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Budget reads the riot act to PSBs: Saurabh Mukherjea

No revision of the 2017 recap plan suggests muted credit growth expectations (9-10 per cent) on the government's part for the banking system

The Union Budget has proposed funds of Rs 25,000 crore for bank recapitalisation in 2017. This remains unchanged from what the government had committed for 2017 as part of its public sector bank revamp plan - Indradhanush - in 2015. Since then, however, public sector banks' (PSBs) asset quality has witnessed sharp deterioration and the slide is likely to continue for the next 12 months. Thus, the current recap plan for 2017 does not account for any additional capital on account of higher provisioning requirement of banks. No revision of the 2017 recap plan suggests muted credit growth expectations (9-10 per cent) on the government's part for the banking system.

As earlier announced by the government, the Banks Board Bureau will become operational in 2017. Further, the finance minister added that a roadmap for the consolidation of public sector banks would be spelt out.
Read our full coverage on Union Budget 2016

Details about the extent and pace of governance reforms at PSBs remain sketchy. We remain sceptical of the half-hearted approach that the government has adopted so far. A merger of weak banks with stronger PSBs could pose risks for even relatively well run PSBs.

In order to support the development of bond markets in India, the Budget announced several proposals. These include: Life Insurance Corporation will set up a fund to provide credit enhancement to infrastructure projects, raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long-term investors; the Reserve Bank of India (RBI) will issue guidelines to encourage large borrowers to access a certain portion of their financing needs through the market mechanism instead of the banks; and the investment basket of foreign institutional investors will be expanded to include unlisted debt securities and pass through securities issued by securitisation special purpose vehicles.

Overall, the government's - and RBI's - intent to promote the corporate bond market comes across strongly. We expect this to be a negative development for PSBs and large corporate lenders as the disintermediation risk from the corporate bond markets rises.

In an announcement that would have sent shivers down the spines of bank employees, the Budget speech, for the first time, mentioned a separate bankruptcy code for banks and financial firms. This specific code for banks will seemingly allow orderly closures of banks, rather than the past practice of messy rescues of banks that were on the verge of failure, carried out by RBI and the government. The Budget proposes to increase rural spending through increased allocation to the rural employment scheme and the Pradhan Mantri Gram Sadak Yojana.

Currently, many non-banking financial corporations face challenges in terms of growth and asset quality due to poor monsoons and lack of infrastructural spending in rural areas. Increased rural spending, if executed well, would drive improvements in the rural economy, leading to improvements in growth and asset quality trends of auto NBFCs. NBFCs focused on rural financing will also benefit from this Budget.

A long-standing demand of NBFCs was to allow deduction of provisions for bad assets from income for tax calculation. Now, the Budget proposes deduction for provisioning of bad debts of NBFCs, up to five per cent of their taxable income.

Until now, NBFCs weren't allowed to claim provision on NPAs as expenses, which resulted in a higher tax outgo for NBFCs. With provisioning on NPAs now eligible for deductions, the tax outgo would be less. Although this will not decrease the effective tax rate of NBFCs, it will back-end the cash outflows related to taxes.



The writer is CEO, institutional equities, Ambit Capital

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Business Standard
177 22
Business Standard

Budget reads the riot act to PSBs: Saurabh Mukherjea

No revision of the 2017 recap plan suggests muted credit growth expectations (9-10 per cent) on the government's part for the banking system

Saurabh Mukherjea 

Saurabh Mukherjea
Saurabh Mukherjea

The Union Budget has proposed funds of Rs 25,000 crore for bank recapitalisation in 2017. This remains unchanged from what the government had committed for 2017 as part of its public sector bank revamp plan - Indradhanush - in 2015. Since then, however, public sector banks' (PSBs) asset quality has witnessed sharp deterioration and the slide is likely to continue for the next 12 months. Thus, the current recap plan for 2017 does not account for any additional capital on account of higher provisioning requirement of banks. No revision of the 2017 recap plan suggests muted credit growth expectations (9-10 per cent) on the government's part for the banking system.

As earlier announced by the government, the Banks Board Bureau will become operational in 2017. Further, the finance minister added that a roadmap for the consolidation of public sector banks would be spelt out.
Read our full coverage on Union Budget 2016

Details about the extent and pace of governance reforms at PSBs remain sketchy. We remain sceptical of the half-hearted approach that the government has adopted so far. A merger of weak banks with stronger PSBs could pose risks for even relatively well run PSBs.

In order to support the development of bond markets in India, the Budget announced several proposals. These include: Life Insurance Corporation will set up a fund to provide credit enhancement to infrastructure projects, raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long-term investors; the Reserve Bank of India (RBI) will issue guidelines to encourage large borrowers to access a certain portion of their financing needs through the market mechanism instead of the banks; and the investment basket of foreign institutional investors will be expanded to include unlisted debt securities and pass through securities issued by securitisation special purpose vehicles.

Overall, the government's - and RBI's - intent to promote the corporate bond market comes across strongly. We expect this to be a negative development for PSBs and large corporate lenders as the disintermediation risk from the corporate bond markets rises.

In an announcement that would have sent shivers down the spines of bank employees, the Budget speech, for the first time, mentioned a separate bankruptcy code for banks and financial firms. This specific code for banks will seemingly allow orderly closures of banks, rather than the past practice of messy rescues of banks that were on the verge of failure, carried out by RBI and the government. The Budget proposes to increase rural spending through increased allocation to the rural employment scheme and the Pradhan Mantri Gram Sadak Yojana.

Currently, many non-banking financial corporations face challenges in terms of growth and asset quality due to poor monsoons and lack of infrastructural spending in rural areas. Increased rural spending, if executed well, would drive improvements in the rural economy, leading to improvements in growth and asset quality trends of auto NBFCs. NBFCs focused on rural financing will also benefit from this Budget.

A long-standing demand of NBFCs was to allow deduction of provisions for bad assets from income for tax calculation. Now, the Budget proposes deduction for provisioning of bad debts of NBFCs, up to five per cent of their taxable income.

Until now, NBFCs weren't allowed to claim provision on NPAs as expenses, which resulted in a higher tax outgo for NBFCs. With provisioning on NPAs now eligible for deductions, the tax outgo would be less. Although this will not decrease the effective tax rate of NBFCs, it will back-end the cash outflows related to taxes.



The writer is CEO, institutional equities, Ambit Capital

Budget reads the riot act to PSBs: Saurabh Mukherjea

No revision of the 2017 recap plan suggests muted credit growth expectations (9-10 per cent) on the government's part for the banking system

No revision of the 2017 recap plan suggests muted credit growth expectations (9-10 per cent) on the government's part for the banking system The Union Budget has proposed funds of Rs 25,000 crore for bank recapitalisation in 2017. This remains unchanged from what the government had committed for 2017 as part of its public sector bank revamp plan - Indradhanush - in 2015. Since then, however, public sector banks' (PSBs) asset quality has witnessed sharp deterioration and the slide is likely to continue for the next 12 months. Thus, the current recap plan for 2017 does not account for any additional capital on account of higher provisioning requirement of banks. No revision of the 2017 recap plan suggests muted credit growth expectations (9-10 per cent) on the government's part for the banking system.

As earlier announced by the government, the Banks Board Bureau will become operational in 2017. Further, the finance minister added that a roadmap for the consolidation of public sector banks would be spelt out.
Read our full coverage on Union Budget 2016

Details about the extent and pace of governance reforms at PSBs remain sketchy. We remain sceptical of the half-hearted approach that the government has adopted so far. A merger of weak banks with stronger PSBs could pose risks for even relatively well run PSBs.

In order to support the development of bond markets in India, the Budget announced several proposals. These include: Life Insurance Corporation will set up a fund to provide credit enhancement to infrastructure projects, raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long-term investors; the Reserve Bank of India (RBI) will issue guidelines to encourage large borrowers to access a certain portion of their financing needs through the market mechanism instead of the banks; and the investment basket of foreign institutional investors will be expanded to include unlisted debt securities and pass through securities issued by securitisation special purpose vehicles.

Overall, the government's - and RBI's - intent to promote the corporate bond market comes across strongly. We expect this to be a negative development for PSBs and large corporate lenders as the disintermediation risk from the corporate bond markets rises.

In an announcement that would have sent shivers down the spines of bank employees, the Budget speech, for the first time, mentioned a separate bankruptcy code for banks and financial firms. This specific code for banks will seemingly allow orderly closures of banks, rather than the past practice of messy rescues of banks that were on the verge of failure, carried out by RBI and the government. The Budget proposes to increase rural spending through increased allocation to the rural employment scheme and the Pradhan Mantri Gram Sadak Yojana.

Currently, many non-banking financial corporations face challenges in terms of growth and asset quality due to poor monsoons and lack of infrastructural spending in rural areas. Increased rural spending, if executed well, would drive improvements in the rural economy, leading to improvements in growth and asset quality trends of auto NBFCs. NBFCs focused on rural financing will also benefit from this Budget.

A long-standing demand of NBFCs was to allow deduction of provisions for bad assets from income for tax calculation. Now, the Budget proposes deduction for provisioning of bad debts of NBFCs, up to five per cent of their taxable income.

Until now, NBFCs weren't allowed to claim provision on NPAs as expenses, which resulted in a higher tax outgo for NBFCs. With provisioning on NPAs now eligible for deductions, the tax outgo would be less. Although this will not decrease the effective tax rate of NBFCs, it will back-end the cash outflows related to taxes.

The writer is CEO, institutional equities, Ambit Capital
image
Business Standard
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