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Event update: Financials - Macro sops – Positive for growth, negative for margins

The FM announced measures to boost economic growth. We highlight the key measures for banks and NBFCs and their impact. We believe upfront recapitalization for state banks leading to better credit growth, GST refunds to MSMEs within 30 days leading to better credit quality, and lower bond yields (because sops are fisc-neutral) are positives. Banks being advised to pass on rate cuts and link loans to external benchmarks is margin negative more so for private banks (as explained later). The actual impact will depend upon what proportion of loans are actually linked to external benchmarks and whether the RBI takes a hard stance on external benchmarking. Therefore the view on actual margin impact is inconclusive however it is important to note that if implemented strictly (which itself is a doubt) external benchmarking will be more negative for private banks than state banks. State banks will also have ease of doing business as 1) the government plans to put in place a mechanism to protect bonafide decisions of bankers 2) the government will put out a transparent policy for one-time settlement of MSME dues. As for NBFCs, the FM reiterated the sops that have been announced recently and added two new sops 1) additional liquidity of Rs200bn to be provided by NHB to HFCs taking the total to Rs300bn 2) NBFCs can use Aadhar authenticated bank KYC which will reduce the cost of customer acquisition. The government had already announced a partial credit guarantee scheme covering retail pool buyouts of INR 1 trillion for which government will guarantee the first loss of upto 10% for 2 years. While the scheme was announced earlier, the FM said that it will be monitored strictly. In addition the FM spoke about co-lending by banks and NBFCs which has already been introduced earlier. These measures will improve liquidity and ease of doing business for NBFCs. In addition sops given to the auto sector and a thrust on infra lending will boost demand for loans for banks and NBFCs. The measures announced are positive for NBFCs but not a game changer.  Sops for the auto sector including higher depreciation for one year, clarity on the continuation of BS-IV vehicles and a likely scrappage policy will be positive for demand for auto loans at the margin. The announcement that the government would release pending payments (around Rs600bn) and proposal to set up a task force to outline a plan for INR100 trillion for infrastructure will help boost growth in the long term.

Key picks: These guidelines are positive on sentiment for state banks that had been beaten down because of their poor 1Q earnings and macro concerns. While a pop in state banks is not ruled out, we maintain our preference for private banks over state owned banks. ICICI Bank and HDFC Bank remain our key picks. Among NBFCs, STFC stands out for its risk-reward. MMFS will also benefit from the feel-good. We highlight that the seriousness with which external benchmarking is implemented remains the key risk for all banks, more so the private banks. Banks that have a higher proportion of fixed loans (HDFC Bank and IIB) are better off than others if external benchmarking is implemented strictly.

Key measures for banks

• The government will provide the proposed recap of Rs700bn to state banks upfront versus the earlier practice of providing recap at the end of the fiscal. This according to the FM will generate liquidity in the financial system of INR 5 trillion (leverage of 7x). The CET1 of state banks combined is 9.1% as of March 2019 and the infusion will take it up to Rs10.5%.
• A transparent one-time settlement policy will be formulated for resolving MSME NPLs. GST refunds and easier bill discounting for MSMEs will lead to higher loan growth and better credit quality for MSME loans.
• The government wants banks to cut rates to boost growth.  The FM has advised banks to pass on cut in MCLR to all borrowers instead of increasing spreads to offset pressure on NIMs. The government also wants banks to launch more repo-linked loans so that borrowers can take advantage of cut in repo rates. These measures are negative for NIMs. Contrary to perception, we believe external benchmarking if enforced strictly is negative for banks, more so for private banks as explained later.
• State banks have complained about the fear of action by vigilance agencies impacting their credit decisions. To address this issue, the government will come up with a mechanism to protect bona fide decisions of bankers which would lead to higher credit growth.
• Sops for the auto sector including  higher depreciation for one year, clarity on the continuation of BS-IV vehicles and a likely scrappage policy will boost demand for auto loans. The announcement that the government would release pending payments (around Rs600bn) and proposal to set up a task force to outline a plan for INR100 trillion for infrastructure will help boost growth in the long term.
• The announcement that the government would release pending payments (around Rs600bn) and proposal to set up a task force to outline a plan for INR100 trillion for infrastructure will help boost growth in the long term.

Key measures for NBFCs / HFCs

• Additional liquidity of Rs200bn by NHB for HFCs. With this additional facility, total liquidity by NHB will be Rs300bn.
• NBFCs can use Aadhar authenticated bank KYC which will reduce acquisition cost.
• Co-lending by banks and NBFCs will be a focus. Regulations related to co-lending have been announced by RBI recently. The government wants banks and NBFCs to actively use this route because banks have the capital while NBFCs have the list mile reach for retail and SME lending.
• The partial credit guarantee scheme which was recently detailed will be monitored strictly by the government to ensure that state banks provide liquidity support to NBFCs by buying their well-rated pools.

·      RBI and the government have come up with several NBFC-liquidity-boosting measures over the last few months including banks being allowed to treat on-lending to NBFCs as priority sector. These measures are positive and will enhance the flow of bank funds to the NBFC sector. However, they are not game-changers.​