Moneycontrol Pro Panorama | Budgeting for healthy banks 

banks

Dear Reader, 

The compulsions on every Union Budget are many, even if it is an interim one this time. The finance minister has to balance the desire to be populist ahead of national elections and the need to keep the fiscal maths pristine. For Nirmala Sitharaman, it is no mean task this time, with the fiscal maths already indicating a troubling path ahead.

She needs every rupee she can get from taxes and other revenues and must spend wisely to keep the overall fiscal deficit in check. Spending choices are trickier amid a lower nominal economic growth that would fetch less than expected tax revenue growth. The choice conundrum is best explained by Manas Chakravarty in this piece. You will get all the troubles on the fiscal maths by Siddarth Upasani in this story here.

Even when the Budget is bombarded with uncertainties, there is one area that the finance minister can bank on, for both revenue and reduction in spending. India’s banks are in their best shape and will remain so this year to give large dividends to their primary shareholder, the government, and would have no need for capital infusion.

The growing health of public sector banks over the past two years has meant that the government didn’t need to earmark any funds towards the recapitalisation of the banks it owns. At the same time, public sector lenders and the Reserve Bank of India transferred record profits as dividend to the government. Our Chart of the Day captures this virtuous trend.

The past two Budgets did not set aside an amount for recapitalisation, a practice followed every year before that. Indeed, the government had to infuse a massive Rs 2.7 lakh crore over three years into its banks to keep them afloat, a significant burden on the exchequer. This burden no longer exists.

Of course, public lenders need to grow and lend for which they need capital. In fact, they are losing market share hand over fist to private banks in the loan market. But the indications are that the government would ask them to tap into the capital markets and most lenders are already raising large chunks of capital from the bond market.

Healthy public banks make for a ready balance sheet to lend to the economy and assist the government in invigorating private capex and managing its social schemes. When companies see lenders willing to offer loans at reasonable price, they have one more reason to set up factories and increase capital deployment. Public capex has increased manifold, thanks to the government’s increased spending earmarked in the past budgets. The trend is likely to continue. Sitharaman should get all the help she needs in keeping capex momentum.

Of course, all care must be taken not to repeat the past mistakes of the corporate cycle, the seeds of which were sown in unbridled infrastructure lending. On its part, the RBI has ensured that banks remain healthy by nipping risky ventures such as excessive unsecured lending in the bud. The central bank has beefed up its supervisory capacities and intensity to keep an eye on incipient risks. It is not whether Indian firms trust banks to keep themselves shipshape but a matter of whether the government can trust them to not come for help.

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