The immediate impact of the Budget is always felt on the financial markets, and the banking sector in particular. The Sensex had declined after the announcement, meaning thereby that there was not much to cheer.
The 10-year bond yield has gone up by 18 bps after the presentation of the Budget spooked by the high borrowing programme of the government. There were quite a few expectations from the banking side, though admittedly no policy decision was part of this bag which is in the domain of the RBI which will be speaking on February 9.
How has the budget affected the banking sector? First, the bank capitalisation issue was an area of interest. True, banks are well-capitalised, and do not require any fresh capital. But infusion of capital is a cornerstone for future growth, and there was a feeling that the government would provide growth capital for some of the banks. A nominal amount has been provided for Rs 15,000 crore.
Second, the bad bank was set up last year as per the announcement made. This time a progressive announcement is that the IBC resolution process would be sped up with the time taken to exit being reduced from two years to six months.
Third, the emergency line of credit was established mainly for the SME at the onset of COVID-19, and was extended to the one time restructured companies under the Kamath Plan. The limit for this assistance was last raised to Rs 4.5 lakh-crore. Here the government was expected to widen the frame for more industries, especially those which came under foul weather the third time over due to the Omicron variant. Here there has been a good reaction with the limit being increased to Rs 50,000 crore for the hospitality industry, which is almost the same as the outstanding credit to this segment.
Fourth, the government has spoken of bringing in a sovereign green bond. This is a novel idea where the government will borrow through such designated bonds. It needs to be seen as how they are priced, and how they will be dovetailed to green projects given that the ESG area is still nebulous where it is hard to differentiate between compliant companies.
Fifth, the Budget points to sectors such as solar energy, EVs, telecom, housing, data centres, etc. which will see an uptick in demand for credit too. Therefore, there is hope that there will be a change in the credit cycle, which has been depressed for long. However, this will be restricted to specific industries, and will not be broad based as yet.
The main number that would be of interest to banks would be the deficit and borrowing of the government as that will shape the state of liquidity during the year. The gross borrowing programme at Rs 14.95 lakh-crore is still high for the third successive year given the rather proactive role being played by the government in supporting growth. This high borrowing raises two issues for banks. The first is that interest rates will continue to be strained as this borrowing has to be supported by the market. We can expect the 10-year bond to move towards the 7 percent mark during the course of FY23. Second, there will be challenges in terms of liquidity depending on how private sector credit shapes up. If growth is steady, then there can be periods of sticky liquidity for sure.
On the whole, banks can see some clarity for the year in terms of liquidity, rates, and direction of business once the RBI announces it policy.
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