If the economy doesn’t pick up as expected, banks may see another wave of stress from loans given to individuals and corporations. (Photo by maitree rimthong/Pexels)
India’s banking sector has crossed the worst point of its bad loan worries. Banks’ books are much cleaner now post large loan write-offs and central-bank-initiated asset quality review. Following capital infusion in recent years, banks’ capital adequacy ratio (CAR), a key component of financial health, too has improved.
Now, the sector waits for cues for the next leg of growth.
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There are clear upside risks emanating from both global and domestic factors. These include fast-rising interest rates, fears of a global recession, the impact of rising unemployment on the asset quality of banks and tightening liquidity conditions as the world over central banks are on the course to withdraw easy money.
If the economy doesn’t pick up as expected, banks may see another wave of stress from loans given to individuals and corporations.
Against this backdrop, Union Budget 2023 is expected to give a blueprint for the future growth of Indian banks. There are two key areas where the banking industry typically expects announcements from the Union Finance Minister (FM) in every Union Budget.
(Graphics: Rajesh Chawla)
Privatisation - a pending promise
The first is capital infusion in public sector banks (PSBs) and the other is steps on bank privatisation.
However, with respect to these two, Union Budget 2023 is likely to be a non-event. FM Nirmala Sitharaman is unlikely to announce an infusion of fresh capital in PSBs this time citing better financial health of banks indicated by improved bad loans ratios and capital adequacy levels. The government infused Rs 3.3 lakh crore in PSBs between FY16 and FY21. In Union Budget 2022, the FM did not announce any additional infusion for PSBs, which is likely to be the case this time as well.
The non-performing assets (NPAs) of banks have fallen to a 6-year low of 7.6 percent as on March 31, 2022. Also, the CRAR (capital to risk-weighted asset ratio) of banks improved to 14.6 percent as of March 2022. This implies no urgency for the government to put money on the table. Similarly, the politically sensitive reform — PSB privatisation — too is likely to take a backseat for now.
In the 2022 Budget, FM Nirmala Sitaraman announced the privatisation of two PSBs. But this wasn’t followed up. The crucial Banking Laws (Amendment) Bill is yet to be tabled in Parliament. According to industry sources, the government is likely to put on hold PSB privatisation ahead of state and 2024 general elections. Although NITI Aayog has suggested the names of two lenders, the government is yet to finalise the names of banks to be privatised. While big-ticket announcements are unlikely, the FM may announce some measures to boost financial inclusion and enhance the operational efficiency of PSBs.
Some of the critical issues the FM should focus on in the Budget include fast-tracking the PSB privatisation programme while the government banks are in still good shape. This is critical to attracting investments and fulfilling the long-pending promise of ceding government control in these banks. PSB privatisation has been a long pending agenda but the promise largely remains on paper. At one point, there were no takers for PSBs due to their significant NPA issue. But that is largely behind Indian banks at this point.
PSBs are dominated by heavily politicised employee trade unions. There was a large stock of toxic assets on their books. Besides, there is a need for a credible buyer who would be willing to experiment with deep-rooted legacy issues in these banks. All that has happened so far is a mega merger of 10 state-run banks into four in 2020 and a forced buy of IDBI Bank using India's largest insurer Life Insurance Corporation of India in 2019. Now, once again, the government has an opportunity to push the PSB privatisation agenda.
It would make immense sense to identify a few large PSBs and grow them into big banks which can compete globally. Indian banks still lack in size when it comes to big Chinese and Japanese banks. The government should come up with a blueprint to create 4-5 big PSBs that can compete globally and capitalise these entities well to compete in the global banking landscape to fund India-linked firms.
Secondly, it is critical to regulate or ban cryptocurrencies at the earliest to avoid confusion among ill-informed investors. India doesn’t have any regulations pertaining to cryptocurrencies at the moment. This gives room for crypto companies to acquire fresh investors. The website of one of the largest Indian crypto exchanges asserts that crypto investments are legal, even though the sector isn’t regulated. An average investor is easily misguided by such vague disclosures.
The RBI’s hands are tied when it comes to the crypto chaos.
In 2018, the RBI banned all banks from dealing in cryptocurrencies. The Supreme Court, however, overturned the ban on a plea by the Internet and Mobile Association of India. The SC said while the RBI had the power to regulate virtual currencies, in the absence of any legislation, the business of dealing in these currencies ought to be treated as a legitimate trade that is protected by the fundamental right to carry on any occupation, trade or business under Article 19(1)(g) of the Constitution. Thus, only the government can now resolve the problem by enacting a law that restricts operations or banning cryptocurrencies outright.
Level-playing field for NBFCs
Finally, the Budget should address the concerns raised by non-banks in terms of effecting parity in regulations on par with banks concerning the recovery process and taxation. NBFCs have demanded that the threshold to allow recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act should be reduced from Rs 20 lakh to Rs 1 lakh to bring them on par with housing financiers, banks, small finance banks and other financial institutions. Also, the industry wants flexibility in upgrading loans of up to Rs 2 crore from NPAs to the standard category on partial repayment of arrears.
All eyes on Nirmala Sitharaman now.
