Budget 2020 India: India’s ailing financing sector needs the government’s immediate assistance, especially a large capital infusion in PSU banks, and higher tax incentives for homebuyers, to pull financing companies out an ongoing slump. PSU banks need a capital infusion to the tune of Rs 1 lakh crore from the government in the upcoming budget to boost the credit growth, ICRA said in a note. The banks’ credit will likely grow at 8-10 per cent in the next financial year 2020-21, requiring an additional capital of Rs 20,000 crore, ICRA said. However, an impending transition to IND-SA 109 regime will raise the banks’ credit provision requirements, requiring a further capital of Rs 80,000 crore, it said.

Capital relief

Indian government has helped pump in Rs 2.66 lakh crore into PSU banks through the last two financial years 2018-20 by allocating government funds and raising money in markets, which, ICRA said, resulted in improved health of the banks. PSU banks may soon exit the RBI’s prompt corrective action framework and turn profitable in the next few years, ICRA said. Non-Banking Finance Companies (NBFCs) and Housing Finance Companies (HFCs) have shown stunted growth in the current fiscal, compared to the last five year’s average. The growth succumbed due to slump in demand from the retail buyers, especially in the real estate sector.

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Home run

Homebuyers must be given more tax incentive such as additional tax deduction for interest on loans taken beyond 31 March 2020; and increased allocation under PMAY (Pradhan Mantri Awas Yojana) for first-time home buyers, ICRA said, adding that this could enhance the general appetite for housing loans. Further, it has also proposed increased allocations under the provisions of Affordable Housing Fund (AHF) which will create long term funds for the HFCs and NBFCs to explore any chance for the growth in housing loans.

What more can be done

  • The government must set up Credit Guarantee Enhancement Corporation for infrastructure financing, as announced in the previous budget, and the Ministry of Finance must provide clarity on roles government-sponsored NBFCs have to play in the infrastructure financing space.

  • Amid the weakening consumption in the economy, ICRA has warned against inaction to boost demand, which can worsen the asset quality pressure in the retail segment given the sluggish economic growth in the ongoing fiscal.