Budget 2022: No major structural changes; signs of normalisation for banks — Sanjiv Chadha

By Sanjiv Chadha

The Budget has made announcements that have a bearing on the banking sector. While there were no major structural changes on the anvil, the assurance given that the IBC resolution process will be sped up is encouraging.

The banking sector has faced a challenge in FY22 in the market with respect to bond yields. It looks like that this will persist for one more year. The gross borrowing programme at Rs 14.95 lakh crore is once again relatively large.

There are two issues for banks here. The first is that interest rates will continue to move up even if we ignore the inflation aspect. Bond yields are already up and have crossed the 6.85% mark. This will have repercussions on investment portfolio of banks which have excess SLR securities.

The other issue is around liquidity. Higher gross borrowings are going to take place under changed conditions unlike last year, where demand for credit was low. We had seen sluggish growth in private demand for credit, which did ensure that the government’s borrowing programme went through quite well with strong support from the RBI, which maintained a permanent surplus liquidity situation. These conditions will change this year. Bank credit can be expected to grow by a double-digit rate and 10-12% looks possible. This means that there would be some competition for funds.

Here we can see two scenarios emerging. In the first, the surplus liquidity is allowed to persist and is progressively used for lending rather than putting in the reverse repo auctions. In the alternative scenario, where the RBI decides to eject this surplus liquidity out as part of its normalisation plan, there could be tightness in liquidity in some phases. Here, we may expect RBI to ensure that any normalisation would be gradual to ensure that there are no tight situations in the market.

But any which way, we can expect interest rates to increase under these conditions, which will be hastened by the rising inflation scene. Bankers have to buffer in these developments for sure.

The Budget has put a lot of emphasis on MSMEs, with the ECLGS scheme being extended to Rs 5 lakh crore with the hospitality sector benefiting by the additional Rs 50,000 crore. This is almost equivalent to the outstanding credit to this segment and hence is a big boost. Other sectors such as housing, data centres, solar energy and telecom have been provided a push in the Budget, which in turn will lead to higher demand for credit from these segments, opening the doors for enhancing business for banks.

While rising interest rates will constrain bond portfolios, higher credit growth and return of pricing power will herald a return to normal.

The author is MD & CEO, Bank of Baroda

from Banking & Finance – The Financial Express https://ift.tt/TvfEp7C