By Siji Philip

Like every budget, the Government of India faces the challenge of managing the priorities and wishlist of its citizens. The prevailing Covid-19 pandemic has changed the business landscape for almost all industries across the country and the BFSI sector is right in the middle of the ensued uncertain dynamics.

The country’s economy is witnessing encouraging signs of recovery, and to provide further impetus, the Union Budget 2022-23 is expected to continue Capex-related spending to support growth. This will directly impact the Banking & Financial sector through credit growth expansion which is yet to kick in meaningfully. The government may consider credit-support measures for businesses and sectors (such as transport and hospitality, among others) facing recovery challenges due to the adverse impact of the Covid-19. This will help banks and NBFCs address NPA issues that may surface from these segments.

MSME sector has been amongst the most impacted sectors due to the recurring resurgence of Covid-19 variants. Keeping cognizance of the crucial role played by the MSME in the Indian economy (contributing ~30% in nominal GDP), the government focused its efforts on revitalizing MSMEs by undertaking several formalization initiatives. Against this backdrop, making it mandatory to share credit data of small borrowers to rating agencies will significantly aid in the formalization of credit to marginal borrowers. Continuing last year’s measures, such as the extension of the ECLGS scheme by one more year and easing conditions of the scheme to make it available to a wider set of MSMEs will help alleviate the stress in the sector.

Over the past two to three years, the banking sector is undergoing a structural makeover that requires institutions to have robust tech and analytics capabilities.

This transformation is quite challenging in the current operating framework with constraints of the public sector. A bolder move to transform the public sector banking industry is on the wish list. Partial privatization wherein the government reduces its stake below 51% is one way forward.  Though the government has announced the privatization of two PSBs in the previous Budget, the progress has been slow.  A step-up on the roadmap for privatization of PSBs will be keenly eyed and would be positive, especially for the lower-tier banks. The demonstration of a few PSBs raising equity without government support over the last few quarters coupled with better earnings prospects for most PSBs indicates that the capital infusion to PSBs is unlikely in this year’s Union Budget.

The Union Budget 2021-22 had announced the setting up of a Bad Bank or NARCL. However, with almost a year passed by, the Bad Bank is yet to take off with impediments such as issues arising from the ownership structure and operational mechanism. We expect further measures around the operations of NARCL. Similarly, NAFID is yet to commence business and is pivotal to catalyze investments in the fund-starved infrastructure sector.

Housing push is essential to mobilize the financial resources needed to develop the domestic economy. Housing will be a key focus area of the Budget, supported through tax incentives and extension of schemes, thereby benefitting housing finance companies and large banks. Among the direct benefits, Budget 2022-23 might bring a potential relief to direct home buyers with an increased limit of home loan interest deduction for a tax rebate from Rs 2 Lacs to Rs 5 Lacs. Moreover, redefining affordable housing criteria to outspread the benefits of additional deduction to a larger market will be a key positive for the sector.

Insurance has gained prominence in the prevailing pandemic times, and the government may look at providing further tax incentives to support higher off-take and penetration of insurance. Increasing Section 80C allowance from Rs 1.50 Lacs to Rs 2.5 Lacs along with reducing GST rate for insurance to make them more affordable are some of the expectations in the insurance space.

The Indian economy is rapidly transforming with deeper penetration and rapid adoption of technology. Keeping this in view, setting up a formal body to oversee the operations of Fintech players and providing financial incentives to promote digital payments may also be on the anvil.

Keeping India’s macro-stability indicators such as inflation and the trade deficit in mind, the onus of Budget 2022-23 would be towards improving real income for the masses. We believe this will provide just the right push needed for sustainable growth going forward!

(Siji Philip is Senior Research Analyst at Axis Securities. The views expressed are author’s own.)