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Event update: Financials - Impact of the budget

The budget is positive for state owned banks especially the weaker ones and well-rated retail NBFCs.

Budget gainers: SHTF, PNB

Budget losers: Wholesale NBFCs, HFCs with large developer portfolios, private banks

No change to our recommendations. We maintain our cautious approach given the sharp rating downgrades which will increase the pace of new NPL formation in the system. HDFC Bank, ICICI Bank, AXIS Bank and SBI remain our key picks.

PSU Banks: Budget positive for weak PSU Banks

• PSU Recap positive for weak banks – SBI, Indian, BoB may not get much: The government has announced bank recap of Rs700bn for FY20 against the provision of Rs 400bn in the interim budget. Last year the government provided recap of Rs1.06 trn. Rs700bn of recap translates to 1.4% of risk weighted assets. Like in the past we expect a larger part of the recap to go to weak / PCA banks such as PNB and IOB. SBI is unlikely to get any recap. (see Figure 1)
• Increase in FII limit for state banks? The FM has proposed  increase in the statutory limit for FPI investment in a company from 24% to sectoral foreign investment limit  with option given to the concerned corporates to limit it to a lower threshold. We do not know if RBI will relax FPI limit for state banks which  is  currently capped at 20%.

Private banks – Negative for fees

• No MDR on digital payments with large merchants negative for private banks: Business establishments with annual turnover more than 50 crore shall offer  low cost digital modes of payment to their customers and no charges or Merchant Discount Rate shall be imposed on customers as well as merchants. RBI and Banks will absorb these costs from the savings that will accrue to them on account of handling less cash. Digital modes would include BHIM UPI, UPI-QR Code, Aadhaar Pay, certain Debit cards, NEFT, RTGS. This is negative for fee income of private banks. HDBK, ICICI, AXIS. RBI will come out with guidelines.

NBFC – Budget positive for strong NBFCs, short term negative for HFCs with developer loans  

• Govt to give 10% first loss guarantee for 6 mths to PSU banks for pools of strong NBFCs: - Positive for financially sound NBFCs / HFCs: The government will provide to PSU banks a onetime credit guarantee for 6 months for first loss of 10% for buying asset pools of financially sound NBFCs for total issuance of upto Rs1 trillion. The consolidated balance sheet size of the NBFC sector is 28.8 trn. The total balance sheet size of HFCs is Rs9 trillion. Since this facility is available only for financially sound NBFCs, the likes of DHFL or Reliance Home do not qualify. This provision is positive for highly rated NBFCs with retail portfolios – SHTF, Indiabulls, L&T Finance and will not benefit wholesale NBFCs.
• Tax incentive for NBFCs: To provide a level playing field to banks and NBFCs, it is proposed that interest on bad or doubtful debts in the case of deposit-taking NBFC and systemically important non deposit-taking NBFC shall be charged to tax on receipt basis.
• NBFCs will no longer need to create a debenture redemption reserve when they do a public issues of bonds. This will facilitate fund raising.
• More regulatory powers to RBI to regulate NBFCs: The RBI Act has been amended to allow RBI 1) To remove a Director of an NBFC 2) To supersede the Board of an NBFC 3) To take action against NBFC auditors 4) To come up with a resolution of an NBFC by amalgamating it or reconstructing it or splitting the non-banking financial company into different units or institutions and vesting viable and non-viable businesses in separate units or institutions to preserve the continuity of the activities of that non-banking financial company that are critical to the functioning of the financial and for such purpose establish institutions called “Bridge Institutions”.  “Bridge Institutions” mean temporary institutional arrangement to preserve the continuity of the activities of a non-banking financial company that are critical to the functioning of the financial system. As part of the NBFC resolution scheme, the RBI can reduce the pay of or cancel shares held by the CEO, MD, chairman or any member of the senior management and also sell assets of the NBFC. 5) to call for data on group companies of NBFCs

HFCs:

• Regulation of HFCs to move to RBI from NHB – negative for HFCs in the short run especially those with a high proportion of developer loans. This is good for the long term . In the short term HFCs could be subject to asset quality reviews and stricter supervision just like the banks with more scrutiny of the wholesale lending books of HFCs in our view. DHFL, IndiaBulls, HDFC, PNBHF  have a higher proportion of developer loans among HFCs.
• Higher tax deduction for affordable housing: Additional Rs 0.15M deduction in income tax on home loans​​ under affordable housing which is positive for retail home loan growth for both banks and HFCs.

Insurance: Marginally positive for general insurance, higher taxation on the sum payable by way of life insurance policy

• FDI limit to be liberalized in insurance and insurance intermediaries. 100% Foreign Direct Investment (FDI) will be permitted for
• Insurance intermediaries. This will help improve the quality of underwriting in general insurance and is marginally positive for the sector. Global insurance brokers like Marsh can expand their operations in India.

·      It is proposed to provide that tax shall be withheld on taxable payout of life insurance companies on net basis at 5%, instead of 1% on gross as at present.