Healthier financial sector to complement budgetary efforts to drive growth

India is one of the major economies which is expected to maintain strong growth momentum amid the likelihood of slowing global growth this year.

The financial position of the banking sector has vastly improved and is now conducive to supporting domestic economic growth compared to the last decade when it faced various challenges led by asset quality issues. After being a drag on the Union government’s fiscal position over the last few years, public sector banks are expected to report net profits in excess of Rs 1 lakh crore in FY2023. With further improvement in profitability in the medium term, these banks will become net cash contributors to the Union budget as the estimated dividend payouts will exceed the interest paid by the central government on the recapitalisation bonds.

The health of the domestic banking sector has improved at the right time as global markets are dislocated in terms of funding costs and corporate India is relying on domestic sources to fund its growth aspirations. Various policy reforms such as the digitisation of retail payments, credit bureau penetration, the success of the Insolvency and Bankruptcy Code (IBC) and strengthened regulatory framework make investors more confident to provide capital to financial sector entities that support credit flows to the deserving and productive sectors of the economy.

Also, with the privatisation of IDBI Bank entering the final stages, more clarity on the Union government’s plans to privatise other public sector banks is expected, which will also be a positive development for the sector. 

Incentivise Long-Term Investments

The Union government has also outlined a massive infrastructure investment pipeline or the National Infrastructure Pipeline of Rs 111 lakh crore of investments during FY2020-25. Accordingly, the demand for credit from infrastructure companies is expected to remain high. A large part of this demand is expected to be met through government-owned NBFCs and public banks. To support the funding requirements of the NIP, the government has also created  the National Bank for Financing Infrastructure and Development (NABFID) as a development financial institution and provided it with requisite capital, apart from recapitalising banks and other financial institutions. Thus, greater clarity on the role of some of the existing government-owned NBFCs (including NABFID) would help. In order to raise resources for infrastructure financing at competitive costs, an increase in the deductions allowed under the Income Tax Act for long-term savings instruments like National Pension Scheme (NPS)/Section 80C/tax saving bonds/infrastructure bonds could be considered.

We also expect the government to take steps to improve consumer confidence and the risk appetite of corporate India. In this regard, given its multiplier effect on the economy, we expect the government to continue focussing on the housing sector, either through targeted schemes or by allowing higher deductions for housing loans to partly counter the impact of rising interest rates and property prices.

Recapitalise General Insurance Companies

While we do not expect any budgetary allocation for public sector banks, the public sector general insurance companies still require additional support. Despite the capital infusion of Rs 17,450 crore over the last five fiscal years and regulatory relaxations, the solvency position of these companies remains weak. The recent revision in the salaries and associated pension liabilities has added to their capital woes. Accordingly, the government will need to provide these companies with a sizeable capital infusion in the near term as well.

To sum up, India is one of the major economies which is expected to maintain strong growth momentum amid the likelihood of slowing global growth this year. The government’s policy actions have been supportive and as we rebound from the Covid-19 pandemic, maintaining high confidence levels among the consumers, corporate India and investors to remain Aatmanirbhar is the need of the hour.

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