Banks expect recapitalisation lifeline from finance minister

Coming ahead of the general elections, the interim Budget on Friday is likely to contain populist measures like farm loan waiver, universal basic income, low-cost housing and enhanced credit flows to the rural sector and small and medium-sized enterprises. Amid this, the banking sector expects recapitalisation and interest sops for depositors so that they will have sufficient funds to lend.

"Capital is the biggest requirement of the banking industry. There could be some announcement on recapitalisation. The thrust this time will be on housing and agriculture. This will indirectly benefit banks as the demand for credit from various sectors is expected to go up," Rajnish Kumar, chairman State Bank of India (SBI), said.

In FY19, the government raised the bank recapitalisation outlay from Rs 65,000 crore to Rs 1,06,000 crore. So far, Rs 51,513 crore has been infused into the public sector banks. The government has to infuse Rs 54, 487 crore more by March 2019. In the interim Budget, bankers expect a new dose of recapitalisation.

Liquidity is certainly going to be an issue, particularly with elections around the corner. Bank credit is currently growing at the rate of 15.1%, while deposit growth is lagging behind at 9.7%. If deposits do not grow in tandem, banks will be tight on capital to meet the rising credit demand.

To attract low-cost term deposits, banks have sought tax relaxations on interest earnings and higher deposit insurance coverage for depositors. Bank deposits that earn an interest income of over Rs 10,000 are taxed at source. Lenders are wanting these limits to be raised to Rs 50,000 a year so that depositors have an incentive to come to the banks despite lower interest rates.

In the interim Budget wishlist, banks also want deposits of up to Rs 5 lakh to be covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of Reserve Bank of India (RBI), which guarantees deposits of up to Rs 1 lakh. "We are paying a premium for the entire portion of term deposits, but the DICGC is only insuring up to Rs 1 lakh of the deposits," said a banker.

"The government needs to revisit these slabs so that depositors are incentivised. Equity linked savings scheme (ELSS) is an open-ended equity mutual fund, which looks more attractive than a bank deposit due to its tax-free status. The government should lift this anomaly, particularly at a time when credit growth is outpacing deposit growth," said another banker.

Though India had specialised infrastructure financing companies, banks were providing the major portion of this finance. Banks can contract deposits only up to 10 years, but the infrastructure loans are often for 15 to 20 years which could create asset-liability mismatches. To prevent this, banks have been requesting to launch infrastructure bonds for which they can raise money from the public and other institutions.

Banks are also asking for the reintroduction of the technology upgradation fund for micro, small and medium scale industries.

"However, finance minister Piyush Goyal will be presenting only an interim Budget, which means that he will be constrained from making too many policy announcements," said another senior banker.

STORY SO FAR

• In FY19, the government raised the bank recapitalisation outlay from Rs 65,000 crore to Rs 1,06,000 crore
   
• So far, Rs 51,513 crore has been infused into the public sector banks and the government has to infuse Rs 54,487 crore more by March 2019.
   
• Bank credit is currently growing at 15.1% and deposits at 9.7%. If deposits do not grow in tandem, banks will be tight on capital