Union Budget 2020 India: Kotak Institutional Equities (KIE) said on Sunday there was an expectation of recapitalisation to bolster the credit growth.
Union Budget 2020 India: At a time when public sector banks (PSBs) continue to accrue bad loans on their books, the Budget for FY21 and the Economic Survey for FY20 have offered hope for their turnaround. While the finance minister said the government would consider providing capital to PSBs as and when required, for now they are being considered fit to stand on their own.
Finance secretary Rajeev Kumar explained that PSBs are now in control of the legacy bad-loan situation. Further, the plan to amalgamate 10 PSBs into four will help achieve cost optimisation. “All these banks, having done the NPA (non-performing asset) reduction, provision coverage and recoveries, are in a position to go to the market to take care of their own capital needs,” Kumar said at the post-Budget press conference, adding, “The amalgamating banks will see a whole lot of expenditure optimisation and efficiencies.”
He pointed to the example of Bank of Baroda, which, after amalgamating with Dena Bank and Vijaya Bank, is saving Rs 1,900 crore a year in cost synergies. State Bank of India’s record profit in Q3FY20 is a sign of revitalisation in the PSB segment.
Analysts have taken these as early signs of a turn to self sufficiency and profitability for PSBs. Kotak Institutional Equities (KIE) said on Sunday there was an expectation of recapitalisation to bolster the credit growth. “However, given that CAR (capital adequacy ratio) levels have improved for banks, we don’t see a near-term requirement for the same,” KIE analysts said.
Karthik Srinivasan, SVP and group head, financial sector ratings at Icra, said unlike past Budgets where the capital allocation for the banking sector had been in focus, there has been no allocation for PSBs in FY21. “We expect most of the PSBs to turn profitable in FY21 and raise capital from the markets for their growth requirements,” he said.
Some help could come from the proposed amendments to the Income Tax Act which will allow amalgamating banks to spread their losses over a period of time and avail of related tax benefits.
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Moreover, a road map for improving operating efficiencies at PSBs has been outlined in the Economic Survey. The Survey bats for the use of data analytics in corporate lending, geo-tagging of collateral and a greater embrace of fintech by PSBs to improve profitability. A transformation of human resources (HR) strategies to give greater ownership of PSBs to their employees has also been sought in the Survey.
In a foreword to an SBI note on the Budget for FY21, chairman Rajnish Kumar said, “The proposal to carry out governance reforms to bring in transparency and greater professionalism in PSBs is a good move. This must be looked in the light of the proposal made in the Economic Survey.”