Mumbai: The big shocker of the budget came for state-run banks, especially small and non-performing ones, when Jaitley announced lower share of capital for these entities and remained largely silent on ways to recapitalise these entities, including paring the government’s stake in state-run banks.
The Rs 7,940 crore capital infusion announced in the budget is nearly half of what state-run banks require and lower than what the government committed for fiscal year 2015.
Even for last year, the government has so far infused only about Rs 6,990 crore out of the promised capital infusion of Rs 11,200 crore, based on performance.
Jaitley’s message is clear: Small government banks, especially which rank lower in terms of performance, will have to go to the market to raise funds or get merged with other banks. They needn’t expect any capital from the government from now on.
But raising money from the market wouldn’t be an easy task for smaller banks, since there is very less investor appetite in these banks, burdened with high bad loans and poor growth. Except the large lenders, like State Bank of India, not many lenders have been successful in tapping private funds.
Traditionally, state-run banks are heavily dependent on government funds for capital. Logically, the reluctance of the government to infuse capital would step up pressure on banks to seek options to merge with large banks or shrink their business size.
Remember, the reasons for non-performance of many state-run banks are not necessarily their inefficiency in operations but the lack of their autonomy. There have been frequent interventions by the government in their business decisions.
These banks were used to roll out the populist measures of governments — loan waivers and different forms of directed lending — time to time regardless of which government rules at the Centre, unlike their rivals in the private sector. Hence, the government cannot escape the responsibility of their current state.
Interestingly, even though the government has cut down the capital infusion for banks, the budget for 2015-16 has increased the farm loan lending target for these lenders to Rs 8.5 lakh crore or 14 percent of the total bank credit. This has irked bankers.
"On one side, the government is not giving capital and at the same time, they expect us to lend more. Where is the money?" asked the chairman of a state-run bank on condition of anonymity. Even analysts have raised caution on the lower-than-expected capital infusion.
"We were expecting an infusion of Rs 15,000 crore in banks this year to meet their Basel-III requirements. What has come is much lower, which will be insufficient for lenders to meet the requirements," said Vaibhav Agrawal, vice-president, research at Angel Broking.
Even though the government has conceptualised forming a holding company to facilitate capital mobilisation of state-run banks, this will not offer a solution for banks in the short term, especially in the backdrop of rising stress on the balance sheets of banks.
The absence of adequate capital infusion in state-run banks would mean two things:
One, majority of the government banks may walk into deeper problems on account of capital required to meet the Basel-III norms and provide for bad and restructured loans stipulated by the RBI norms.
As Firstpost has noted earlier, the government banks would need a substantial amount of capital to meet the mandatory capital requirements under the Basel-III norms, to make provisions for a sizeable chunk of stressed assets on their books and to get ready for an expected pick up in credit growth.
The estimated equity capital requirement for state-run banks to meet the Basel-III norms alone is about Rs 2.4 lakh crore.
As of end December, total gross bad loans of banks stands about Rs 2.9 lakh crore. If one combines this with the restructured loan stock, the pile rise to over 10 percent of the total bank loans. Lack of capital would deepen the crisis of state-run banks.
Two, state-run banks with weak capital base would limit their ability to lend to productive sectors, essential for economic recovery. Weak capital position of public sector banks would logically push private sector banks to step up lending. But, one has to wait and watch if private banks, which typically avoid high risk sectors, would do that. In the absence of adequate bank funding, the expected recovery in growth can get delayed.
In the absence of a recapitalisation roadmap, the government, which owns more than 75 percent in 10 out of the 27 public sector banks, has to either bring down its stake in government banks below 51 percent to free up equity capital in these lenders.
For now, Jaitley’s silence has only contributed to deepen the crisis in public-sector banks.
Arun Jaitley's Budget 2015 sets the stage for a new economic order-ForbesIndia
FM decides to plump for growth, eases fiscal deficit target to push public investment; significant reforms on black money, ease of business and entrepreneurship
I
t would seem Finance Minister Arun Jaitley was well aware of the huge burden of expectations he was carrying on his shoulders this time, when he rose to present the Budget for 2015-16. Taking off from the view that the world now thinks it is “India’s chance to fly”, Jaitley put together a Budget which, if one joins the dots, sets the stage for a new economic order in India. Alongside, acutely aware of the need to push growth despite the new GDP calculations, the finance minister has taken the route of pushing public investment for the purpose while veering slightly away from the fiscal consolidation path for the moment.
In many ways, Jaitley has presented a Budget which does not disappoint those who had placed their faith in this being a much more substantive vision statement than the one he presented just after the Narendra Modi government took charge in 2014. Budget 2015 operates on some clear themes, and Jaitley has taken pains to explain not just the challenges he faces but also the key ideas he is banking on. Declining agricultural income, the need for increasing investment in infrastructure, the need to remain on the fiscal consolidation path, a perceptible decline in manufacturing and the impact of the greater devolution of taxes to states have been highlighted in his Budget speech as his major challenges.
In many ways, Jaitley has presented a Budget which does not disappoint those who had placed their faith in this being a much more substantive vision statement than the one he presented just after the Narendra Modi government took charge in 2014. Budget 2015 operates on some clear themes, and Jaitley has taken pains to explain not just the challenges he faces but also the key ideas he is banking on. Declining agricultural income, the need for increasing investment in infrastructure, the need to remain on the fiscal consolidation path, a perceptible decline in manufacturing and the impact of the greater devolution of taxes to states have been highlighted in his Budget speech as his major challenges.
The Balancing Act
In that context, Budget 2015 is nothing short of an efficient balancing of imperatives and a road map for reform despite pressures. As expected by some quarters, he has eased the fiscal consolidation target a bit announcing that the three percent fiscal deficit target will now be met in three years, rather than two. The FY16 target is now at 3.9 percent, rather than the earlier 3.6 percent, though he has managed to stick to the 4.1 percent target for FY15, even as he reiterated the government’s resolve of not wavering from the fiscal consolidation path. Alongside, infrastructure spends have been hiked by way of higher outlays for roads and railways and an increase in the capex spends of state-owned enterprises. The Rs 20,000 crore corpus National Investment and Infrastructure Fund (NIIF), the proposal to have tax-free bonds for roads, rail and irrigation sectors and the accent on public-private partnerships for boosting infrastructure are steps aimed at making sure that the relaxation in the fiscal deficit target is targeted towards investment in infrastructure. The disinvestment target for FY16 has been pegged at Rs 69,500 crore, which will be crucial for public spending.
In that context, Budget 2015 is nothing short of an efficient balancing of imperatives and a road map for reform despite pressures. As expected by some quarters, he has eased the fiscal consolidation target a bit announcing that the three percent fiscal deficit target will now be met in three years, rather than two. The FY16 target is now at 3.9 percent, rather than the earlier 3.6 percent, though he has managed to stick to the 4.1 percent target for FY15, even as he reiterated the government’s resolve of not wavering from the fiscal consolidation path. Alongside, infrastructure spends have been hiked by way of higher outlays for roads and railways and an increase in the capex spends of state-owned enterprises. The Rs 20,000 crore corpus National Investment and Infrastructure Fund (NIIF), the proposal to have tax-free bonds for roads, rail and irrigation sectors and the accent on public-private partnerships for boosting infrastructure are steps aimed at making sure that the relaxation in the fiscal deficit target is targeted towards investment in infrastructure. The disinvestment target for FY16 has been pegged at Rs 69,500 crore, which will be crucial for public spending.
Reformist ThrustJaitley has not disappointed on the reforms front. A number of the broad proposals–be it on creating a job-creating economy rather than a job-seeking one or in making the capital markets more efficient or even on the banking front–would rank as important steps in creating a new economic framework. Sample some of the steps. The Forward Markets Commission has been merged with Sebi, a Public Debt Management Agency will be set up to bring external and domestic borrowings under one roof and section 6 of FEMA will be amended. There are several steps to ensure better monetisation of gold and foreign investments in alternative investment funds have been allowed.
A number of initiatives have been announced on the ease of doing business and the skilling side too, an aspect which has been at the centre of pre-Budget debate in connection with the government’s Make in India programme. The setting up of the MUDRA Bank to refinance the microfinance institutions and the entire initiative of ‘funding the unfunded’ also aims at addressing a major gap which existed for micro and small enterprises which struggle to access funds.
Perhaps one of the most important elements of the Budget is the move to rein in the parallel economy. Through a series of steps, Jaitley has aimed at addressing the black economy which includes the creation of a new law on black money and tough measures to bring offenders to book.
There are some other big moves as well. The General Anti Avoidance Rules (GAAR) a bugbear for quite some time, has been deferred by two years, the Goods and Services Tax timetable is now clear, the accent has moved from reducing subsidies to plugging subsidy leakages through what the Budget calls the Jan Dhan, Aadhar and Mobile (JAM) trinity for direct benefits transfer and the tax structure is being sought to be simplified and made predictable. All these were key concerns expressed by India Inc and the markets ahead of the Budget.
For the corporate sector, the broad road map is to reduce corporate tax from 30 percent to 25 percent over the next four years beginning next year. And the Budget also has enough for the individual taxpayer as well. Predictably, despite the markets being choppy through the day owing to some concerns on aspects of the fine print, the overall reaction from Corporate India has been one of cheer.
Says KPMG India CEO Richard Rekhy: “The finance minister has come out with a pragmatic Budget which is directionally focussed at achieving growth and keeping the fiscal prudence in mind. The focus is on ease of doing business in India and increased infrastructure spend. Measures like New Bankruptcy Legislation, startup entrepreneur’s funds, GST rollout by FY 2016, deferral of GAAR will definitely support the cause of ease of doing business in India.”
Adds Rajiv Lall, executive chairman, IDFC: “It’s a development-oriented budget and not a populist budget. A welcome shift in direction.”
However, BMR Advisors chairman Mukesh Butani expresses mixed reactions. “From a policy standpoint, the FM has engineered the Budget around the prime minister’s initiatives such as ‘Make in India’, ‘Swachh Bharat’, and ‘Skill in India’. The focus on black money and curing the economy of this menace seems to have taken centrestage. The impetus to infrastructure, agriculture and education sectors is laudable though the much-expected big bang reforms are yet in the waiting.”
Impact Under Watch
With the overall macro situation now benign and inflation coming under control, Jaitley realises this was his best chance to lay the broad reform framework in place, and execute the various elements over time. However, what will be keenly watched is how the Budget initiatives play out in the days and months ahead and whether Jaitley’s gamble on growth actually pays off.
As BMR’s Rajiv Dimri points out: “Much of the reforms process outlined in the Budget proposals need to be realised through tangible steps over the year. It remains to be seen how reforms unfold and take shape in terms of GST implementation and TARC recommendations. Impact on prices would be interesting to watch with Budget proposals withdrawing service tax exemptions on construction of airports and ports, government services, increase in service tax rates and higher additional duties on petrol and diesel.”
While the ultimate test for Jaitley will be in how the various Budget proposals are implemented, the finance minister does deserve full marks this time round for putting forward a Budget which aims to address multiple challenges. As a statement of intent, it gets full marks. And that is a pretty good beginning.
Read more: http://forbesindia.com/article/budget-2015/arun-jaitleys-budget-2015-sets-the-stage-for-a-new-economic-order/39747/1#ixzz3T3BMFaf0
A number of initiatives have been announced on the ease of doing business and the skilling side too, an aspect which has been at the centre of pre-Budget debate in connection with the government’s Make in India programme. The setting up of the MUDRA Bank to refinance the microfinance institutions and the entire initiative of ‘funding the unfunded’ also aims at addressing a major gap which existed for micro and small enterprises which struggle to access funds.
Perhaps one of the most important elements of the Budget is the move to rein in the parallel economy. Through a series of steps, Jaitley has aimed at addressing the black economy which includes the creation of a new law on black money and tough measures to bring offenders to book.
There are some other big moves as well. The General Anti Avoidance Rules (GAAR) a bugbear for quite some time, has been deferred by two years, the Goods and Services Tax timetable is now clear, the accent has moved from reducing subsidies to plugging subsidy leakages through what the Budget calls the Jan Dhan, Aadhar and Mobile (JAM) trinity for direct benefits transfer and the tax structure is being sought to be simplified and made predictable. All these were key concerns expressed by India Inc and the markets ahead of the Budget.
For the corporate sector, the broad road map is to reduce corporate tax from 30 percent to 25 percent over the next four years beginning next year. And the Budget also has enough for the individual taxpayer as well. Predictably, despite the markets being choppy through the day owing to some concerns on aspects of the fine print, the overall reaction from Corporate India has been one of cheer.
Says KPMG India CEO Richard Rekhy: “The finance minister has come out with a pragmatic Budget which is directionally focussed at achieving growth and keeping the fiscal prudence in mind. The focus is on ease of doing business in India and increased infrastructure spend. Measures like New Bankruptcy Legislation, startup entrepreneur’s funds, GST rollout by FY 2016, deferral of GAAR will definitely support the cause of ease of doing business in India.”
Adds Rajiv Lall, executive chairman, IDFC: “It’s a development-oriented budget and not a populist budget. A welcome shift in direction.”
However, BMR Advisors chairman Mukesh Butani expresses mixed reactions. “From a policy standpoint, the FM has engineered the Budget around the prime minister’s initiatives such as ‘Make in India’, ‘Swachh Bharat’, and ‘Skill in India’. The focus on black money and curing the economy of this menace seems to have taken centrestage. The impetus to infrastructure, agriculture and education sectors is laudable though the much-expected big bang reforms are yet in the waiting.”
Impact Under Watch
With the overall macro situation now benign and inflation coming under control, Jaitley realises this was his best chance to lay the broad reform framework in place, and execute the various elements over time. However, what will be keenly watched is how the Budget initiatives play out in the days and months ahead and whether Jaitley’s gamble on growth actually pays off.
As BMR’s Rajiv Dimri points out: “Much of the reforms process outlined in the Budget proposals need to be realised through tangible steps over the year. It remains to be seen how reforms unfold and take shape in terms of GST implementation and TARC recommendations. Impact on prices would be interesting to watch with Budget proposals withdrawing service tax exemptions on construction of airports and ports, government services, increase in service tax rates and higher additional duties on petrol and diesel.”
While the ultimate test for Jaitley will be in how the various Budget proposals are implemented, the finance minister does deserve full marks this time round for putting forward a Budget which aims to address multiple challenges. As a statement of intent, it gets full marks. And that is a pretty good beginning.
Read more: http://forbesindia.com/article/budget-2015/arun-jaitleys-budget-2015-sets-the-stage-for-a-new-economic-order/39747/1#ixzz3T3BMFaf0
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