Budget 2020: Spelling reforms for the financial sector

Given the importance of the financial sector in bringing about growth in the economy, the Budget has addressed some critical concerns though admittedly these measures would take time to work out though the year as they do not always involve direct allocations.

First, the FM has indicated that some of the PSBs may be accessing the market for capital. This is significant as it indicates not just the funding aspect but also a move towards letting go of equity. This can be a precursor to disinvestment taking place through the back door. One can guess the banks involved would be the better performing ones which command a good price. Interestingly the Budget also talks of the government selling its stake in IDBI Bank, presently owned by LIC, and hence does not make too much of difference in terms of ownership.

Second, it is comforting to know that the government has in place a mechanism to track the health of the commercial banks. This is important because the recent episode of NPAs in banks did cause some concern not from the point of view of deposit holders but the system as a whole as such problems do take time to build up and clearly there was no system in place to provide these signals. One would hope that this gets extended also to the cooperative banks and NBFCs (the Economic Survey has spoken of a ‘health card’ for them) which tend to be more vulnerable than commercial banks which have stronger regulatory oversight.

Third, increasing the deposit insurance cover to Rs 5 lakhs is very positive for the deposit holders especially it comes at a time when there has been an aborted attempt to make deposit holders also liable for the defaults of borrowers. The cost of insurance will increase for banks on this score as the cover is higher, but would help to strengthen the confidence levels in banks. This was required post the PMC fiasco when this issue surfaced. Otherwise scant attention has been paid to deposit insurance as it is always assumed that the government and RBI will bail out failed banks, which has been the case so far.

Fourth, the lowering of limit for NBFCs to qualify for debt recovery under SARFESI is again another step taken for helping out this sector. This should make NBFCs also come into this ambit and with the loan threshold being reduced this will help to clean their balance sheets.

While these steps have been taken at the institutional level, the future of funding in the country would be in the bond market on which several steps have been taken by the government over time. This time there is widening of the scope for FPIs to invest from 9% to 15% of outstanding debt. This would help in a limited way though admittedly the FPIs have not fully utilized the limit and have tended to concentrate more on GSecs than corporate debt.  There would also be announcements in course of time to revive the CDS market by allowing netting which will enable more liquidity in the market.

Hence while there have not exactly been any outlays here, these announcements can be seen more as reforms that are being brought in given the importance of all these three segments in the financial system.

— The writer is Chief Economist, CARE Ratings

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