Budget 2015 has introduced some very good reforms within the financial sector which fundamentally address
• Resolution on stressed assets;
• Governance and financing in banks;
• Garnering financial savings; and
• Financial inclusion
All of these were pre-budget expectation of the sector and clearly are most important.
Resolving the issue of stressed assets
Bankruptcy code
Introduction of the new bankruptcy law is very critical for resolution of stressed assets and now there would be clear laws for banks to be able to enforce liquidation of companies under default. The legislation would enable professional liquidators to gain control over companies on behalf of creditors and work towards a systematic winding down of Companies. Presently, most of the redressals, ie BIFR or SICA were legislations but plagued with delayed tactics which made resolution impossible. With Lenders having the ability to appoint a liquidator who would act in the best interest of creditors, realisations would increase and there would be a real threat to defaulting borrowers. It also resonates the RBI Governors comment that defaulting borrowers had no business to be part of turnarounds where their default was established.
This is clearly the way forward for effective resolutions and would augment well for ARCs and Bankers as SR and cash deal valuations will increase with reduced resolution timeframes. However, the stringency and effectiveness of the law remains to be tested. Going by overseas experience and indeed experience Indian subsidiaries of global corporations that went into bankruptcy, if the law is modelled around those existing in US or UK markets, they may be very effective.
SARFESI for NBFCs
This was an anomaly waiting to be corrected. Given that NBFCs inherently lend to riskier assets, applicability of SARFESI was even more required. That, coupled with a good bankruptcy law would enable NBFCs have stronger recover platforms.
Governance and financing in banks
Basel III implementation would require significant capital infusion particularly in PSU banks will rise gradually to 8% by FY19. It is estimated that PSU banks would require INR 1.6 trillion to 2.2 trillion in equity infusion to bridge Basel III capital shortfall. Government will have to infuse over INR 830 billion by FY19 to maintain government majority stake in PSU banks which will put significant pressure on the fiscal situation.
In comparison, the budget has allocated around INR 750 billion for PSU Bank capitalisaiton. I see this as an extremely positive step as it is a clear indication that the government does not intend to fund banks capital requirements from the Treasury. The budgeted amount seems to be bridge capital, if required, until the Government is able to push in legislation to form a Bank Holding company.
The Finance minister has indicated that he would consider Bank holding companies but in the interim will put in a structure to oversee PSU Bank appointments. This seems to be a start in terms of getting an oversight mechanism in place which would go a long way in terms of funding the BIC whenever set up. As I see this play out, whilst urgent needs for governments share of Banking capital will be funded by the budget, most of the other capital requirement would come out of the BIC structure. Further, as stated above, capital would be given to banks based on their plans on a commercial basis. This may lead to much needed consolidation in the banking sector. Whilst most opinion leaders see the budgetary allocation of capital inadequate, I see it as a good measure to force a long term solution to PSU banks capital needs, governance structure, consolidation and NPA rationalisation. Based on current market capitalisaiton the BIC may be valued at around 2.6 trillion if all of governments stake is transferred to it.
Garnering of financial savings
Savings rate has been falling consistently over past few years from a high of 36.8% of GDP in FY08 to 30.1% in FY13 on account of high inflation and increasing public expenditure. Also worryingly in household savings, which constitutes bulk of the domestic savings, there has been a significant shift from financial savings to savings in physical assets. Further, the cash in the Indian system is the highest amongst its peers.
The Finance minister has introduced a slew of alternative asset schemes around gold and and infrastructure which effectively have the ability to convert physical savings to financial savings which can be more productive. In a country that saves US$ 600 million annually, a shift to financial savings will significantly go towards contributing to the countrys growth
Financial inclusion
Financial inclusion and getting excluded money to banks (black money) has been given significant prominence in the budget. With the 125 million bank accounts, Jan Dhan Yojna has been a kin to the Telecom sector offering mobiles for a penny. With the infrastructure in place (Bank accounts opened, RUPAY cards given), the budget talks of Direct benefit transfer, incentivsiation of usage of credit card and discouraging cash payments. This, coupled with the newly licenses payments and small banks, would enable usage of no frills accounts which would be far more effective than any such initiative globally. However, the needs to be strict execution discipline for this to work well. The budget has surely but the building blocks in place.
Others
With the RBI not taking a call on capital flows and the removal of distinction between FPI and FDI would enable "flow to India" which is presently vital for "make in India". From a financial services perspective, I see higher capital flows into NBFCs, Insurance as well as Banking which is extremely critical for our financial markets and our capital raising efforts.
Whilst things like Mudhra bank have been announced, I am in this short time unable to understand its rationale as I could not for the Mahila bank set up a few years bank. Frankly any sustained channelization of capital requires sustainability, which can only come through a robust and long term profitable proposition.
All in all, this budget has ringed in positively for the Financial services sector and aims to create the right legislative environment for facilitating Indias growth and enabling radical reform in the sector. However, timely implementation is key.
Author is Partner & National Leader – Financial Services at EY
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