Banking on the budget with no surprises

The Union Budget may not have much to talk about on what could be called clichéd subjects such as bank capitalisation, the bad bank or even a DFI (development finance institution). So, what is it that banks will be looking out for in tomorrow’s Budget?

It will be related more to business where banks’ strategies will be built, based on what can be taken from the budgetary numbers. A bank’s business revolves around two pivots — credit and deposits; and they would be looking for signals on these.

The overall state of the economy and growth assumed will be important, as this would enable bankers to take out their worksheets and extrapolate potential growth in credit. Typically, nominal gross domestic product (GDP) growth of 12-13 per cent should result in bank credit growth of at least 10-12 per cent; and this will be the prelude to the Reserve Bank of India’s (RBI’s) credit policy subsequently.

Under this umbrella, the stance taken on the Emergency Credit Line Guarantee Scheme will be watched — for the limit of Rs 4.5 trillion presently can be extended to specific sectors that require assistance, given that this amount has not been fully utilised, as the appetite of industries which qualify is limited. Any new plan on asset monetisation, or policy to provide push to industry, would mean a business opportunity.

The future of deposits will be an issue for banks. This year, quite ironically, banks have been happy with deposits not growing, as there were few avenues to lend anyway. Hence, excess funds meant investing in the RBI’s negative carry reverse-repo auctions, which is not the best solution. It was a happy equilibrium.

But assuming growth takes off in the next fiscal, banks will have to take a closer look at deposits. Here, any benefits given to savings, either in terms of expansion of coverage under Section 80C, or even the lowering of maturity of fixed deposits to three years (for being included in this bucket) will be awaited.

This, along with possibly some tax benefits on home loans in terms of both principal and interest, will be useful for banks.

A nagging worry for banks will be the size of the fiscal deficit. Assuming GDP growth of 12-13 per cent, the fiscal deficit at 6 per cent would be in the regionn of last year — i.e. Rs 15-15.5 trillion. How large should the gross borrowing programme be?

In FY21 and FY22, it was in the region of Rs 12-12.8 trillion. This large amount, along with the possibility of overshooting the mark, was responsible partly for the fact that the market kept tugging yields upwards.

It will be a challenge this year, too, unless this amount comes down sharply, which seems unlikely given that there are repayments of nearly Rs 4 trillion.

Bankers put on the “market hat” when evaluating the borrowing plan of the government, as the yields would matter. True, monetary policy also would have an impact, but this year, it has been seen that the market has pulled effectively in the opposite direction, much as the RBI tried to manage interest rates downward. The government’s breakdown of the deficit into net borrowings, National Small Savings Fund, and cash drawdown would matter here.

Probably, the only item in the unfinished agenda of the government in the financial markets is the creation of market makers in the corporate bond market. This is what could see some shape being given, and the banks will be looking at this as another business opportunity.

Therefore, the Budget will delineate the perimeter of what the business landscape would be; and the credit policy to follow will provide further direction for FY23.   

The writer is chief economist at Bank of Baroda, and the author of Hits and Misses: The Indian Banking Story. This article has been edited for space