Budget 2022 | Capital expenditure push could rejuvenate credit growth

The continued thrust by the Government of India (GoI) on improving infrastructure to help sustain economic growth was the key theme for the Union Budget of FY2023. Towards this end, it has significantly increased its capital expenditure by 35.4 percent to Rs 7.5 trillion.

This has the potential to revive the overall credit demand, which was severely impacted by the pandemic in the last two fiscals. Given the large quantum of investment required for infrastructure, the GoI plans to attract the private sector participation through multiple steps, such as applying global best practices, and balanced risk allocation. Further, in this regard, the proposals to use innovative financing instruments such as blended finance, and sovereign green bonds are expected to broaden the overall credit ecosystem. The plans to issue sovereign green bond reiterates the government’s intent towards meeting its COP-26 commitments. The above measures can potentially revive the private sector appetite, and also provide growth opportunities for the banking sector.

Following the large capital infusions over the last few years, the public sector banks (PSBs) which account for almost two-third of the banking sector are relatively much better placed in terms of capitalisation and profitability, and consequently their ability to support the near term credit demand. While the GoI has scaled down the budgeted amount for recapitalisation from Rs 200 billion to Rs 150 billion for FY2022 despite the significant thrust on growth over the next few years, in line with our expectations, FY2023 will be the first time in over a decade that the GoI would not budget for recapitalising a PSB.

Apart from infrastructure, a key part of the Budget was earmarked for the Micro Small and Medium Enterprises (MSMEs). The COVID-19 has posed significant challenges to the banking sector and, the GoI’s emergency credit guarantee line scheme (ECLGS) was instrumental in providing the requisite liquidity support to MSMEs with disbursements of Rs 2.3 trillion of bank credit. The proposal to augment the ECLGS by an additional Rs 500 billion, and extending the scheme till March 2023, for hospitality and related sector will provide further relief in view of the continued stress.

Further, with the revamping of Credit Guarantee Trust for Micro and Small Enterprises (CGTMSE) scheme, an additional credit of Rs 2.0 trillion for MSME will also aid the credit growth for the banking sector. Similarly, affordable housing remains a key area of thrust with an enhanced allocation of Rs 480 billion for FY2023 under the Pradhan Mantri Awas Yojna (PMAY) scheme augurs well for home buyers and also help lenders scale-up exposure towards this segment.

Apart from proposals to enhance fresh credit flow, the operationalisation of the national asset reconstruction company limited (NARCL), and proposal to make amendments in insolvency and bankruptcy code (IBC) also augurs well for the recoveries from legacy stressed assets. The GoI has proposed to amend the IBC to address the stressed overseas assets, as many of the stressed assets have failed to achieve desired resolution plan and value because of complex corporate structures holding these overseas assets.

Despite a smart pick up in revenues during FY2022, the modest divestment targets and high capex commitments for FY2023 meant a sharper than expected rise in GoI borrowings and fiscal deficit for the next year. Accordingly, while the growth-focused Budget has enthused the stock markets, the bond markets have taken it otherwise, and the benchmark yields jumped by over 20 bps. With expected rise in global interest rates as also uptick in crude prices coupled with absence of an update on measures to facilitate the awaited bond index inclusion and increasing maturities of G-Secs over the next few years, the yield curve is likely to get steeper over the course of the next year.

Karthik Srinivasan is Senior Vice President & Group Head, ICRA. Views are personal, and do not represent the stand of this publication.