Banking stocks under pressure after Budget 2024 skips major reforms for sector

The IBC has resolved over 1,000 companies, leading to direct recoveries of more than Rs 3.3 lakh crore for creditors

Barring Federal Bank, all banking stocks nosedived in the sea of red on July 23 after 2024 Budget failed to announce any major reforms for the sector. Shares of Axis Bank, ICICI Bank, HDFC Bank, SBI, Bank of Baroda, and IndusInd Bank slipped up to 1 percent.

Investors had hoped for announcements regarding the consolidation of government-owned banks, divestment measures, or recapitalisation efforts in pre-budget discussions, but these measures were not addressed.

However, the budget document did outline an integrated technology platform to enhance the outcomes under the Insolvency and Bankruptcy Code (IBC), aiming for consistency, transparency, timely processing, and improved oversight for all stakeholders.

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"The IBC has resolved over 1,000 companies, leading to direct recoveries of more than Rs 3.3 lakh crore for creditors. Additionally, 28,000 cases involving over Rs 10 lakh crore were resolved before admission. We will initiate appropriate changes to the IBC and reforms to strengthen the tribunal and appellate tribunals to expedite insolvency resolution," stated Finance Minister Nirmala Sitharaman.

Steps to reform and strengthen debt recovery tribunals were also announced.

The 2021 Budget had announced the privatization of some public sector banks (PSBs) as part of a disinvestment drive aiming to raise Rs 1.75 trillion. Besides IDBI Bank, the plan included privatizing two PSBs and one general insurance company.

Currently, Indian banks are in excellent health. The industry has seen gross bad loans (NPAs) drop to a 12-year low of 2.8 percent in FY24. Net NPAs are at a historic low of 0.6 percent. Balance sheets are the strongest they have been in over a decade, and profits have rebounded sharply, quadrupling in 10 years.

The return on equity (ROE) of the Indian banking sector is the highest at 15 percent since FY2011. Loan growth in the sector has increased from a decadal average of 10 percent to 15 percent over the past two years.

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