The Union Budget 2015-16's proposals will negatively impact mid-sized public sector banks (PSBs) while improving the outlook for non-banking finance companies (NBFCs) and private sector banks, India Ratings & Research (Ind-Ra) believes.
Negative Impact on Mid-sized PSBs: The proposal of Rs 79.4 billion for the capitalisation of public sector banks is lower than Ind-Ra's expectation of Rs 200 billion. This modest allocation, along with recent differentiation in infusion based on performance, could be negative for the growth of mid-sized PSBs which account for about 30% of system assets. The decision on the actual allocation to banks has been deferred to the Bank Board Bureau, which is planned to be set up.
Positive for Private Sector Banks and Large PSBs: Ind-Ra believes the reduction of corporate tax rate to 25% from 31% earlier may improve banks' return on assets by 6bp over the next four years. The budget has proposed a few measures to improve the asset quality prospects for banks - (i) GDP growth uptrend confirmed, which should help growth prospects in cyclical sectors including metals (ii) The National Infrastructure Fund is expected to support equity funding to viable projects, thereby improving the prospects of restructured accounts (iii) The long-awaited strengthening of the bankruptcy code and improving judicial capacity aims to improve the long-term recovery prospects from NPLs. These are positive for the asset quality of banks and business prospects of asset reconstruction companies.
Positive for NBFCs, Microfinance Institutions: It was refreshing to see the government looking beyond banks to encourage credit delivery. The new 'Mudra Bank' for refinancing microfinance institutions and including large NBFCs under the Sarfaesi Act are structural changes that will improve the viability of these growing intermediaries. The Sarfaesi Act will enable large NBFCs to fund SMEs and mid-corporate businesses with lower loss prospects. The Gold Monetisation Scheme could moderate the demand for gold loans; however, the details of the scheme are awaited.
