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Budget Announcements For Financial Sector

Budget announcements were taken positively by the financial sector. Market participants & investors cheered the budget proposals like increase in infra and capex spending which will put economy on strong growth path and structural initiatives to improve the health of country financial sector.

Key salient features of Union Budget 2021-22 pertaining to financial sector :-

* ARC/AMC to set up for stressed assets in PSBs

* Rs20,000 cr proposed for the PSU banks capitalisation

* Divestment of two public sector banks (PSUs) and one general insurance company

* Eligibility for debt recovery under SARFAESI Act 2002 proposed to reduce from Rs50 lakh to Rs20 lakh

Higher fiscal borrowing would spike yield & inflation; however it will use for infra/capex spending rather than public spending which will help to create long term assets for the country. Availability of higher capital/liquidity across global market will be supportive for initiative. Though one should keep a close watch on rating agency reaction. As per our view, Budget 2021-22 is positive for banking & financial sector as the announced proposals will lead to overall revival of the economy.

Union Budget proposed setting up a bad bank under ARC/AMC model to house stressed assets currently in the books of PSBs. As per the quick understanding, bad bank will acquire bad loans from banks at a negotiated price (at a discount to book value) and pay by the way of cash and security receipts (SR). The funds for buying the bad loans will come from sponsors (govt) as well as AIFs. Bad bank will have the responsibility to turnaround the bad assets through selling it further to private parties such as distressed assets funds to unlock values.

Govt took this bold step for setting up a bad bank considering the weak recovery from IBC and poor financials health of existing ARCs. The proposed bad bank is expected to be better than both the IBC and ARCs in terms of pricing and faster recovery. NPA can increase to 13.5% by Sep 2021 from 7.5% in Sep 2020, as per the RBI financial stability report. We believe bad bank will be effective in cleaning up bad loan menace so that PSBs can solely focus on credit growth, which in turn positive for the economy given the higher share of PSBs (>60%) in Indian credit market.

Govt took this bold step for setting up a bad bank considering the weak recovery from IBC and poor financials health of existing ARCs. The proposed bad bank is expected to be better than both the IBC and ARCs in terms of pricing and faster recovery. NPA can increase to 13.5% by Sep 2021 from 7.5% in Sep 2020, as per the RBI financial stability report. We believe bad bank will be effective in cleaning up bad loan menace so that PSBs can solely focus on credit growth, which in turn positive for the economy given the higher share of PSBs (>60%) in Indian credit market.

The govt has also proposed Rs20,000 cr for recapitalisation of PSBs. The move comes as the much-needed relief for PSBs given their weak capital position and likely weakening of assets quality in the near term due to recognition of NPAs from morat book.

Further, the govt has announced strategic divestment in two PSBs and one general insurance company. Market cheered this budget announcement as govt remained unable to privatise PSBs ever after implementing economic liberation in 1991. Though the govt did not announce the name of PSBs which would be divested.

Under SARFAESI act’ 2002, eligibility of debt recovery for NBFCs with minimum assets size of Rs100 cr is proposed to be reduced from existing level of Rs50 lakh to Rs20 lakh. The move is positive for NBFCs sector as it will bring credit discipline in NBFCs and recovery of small ticket loans given to MSMEs.

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