

While the impact of the third wave on economic activities is limited, the hospitality sector in particular has been adversely affected.

The banking sector will benefit from the budgetary proposal to facilitate Rs. 500 billion of additional credit for hospitality and allied sector under the ECLGS, through protection of asset quality of lenders, including banks. Further, the Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme which proposes to channelise credit flow of Rs 2.0 trillion to MSMEs by infusion of funds will also enable credit growth for the banking sector. Similarly, enhanced FY2023 provision of Rs 480 billion for affordable housing, a key thrust area   under Pradhan Mantri Awas Yojna (PMAY) scheme will also help lenders including banks increase their exposure towards this segment. It augers well for the home buyers as well.

Moreover, the operationalization of National Asset Reconstruction Company Limited (NARCL) and proposal to amend the Insolvency and Bankruptcy Code (IBC) is positive from the recovery from legacy stressed assets perspective. The amended IBC will also address the stressed overseas assets. Many of the stressed assets have failed to achieve the desired resolution plan and value because of their complicated corporate holding structures.

On the flip side, despite a smart pick up in revenues during FY2022, modest divestment targets and high capex commitments for FY2023 has meant a sharper than expected rise in GOI borrowings and fiscal deficit for the next year. Accordingly, benchmark yields in the bond markets have reacted and jumped by over 20 bps.

The expected rise in global interest rates, uptick in crude prices, absence of an update on measures to facilitate the awaited bond index inclusion and increasing maturities of G-Secs over the next few years has resulted in steeper yield curve which is likely to get steeper going forward. The banks who are major players in bond market will be affected by this.

The writer is Senior Vice President and Group Head, ICRA. Views are personal.

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Karthik Srinivasan