Analyzing new budget through the perspective of NBFC and Banking

Soumya Bajpai

10 Sep, 2022

The Union Budget 2021-22 has evidenced a sharp increase in Capex allocation and outlining manufacturing as a key pillar for the economy, while rightly allowing for a higher fiscal deficit, given the low-interest scenario the perspective of NBFC and Banking. Union Budget has pegged the current year’s (FY20-21) budgetary deficit at 9.5%. The fiscal deficit target has been above the market expectation for both years. The anticipation for FY20-21 was around 7.5%, while for FY21-22 was around 5.0%-5.5%.

Infrastructure: Key highlights for Union Budget 2021-22

• As per expectation, the government has its capital expenditure gross budgetary support (GBS) allocation by 5.54 lakh crore in a budget to ramp-up infrastructure spending focusing on economic revival. Further, 2 lakh crores for the additional Capex to nudge states, allocating 20000 crores toward setting up DFI to have a lending portfolio of 5 lakh crores over the next three years to mobilize funding required to fulfill NIP. It is to create opportunities in key segments like railways, roads, infrastructure power, defense, etc.
• Roads & Highways were the most resilient segment of infrastructure. On overall Capex front, for Roads and Highways, the revised estimates FY-21 spends is pegged 12% higher at 92053 crores vs. budgeted estimates of 81975. Even for FY-22, the government has pegged the road Capex at 108230 crores. The government is looking to provide an alternative financing source by monetizing five operating projects worth ₹ 5000 crores.
• Most importantly, the budget also provided an alternative source of financing such as setting up DFI, monetization of assets across segments, including Highways, Grid Assets, Airports, etc.

Disinvestment agenda receives a major push in Budget 21-22

In the Union Budget 21-22, the FM announced the target of ₹ 1.75 lakh crore for disinvestment. Notably, all strategic stake sales announced already would be completed in FY22E, while Niti Ayog has been tasked with working on the following list of PSUs for disinvestment. Among all the new companies in which government stake would be monetized next year has included two banks and a general insurer. Notably, the LIC of India would also form part of the FY22 disinvestment agenda. The government has also announced an asset monetization plan for encashing several operational assets such as power transmission projects, NHAI toll roads, oil & gas pipelines,  warehousing assets, tier 2/3 airport assets, and sports stadium, etc.

Perspective of NBFC and Banking is primary focus

Setting up an (ARC) Asset Reconstruction and Management Company or bad bank to take up existing stressed assets with a singular focus on resolving stressed assets recovery remains optimistic for the banking sector, especially PSU banks^[1]. Further, ₹ 20,000 crores, capital infusion to strengthen PSU banks’ balance sheet and focus on growth. The infrastructure and development push from budget to fuel banking credit growth from the perspective of NBFC and Banking.

After this government announced a merger of 13 public sector banks into five central banks, the government has taken the first step towards privatizing state-run banks, starting with the divestment of two PSU banks, in a bid to expedite long-awaited reforms in a banking sector.

Governments focus on augmenting Farm income

The government remains committed to augmenting farm income with record procurement of farm produce (Wheat, Rice, Pulses) from domestic farmers for FY21. Rice procurement is at ₹ 1.72 lakh crore for FY21, wheat procurement is at ₹ 75,000 crores, and pulses at ₹ 10,000 crores. It also emphasized doubling the fund’s under NABARD for micro-irrigation for FY22 at ₹ 10,000 crores vs. ₹ 5,000 crores in FY21. Budget 2021-22 also set a target for agriculture credit at ₹ 16.5 lakh crore for FY22. It also talked about the introduction of agricultural infrastructure and development cess on certain products.

Commercial Vehicles space receives an impetus in the Budget 21-22

For auto space, the Budget announcement introduced a voluntary vehicular scrappage policy for commercial vehicles older than 15 years and personal cars older than 20 years. Companies across a value chain (OEMs, forging players, tire players, and tire chemical suppliers) stand to gain as a result. Other initiatives in infrastructure space (aggressive road building) and the Agriculture economy (focus on farm incomes) are positive for several leading auto OEMs.

Budget developments on Direct Taxes for individuals

• No significant changes in income tax rates or slabs for individuals or corporates.
• Unit-Linked insurance products (ULIPs) with higher premiums above ₹ 2.5 lakh per annum will be subject to tax on maturity. It will bring a taxation on higher value ULIPs at par with mutual funds.
• Tax exemption on any interest earned on employee’s contribution towards various provident funds has been restricted to the annual grant of ₹ 2.5 lakh.
• Additional deduction of the ₹ 1.5 lakh on interest on the housing loan for affordable housing has been extended on home loans up to 31st March 2022. The scheme was introduced in the 2019 budget and has been extended since then.

Higher than expected fiscal deficit & Government borrowing

Due to higher deficit, the borrowing from the bond market is also higher. The finance minister has announced an additional ₹ 80000 crores of market borrowing in a current financial year, while for FY21-22, a gross market borrowing is pegged at ₹ 12 lakh crore. The bond market was expecting a gross borrowing of around ₹ 10 lakh crore for FY21-22. Accordingly, the bond market reaction has been adverse, the bond market has disappointed with no announcement concerning a road map for the inclusion of Indian Sovereign bonds in global bond indices, leading to significant inflows.

Conclusion

Financial Sector is a backbone of the economy and has been one of the focus areas in the overall scheme of bringing back a demand and boosting the economy from the perspective of NBFC and Banking sector. FM has specifically announced Rs 1 lakh crore liquidity boost during the current financial year. This is not the only source of money for NBFC, but this is going to be a new source. So clearly, it would add to the overall liquidity situation for NBFCs will have a positive thing. The FM did emphasize that funding should be made available to fundamentally-sound NBFCs by mutual funds and banks.

Read our article: Regulatory Framework for NBFCs: A RBI Revision