The new government’s maiden Union Budget gave a shot in the arm to the banking sector at large, but it did leave the State-run banks in a vulnerable position. CNBC-TV18’s Ritu Singh highlights the hits and misses for the banking community from this Budget.For the banking community, this Budget was bitter-sweet, it brought cheer to some, but left many disappointed too. For the private lenders, the Finance Minister’s move to remove the distinction between Foreign Portfolio Investments (FPIs) and Foreign Direct Investment (FDIs) has brought immense relief. Now, FIIs will get more headroom to buy into private banks. Axis Bank, YES Bank, Kotak Mahindra Bank and Federal Bank will be the biggest beneficiaries.
Axis Bank’s Shikha Sharma welcomed the move, saying an unnecessary inefficiency in the market has been done away with, thanks to this new measure.
“We currently have shareholder approval to go upto 62 percent and we would have to go back to our shareholders to take it to 74. We will have to discuss it at the board, but I think the new regulation definitely provides an opportunity to have that discussion,” she said. Another big positive from this Budget was giving the long-pending SARFAESI Act powers to larger NBFCs. So far, only banks were allowed to recover money under this Act, not NBFCs and this move is seen a good measure to strengthen the credit culture in the banking sector.
A Micro Units Development Refinance Agency (MUDRA) Bank is also proposed to be set up with a focus on lending to small entities and entrepreneurs. Furthermore, to improve the governance of public sector banks, the Budget also provided for a bank holding company to be set up. But for the industry that’s been clamouring for rate cuts, the FM’s decision to defer the 3.6 percent fiscal deficit target for this year may limit the chances of a steep fall in rates.
Uday Kotak, vice-chairman & managing director, Kotak Mahindra Bank said, “I don't think fiscal deficit target increase is a big issue but a higher fiscal deficit will limit reduction in interest rates.”
But for the state run banks, there was a big shocker. The Rs 7,940 crore capital infusion announced for FY16 is barely half the amount that PSBs require, and even lower than the amount the government had committed for FY15. The message is clear. The government will not hand-hold poor-performing banks, and they will have to tap the markets for any capital needs from here on.
It’s a double-whammy of sorts for these banks. For PSBs burdened with bad loans, the investor community may not even have the appetite to buy into stocks. While this will pressurize the smaller banks to merge with the big ones, for now, state-run banks will have to depend on asset monetization to meet their requirements. What’s worse is that while the banks’ capital infusion has been cut down, Jaitley has increased the farm-loan target for PSBs to14 percent of total credit, which might just deal a killing blow to the smaller banks.
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