Budget 2020: High small savings rates would limit fall in bond yields

With the government infusing over Rs 3 lakh crore into Public Sector Banks (PSB) over the last five years, the Union Budget 2020-21, in line with our expectations, indicated no additional capital infusion into PSBs. However, a capital of `10,000 crore set aside for India Infrastructure Finance Company Ltd (IIFCL) and Rs 7,000 crore for subsidiary of National Investment and Infrastructure Fund (NIIF), indicating the government’s continued thrust on infrastructure development, and `6,950 crore capital for public sector general insurance companies to help them meet the regulatory solvency levels, are positives. 

We expect the PSBs to turn significantly profitable in FY21, breaking even in FY20 after four consecutive years of losses (FY2016-19), in addition to reducing their Gross NPAs (non-performing assets) and Net NPAs. Some of them may also be able to raise capital directly from the markets for their growth requirements, thereby reducing their dependence on the government. We estimate the capital requirement for PSBs at Rs 10,000-20,000 crore for FY21 for 6-8 per cent credit growth and an ~50-75 bps cushion above Tier-I regulatory requirements. The intent to bring in transparency and greater professionalism in PSBs is a welcome step and we await the measures thereof.

IIFCL and NIIF subsidiary are expected to be key vehicles for credit flow to infrastructure projects under National Infrastructure Pipeline. However, the availability of long-term funds for these entities to be able to leverage this equity would be critical for funding the projects.

The continued use of large-scale borrowing through extra-budgetary resources, namely GoI-fully serviced bonds of Rs 49,500 crore during FY21, could adversely impact debt markets as the increase in supply of quasi-sovereign debt will further push up the bond yields in domestic markets. Further, with small savings rate to remain sticky as the Government of India (GoI) continues to use borrowings from National Small Savings Fund, the bond yields are unlikely to materially come down. 

At the same time, the plans to deepen the bond markets through exchange-traded fund with government securities (G-Secs) as underlying assets could increase participation from risk-averse investors. The opening up of some categories of G-Secs to NRIs and the proposed increase in FPI (foreign portfolio investment) limits for corporate bonds to 15 per cent of the outstanding, are measures that would accrue benefits over the medium term as the current participation is ~6.1 per cent of bonds outstanding. 

We expect the focus on improving the rural income levels and credit flow via the Self-Help Groups could help uphold the rural economy and the impact of the above on rural-focused Non-Banking Finance Companies (NBFC) and Housing Finance Companies would be positive. The expansion of NABARD refinance scheme should help NBFCs active in the agriculture space. Further, the inclusion of more NBFCs under Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act 2002 and reduction in the minimum loan amount for recovery under SARFEASI is positive for NBFCs from a recovery perspective.

Greater access to the TReDS (Trade Receivables electronic Discount System) platform for NBFCs will give them a wider market opportunity while providing MSMEs (micro, small and medium enterprises) more avenues for receivables funding. On the contrary, the proposal to extend restructuring of bank loans availed by MSMEs is credit negative for banks as it may lead to adverse credit behaviour of borrowers in the long term.

The divestment target of Rs 2.1 lakh crore for FY21 (`0.65 lakh crore for FY20 as per revised estimates) seems ambitious, notwithstanding the proposed divestment of Life Insurance of India (LIC). Overall, the Union Budget for FY21 has targeted to reduce the government’s fiscal deficit to 3.5 per cent of the GDP (Gross Domestic Product) in the coming fiscal from the 3.8 per cent of the GDP included in the revised estimates (RE) for FY20, which appears challenging.

budget musings

Karthik Srinivasan Group Head  (Financial Sector Ratings), ICRA Ratings