Union Budget 2015: Proposed Bankruptcy Law a manna for banks

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Published: March 1, 2015 3:09:32 AM

The gold monetisation scheme could be a game-changer, too

The proposed bankruptcy law fulfils a long-standing demand of the bankers.The proposed bankruptcy law fulfils a long-standing demand of the bankers.

Budget FY16 has unveiled a vision for the future. The government has rightly decided to spruce up public investment to channelise private investment. The 3.9% fiscal deficit target for the next fiscal year seems well-thought-out, with revenue assumptions having the potential to overshoot.

The proposed bankruptcy law fulfils a long-standing demand of the bankers. Uniform bankruptcy code for easy exit also charts the course to be adopted by lenders. The loopholes on the account of multiple laws like the Sick Industrial Companies Act (SICA) and the Board for Industrial and Finance Reconstruction (BIFR) that allow defaulters to exploit and delay recovery will stand altered. This code would replace the SICA as well as the BIFR. Also, the decision to have commercial courts, acting under the judicial courts, could fast-track debt recovery. For the lenders, this is a big positive as the tightening of defaults makes doing business easier.

The proposed public contracts (resolution of disputes) law could cut down the time consumed in resolving disputes over public contracts in the infrastructure sector. Allied industries—construction, real estate and project management—will benefit.

The encouragement provided to the use of cards instead of cash will not only allow banks to focus on services but will also do away with the need for the large manpower for handling cash at the branch-level. Banks would be in a better position to reallocate manpower. Along the entire supply-chain for supply of cash, the banking system bears the highest cost, primarily because of the high fixed costs of ATM machines, high opportunity cost of holding cash and negative externalities like higher soiling of notes in general. In short, this particular move will effectively bring down the social cost of unaccounted money, apart from adding to the banks’ bottomline. This proposal, coupled with a legislative framework to counter black money, will act as a deterrent for a parallel economy and result in better price discoveries in the construction sector.

Bringing NBFCs on a par with financial institutions helps banks clean up balance-sheets by selling stressed assets at an early stage to ARCs. This is because NBFCs, given their inability to access Sarfaesi Act provisions, would only take on those NPA accounts where Sarfaesi has already been invoked. Now, this can apply to SMAs, too.

The proposed National Investment and Infrastructure Fund, with an annual flow of R20,000 crore, could raise debt and invest as equity in infrastructure finance companies such as IRFC and NHB. The equity, in turn, would enable these companies to be leveraged in raising debt.

The finance minister has announced four measures for the monetisation of gold, another long-standing demand of the bankers. These include: a gold monetisation scheme, replacing both the existing gold deposit and gold metal loan schemes; a sovereign gold bond as an alternative to purchasing the metal; developing a national gold coin, featuring the Ashok Chakra; and gold purchases through debit/RuPay cards. These will ensure monetisation of the existing stock of gold (over 20,000 tonnes), creating a substitute for physical gold, recycling domestic gold and curbing black money generation. The gold monetisation scheme could be a game-changer for the banks, incentivising them to hold a part of the deposits as CRR or SLR. This frees up resources for productive purposes.

The decision to incentivise savings for pension funds augurs well for infrastructure financing and retirement planning. This gives a fillip to the National Pension Scheme. The decision to have a flexible limit for provident fund contribution by an individual, below a threshold income, will encourage people to balance consumption and savings. The move towards a unified agricultural market helps farmers get correct remuneration for their produce.

Overall, the Budget is a pragmatic vision and a road map for the future. This, coupled with the Rail Budget, seems to be a concerted move by the government to sustain the growth momentum.

By Arundhati Bhattacharya, Chairman, State Bank of India

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