Tag: budget 2021

Cabinet approves setting-up of DFI to fund infrastructure, BFSI News, ET BFSI

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The Union Cabinet has approved setting up of development financial institutions (DFI) to fund infrastructure.

The institution will have an initial capital infusion of Rs 20,000 crore.

Finance Minister Nirmala Sitharaman said, “Past attempts to have alternative investment funds were taken up, but for various reasons, we ended up with no bank which could take up long-term risk (which is very high) and fund development.”

She added, “The DFI will help raise long-term funds; Budget2021 will provide initial amount and Capital infusion will be of about Rs. 20,000 Cr this year; initial grant will be Rs. 5,000 Cr, additional increments of grant will be made within the limit of Rs. 5,000 Cr.”

On the constitution of the board of DFI, FM Sitharaman said, “Professional board and 50% of them will be non-official Directors. The Chairperson will be an eminent personality and professional standards will be the ground for the directors recruitment. The board will have a power to appoint WTDs. We will attract best of talents’ and we are looking for longer terms and higher tenures for directors.”

To raise further funds, the DFI could be tapping pension funds, large insurance companies and soverign funds. She said, “Development Finance Institution will also have some tax benefits, being given for a 10-year long period and the Indian Stamp Act too is being amended. With this, we hope to be able to attract big pension funds and sovereign funds.”

On the ownership of the DFI, she said, it will start entirely with government ownership and gradually come down but not less than 26%.

FM in her budget 2021 announcement had said, “Infrastructure needs long term debt financing. A professionally managed Development Financial Institution is necessary to act as a provider, enabler and catalyst for infrastructure financing. Accordingly, I shall introduce a Bill to set up a DFI. I have provided a sum of `20,000 crores to capitalise this institution. The ambition is to have a lending portfolio of at least `5 lakh crores for this DFI in three years time.”



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Reports, BFSI News, ET BFSI

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Development Finance Institution (DFI) is expected to be set up with India Infrastructure Finance Company’s (IIFCL) paid-up capital of Rs 10,000 crore and an additional provision of Rs 10,000 crore announced in the Budget 2021, reported Business Standard.

As per the draft note, the Cabinet said that the Reserve Bank of India (RBI) Act and the Banking Regulation Act may be amended to set up the DFI for enabling it access to a line of credit, said BS. quoting sources.

“With an initial capital infusion of Rs 20,000 crore, the government or other investors may infuse up to Rs 1 trillion in the DFI at a later stage. The government’s part will come through the supplementary demand for grants.Prior to subsuming the infrastructure company with the DFI, it will clean up its books by providing for outstanding bad loans worth Rs 4,500 crore.”

It is also expected that the entity may have a lower minimum capital adequacy ratio of 9%, compared to 12-15% for NBFCs. The draft also proposes transfer of the assets and liabilities of IIFCL to National Bank for Financing Infrastructure and Development (NaBFID).

Post the transfer, IIFCL shall fully provide for all its outstanding bad assets, so that the new institution will have a clean book. It also said any additional requirement of money will be given through demand for grants subsequently, said BS.

Banks have been facing the challenge of an asset-liability mismatch in funding infrastructure projects or other projects with a long gestation period, and this gave the rise to the idea of setting up of a DFI, which will include access to low-cost funds from a priority-sector shortfall and greater headroom for borrowing, compared to other NBFCs.

Currently, there are some financial institutions — Indian Railway Finance Corporation, National Bank for Agriculture and Rural Development, and the Small Industries Development Bank of India — are working like the DFI.

Meanwhile, the proposal is likely to get a nod from the Cabinet soon.



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Will RBI’s MPC take the Budget 2021 route?, BFSI News, ET BFSI

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The Reserve Bank of India’s Monetary Policy Committee (MPC) began its meeting on Wednesday, and it is expected that the committee would maintain the interest rates and continue with an accommodative policy stance to push the growth.

Meanwhile, the Budget has revised the fiscal deficit to 9.5% for FY21 and 6.8% for FY22, indicating that the government’s borrowings would be high and in such a scenario it would be difficult for the RBI to maintain low interest rates — to encourage banks to lend more.

Jyoti Prakash Gadia, Managing Director, Resurgent India, said, “We expect a status quo to be maintained by RBI, in policy rates, with a pause for the 1st quarter of the next fiscal… A shift from the accommodative stance may not emerge in the short run, as the position gets cleared on the inflation and interest rate benchmarks. The continued tilt in favour of growth, in the growth – inflation tradeoff is need of the hour and basic expectation.”

Since the last three meetings, the MPC has kept the rate unchanged at a record low of 4%, and the reverse repo rate is 3.35%.

Aditi Nayar, principal economist, Icra, said that despite a drop in inflation in December 2020, the trajectory remains unpalatable. “We expect an extended pause for the repo rate, with the stance to be changed to neutral in the August 2021 policy review or later, once there is clarity on the durability of the economic recovery,” she said.

Inflation is now back within the MPC’s target band, despite concerns over rising input costs, and the economy appears well poised for a growth recovery, believes Rahul Bajoria, Chief India Economist, Barclays.

“While the MPC will likely draw comfort from the favourable developments on growth and inflation, it will wait to gauge the sustainability before signalling a change in approach. Liquidity guidance may take precedence over policy guidance in the interim,” he added.

Meanwhile, the price pressures have also been softening and with retail inflation posting successive downward surprises for November and December, the MPC may draw some comfort from this situation. Against the central bank’s estimate of 6.8% in Q4 2020 inflation averaged around 6.4% YoY. In addition, the price decline in vegetables has continued in January, which may drive CPI inflation closer to 4% YoY.

Softening of CPI inflation also reflects easing of supply side constraints that affected food inflation.

Experts believe the MPC may ensure availability of adequate liquidity to stimulate investments in the infrastructure sector after the Finance Minister Nirmala Sitharaman, in her Budget 2021 speech, announced that the government would set up a dedicated infrastructure financing body.

The Gross Domestic Product (GDP) is projected to contract by 7.7% per cent in the ongoing fiscal year but is likely to rebound with a 11% growth in FY22, making for a “V-shaped” recovery, noted the Economic Survey 2021, taking cues from resurgence in high frequency indicators such as power demand, e-way bills, GST collection, etc.

It is also expected that the RBI may continue to hike banks’ held to maturity limits (HTM) till FY24 to fund high fiscal deficits without hardening yields. The RBI has already hiked banks’ HTM limit by 2.5% of book till FY22 to support recovery by enabling the Centre to run higher fiscal deficits.

“Banks will buy G-secs without fearing maturity to market (MTM) hits. RBI contains yields/lending rates by incentivising banks to invest the $80 billon money market surplus in G-secs without fear of MTM hits. As banks raise deposits at 5%, they would invest in G-secs at, say, 5.9% if exempted from MTM hits. It is fairly reasonable to assume that yields will rise over the next 12 months as growth normalises. Although we expect the RBI MPC to cut 50bp in 1H21, as inflation abates to the RBI’s 2-6% inflation mandate, we also see a 100bp hike in FY23. We are tracking December inflation at 5.2%,” said, Indranil Sen Gupta, India Economist, BofAS India.



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New Asset Reconstruction Committee: Banks likely to ask RBI to relax norms

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RBI’s September 2016 circular mandated that, with effect from April 2018, banks would need to continue providing for loans sold as if they still were on the books.

Lenders, backed by government, could approach the Reserve Bank of India (RBI) for relief on provisioning for assets sold to the proposed asset reconstruction committee (ARC). They are expected to seek a relaxation of the September 1, 2016, circular which requires them to provide for an asset, assigned to ARCs, as if it were still on their books. Moreover, they are likely to ask the ARC be exempt from making future provisions for the assets it buys.

Experts observed that given banks are already holding a fairly high level of provisions  incentives were needed to push banks to sell loans via a 15:85 model. The model implies that the sellers get 15% as upfront cash payments and security receipts (SR) for the remaining 85% of the value.

Should these exemptions be granted, it will give the new institution an upper hand over existing players, experts said.

Finance minister Nirmala Sitharaman said in her Budget speech on Monday an ARC would be set up to help banks deal with bad loans and later clarified the government would not be funding it. However, financial services secretary Debasish Panda has hinted at provisioning relief being offered through a government guarantee. Panda told reporters on Tuesday sales to the new ARC would be a cash-neutral transaction for banks. Since the regulator may insist on provisioning to support this arrangement, banks may request the government for a guarantee that could satisfy the regulator, Panda said.

RBI’s September 2016 circular mandated that, with effect from April 2018, banks would need to continue providing for loans sold as if they still were on the books. The rule was applicable if the SRs received in the sale comprised more than 10% of bank’s own bad loans. Consequently, hybrid cash-and-SR deals have dried up and banks have been offering bad loans to ARCs almost exclusively on an all-cash basis.

The new ARC will have the advantage of the loan exposures being clubbed across banks, although this, too, is prone to challenges. Industry executives FE spoke to said banks hold varying levels of provisions against the same asset and that would complicate the process. A senior executive in the stressed assets market believes private banks may not want to transfer the asset at book value. Implementation issues apart, he pointed out that no lender would want to make additional provisions if the asset is to be transferred in a 15:85 structure.

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A progressive and forward looking one for Financial Services Sector, BFSI News, ET BFSI

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Sanjay Doshi, Partner and Head, Financial Services Advisory, KPMG in India

Budget 2021 looks to address some of the key pertinent issues in Financial Services sector around bad debts, asset restructuring and infrastructure financing. It has also put a focus on achieving growth and investments through divestments of government interests, increase in FDI limit and policy changes on FPI/NRI investments.Below is a sector wise deep dive on the budget announcements.

Banking: The Banking sector, especially Public Sector Banks, have been given significant support through measures around re-capitalisation to the tune of Rs 20,000 Cr, setting-up of asset reconstruction to handle bad loans and divestment of two PSU Banks. The proposal to divest stakes in two PSU banks is forward looking and will bring better focus on low performing PSU Banks, autonomy and capital optimisation. This will also lead to consolidation in banking and NBFC sector. RBI’s expected guidelines on the ownership of banks will be crucial to facilitate the same.

The proposal to setup an Asset Reconstruction Company/Asset Management company to consolidate and take over the existing stressed debt and then management of the same is a step in the right direction. This will invite interest from Alternate Investment Funds and other potential investors and help Banks in eventual value realisation. It would be required to review finer details of structure and operations of the Asset Reconstruction and management company handling the bad loans/assets.

Insurance: Increase in FDI limit to 74% in Insurance (from 49%) will help revive growth capitalisation of smaller and mid-size Insurance players. The Insurance sector may see heightened interest from foreign investors considering liberalisation including realignment of stakeholders – however the level of interest may be calibrated depending on the ability to control vs own and nature of safeguards proposed.

Suggested Amendments in the Finance Bill to LIC Act around governance and surplus distribution, will be an enabler to the Proposed launch of the mega IPO for LIC in 2021-22. This will also have a greater impact in the Insurance industry and make products of private insurers more competitive and at par with LIC with prospective affect.

NBFCs: The proposal to reduce the minimum loan size eligible for debt recovery under the SARFAESI Act from Rs. 50 lakhs to Rs. 20 lakhs will enable NBFC’s in NPA recovery especially in MSME sector.

Announcement on allocation of Rs 20,000 crore to set up of a Development Finance Institution (DFI) which is expected to fund infrastructure projects and achieve a portfolio of Rs 5 lakh crore within three years is a progressive step towards reviving infrastructure financing, given the planned infrastructure investments over the next few years.

Capital Markets: The proposed launch of a unified securities market code consolidating multiple securities related laws and creation of new investors charter is expected to be beneficial to protecting investors interests. Finer details of the proposed change would need to be reviewed to ascertain its impact on cost, efficiency and compliance process.

Click here to read ETBFSI blogs.

DISCLAIMER: The views expressed are solely of the author and ETBFSI.com does not necessarily subscribe to it. ETBFSI.com shall not be responsible for any damage caused to any person/organisation directly or indirectly.



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Bank Nifty constituents hit new highs after Budget 2021, BFSI News, ET BFSI

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by Syed Fasiuddin

Bank Nifty constituents hit new highs shortly after Finance Minister Nirmala Sitharaman announced her budget for 2021. The Bank Nifty, since the announcement of the budget, which included numerous reforms aimed towards the BFSI sector, including the setting up of a bad bank, amendments towards the Insurance Act of 1938, the recapitalisation of public sector lenders, and the proposed divestment of two public lenders and one general insurer, amongst others, sparked cheer in the market – recording a 3074 point jump.

Public Bank stocks jump
Government owned lenders and constituents of the Bank Nifty Index – including the State Bank of India, Punjab National Bank (PNB), Bank of Baroda, recorded sharp single and double digit rises in values since February 1, when the budget was first announced. SBI within the day recorded a spectacular jump of 7.21%, closing at Rs 333.10 – rising by Rs 22.40. PNB and BoB recorded jumps of 1.26% and 1.01%, respectively, on February 2. PNB at the end of day traded at Rs 36.20, whilst BoB traded at Rs 74.65 – rising by 0.45 and 0.75 points, respectively.

Private lender stocks cheer
Private lenders RBL Bank, Federal Bank, HDFC Bank and Bandhan Bank recorded the highest jumps since the budget was first announced, rising by 11.52%, 10.08%, 9.9% and 9.84% respectively. RBL Bank recorded a jump of 25 points, closing at RS 242.00 at the end of market hours. HDFC Bank alone rose by 140.9 points, trading at Rs 1560, since the budget was announced, whereas Bandhan Bank rose by 30.40 points, to close at Rs 339.35, on February 2. Kerala based Federal Bank also recorded a 7.35 point jump to trade at Rs 80.25 by the close of the BSE.


Other constituents of the Bank Nifty, including ICICI Bank, Kotak Mahindra Bank and Axis Bank, recorded similar gains, jumping by 9.61%, 8.47% and 8.13%, respectively. ICICI Bank rose by 54.20 points to close at Rs 618.45, whereas Kotak Mahindra Bank and Axis Bank recorded an increase of 145.50 points and 53.65 points, respectively, to close at Rs 1863.50 and Rs 713.70.

Bankers remain optimistic
Both public and private bankers expressed optimism at the budget unveiled by Nirmala Sitharaman, on February 1. Dinesh Kumar Khara, Chairman of the State Bank of India (SBI), said “The Union Budget has unveiled a set of well-crafted and robust policies that encompasses the vision of an Atmanirbhar Bharat. The Budget has rightly envisaged a substantial jump in capital expenditure that has a strong multiplier impact on the economy. The decision to open up the insurance sector, setting up a DFI and an ARC, privatizing a couple of public sector banks are all positive steps for the financial sector.”

The Chairman of India’s largest lender further said “One of the cornerstones of this budget is fiscal numbers that are transparent and has the potential to surprise us on the upside. In principle, the budget has rationalized the off-balance-sheet borrowings and headline fiscal deficit numbers, which will overtly please markets and even rating agencies. The fact that the expenditure announcements in the budget have been matched with the status quo on taxes will please everyone and bolster market sentiments.”

Kotak Mahindra Bank founder Uday Kotak, expressing his views on the budget, tweeted “A Budget for growth with next-gen reforms. Focus on healthcare, infra, financial sector. A stable tax regime, higher borrowings for capex. Specific reforms: disinvestment & monetization, opening up of insurance, cleanup plan for stressed assets. Sign of a self confident India.”

Chandra Shekhar Ghosh, MD & CEO, Bandhan Bank, noted “The government has prioritised spending on growth at this stage, in the hope that such growth would help manage the fiscal deficit subsequently. A substantial increase announced in the expenditure on healthcare and infrastructure will help boost economic growth, including the MSME sector and generate employment. Overall, it was a growth-centric Budget aimed at securing India’s long-term economic interest.



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Pragmatic in approach, nuanced by construction

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Against the backdrop of sharp deceleration in growth in the wake of an unprecedented global health crisis, the FY22 Budget has emphatically provided a much needed thrust for healthcare spending, job creation, and overall economic recovery, all within the ambit of deft fiscal rectitude. The announcements made by the Finance Minister should be seen in conjunction with government’s previous announcements under various fiscal packages encompassing Pradhan Mantri Garib Kalyan Yogana and Atma Nirbhar Bharat Abhiyan.

From an objective standpoint, in a year of difficult fiscal computations, the Finance Minister has walked a tightrope to balance the stretched revenue receipts with necessary expenditure support. At 6.8 per cent of GDP, FY22 fiscal deficit is a realistic display of support to reinvigorate India’s Real GDP growth, which is projected at 11 per cent, albeit supported by low base.

The Basics: Healthcare and Capex

With the pandemic exposing the vulnerabilities in the healthcare sector, the FY22 Union Budget makes a bold attempt to improve the situation allocating ₹2.23-lakh crore — an increase of 137 per cent from the last year’s budget. For Covid-19 vaccines itself, a significant allocation of ₹35,000 crore has been provided, with more support likely in case required

I reckon the government’s thrust on increased capex spending — budgeted to rise by 26.2 per cent over FY21 — will provide the much-needed supply side push to the economy

Creation of an Asset Reconstruction Company was the need of the hour, to reinvigorate risk taking appetite that was getting bogged down by the monumental requirements for provisioning on account of stressed assets. In my opinion, this singular step, with active participation from the financial sector, should help in de-clogging of investments in the country in a formal institutionalised setup

The laying out of the DFI structure is a structural medium term reform to garner infrastructure financing, which is currently being carried out by banks, which as an entity is prone to ALM mismatches as far as financing long term infrastructure projects are concerned. Earmarking of ₹20,000 crore for bank recapitalisation is a step in the right direction. With fiscal situation expected to get comfortable in the coming quarters, possibility of a top-up in this case cannot be ruled out

Continued capital account liberalisation in insurance, with FDI cap getting raised to 74 per cent from 49 per cent is a fantastic move and is likely to pave way for greater insurance penetration in the country The disinvestment target of ₹1.75-lakh crore is bound to unlock value while also leading to diversification of ownership under the Net Public Sector Enterprises Policy

The significant others

Government’s allocation of ₹15,700 crore for MSMEs will bolster growth further. The earlier allocation towards Production Linked Initiative Scheme (PLI), creation of Mega Investment Textiles Parks, and adjustment in customs duty on a range of products will provide protection to this segment to recover from the Covid-19 shock. Further, change in the definition for Small Companies by increasing the thresholds for paid-up capital by 4 times and turnover by 10 times is a welcome move as it eases the compliance requirements of more than two lakh small companies

For incentivising start-ups as well, extending the eligibility for claiming tax holiday and capital gains exemption for investment in start-ups by one more year, until 31st March 2022, will not only free up the working capital of these firms but also revive entrepreneurial spirits

Overall, FY22 Budget is a pragmatic and visionary statement which distinctly lays its focus on consumption and investment drivers to speed-up the economic recovery. The government has prudently laid its long term focus on nurturing growth while also consolidating its fiscal position. Accordingly, it plans to trim fiscal deficit to 4.5 per cent by FY26. This should be broadly acceptable at the time when India needs a strong engine of growth to push it towards achieving the goal of a $5 trillion economy.

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Growth-focused budget helps Sensex , Nifty maintains the bull run, BFSI News, ET BFSI

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-Sheersh Kapoor

Broader markets have started recovering post the announcement of Union Budget 2021. A growth and capex oriented Budget has provided ammunition to the bulls as the BSE Sensex attempts to scale mount 50K yet again. Several stocks notched up 52-week highs today in the broader market.

At close, the Sensex was up by 2.46% at 49,797.72, and the Nifty up by 2.57% at 14,647.90. Nifty Bank Index traded green at Rs 34,267 Adding 3.56%, while BSE Bankex ended at Rs 38,833 adding 3.43%. Amongst the top Gainers were- SBI at Rs 333 adding 7.21% followed by HDFC Bank at Rs 1,560 adding 5.67%, Bandhan Bank at Rs 339 (4.98%), Kotak Mahindra Bank at Rs 1,861 (3.32%), IDFC First Bank at Rs 47 (2.36%), RBl Bank at Rs 242 (2.34%), ICICI Bank at Rs 617 (2.24%).

Nifty Financial Services ended at 16,208 adding 3.23%. Amongst the top gainers were Indiabulls Hsg at Rs 213 adding 3.74% followed by HDFC at Rs 2,659 down 3.09%, Bajaj Finance at Rs 5173 (2.27%),Power Finance at Rs 118 (2.19%). while all other major indices traded in green, Bajaj Finance and Cholamadalam traded lower by 2.53% and 0.89% respectively.

Other key takeaways

Govt won’t own or fund ‘Bad Bank’
The government is preparing to bring stressed assets worth Rs 2.25 lakh crore under the proposed ‘Bad Bank’. The entity which will be entirely funded and managed by commercial banks, said two top bureaucrats in an exclusive interaction on February 2. The funding will be done by banks from both the private sector and the public sector, they said. It is not clear what is initial capital estimated for setting up the Bad Bank

“The new budget has ignited spark in all cyclical and economy driven sectors.”

Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities:-
The elevated borrowings for the next few years indicate higher spending could remain for next few years. The earnings season is throwing good earnings surprise which is also getting factored in stock prices. With clarity on growth and earnings it will be ideal to focus on economy driven sectors like capital goods, construction, engineering, cement, power utilities, oil & gas, banks, Insurance and NBFCs.”

“As valuations are rich and Nifty-50 has again gone closer to the 15,000 mark there could be some resistance setting in at these levels. Investors can now look to accumulate stocks in every decline with a 2 to 3 year view.” he added.

HDFC Q3 result:
The company has reported 65 % YoY fall in its December quarter net profit at Rs 2,925.8 crore versus Rs 8,372.5 crore and revenue was down 42.3% at Rs 11,707 crore against Rs 20,285.5 crore. The Q3FY20 net profit includes proceeds from Gruh stake sale, reported CNBC-TV18.

Gold Updates
COMEX gold trades little changed near $1865/oz after a 0.7% gain yesterday. Gold is choppy amid mixed trade in the US dollar index and as market players assess the possibility of a US stimulus deal.

Experts believe that gold may continue to witness mixed trade reflecting the mixed trend in the US dollar but general bias may be on the upside owing to global growth worries and the possibility of US stimulus. Domestic gold prices have become cheaper due to duty cut, however, general price trend will be determined by international markets.

Rupee Updates
Indian rupee is trading higher by 8 paise at 72.94 per dollar, amid buying seen in the domestic equity market. It opened flat at 73.02 per dollar against it’s previous close of 73.02. The rupee opened flat at 72.92 against the US dollar in opening trade on Tuesday morning.

USDINR pair closed positive, USDINR Feb Future is trading at 73.27. it is expected to trade with bullish momentum for the day. The USDINR Spot pair took support at 72.80 level and bounced back up to 73.15 levels and ended above 73.00 level indicating a positive momentum to continue with in the range of 72.70-73.20 levels.



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Russell Gaitonde, Deloitte, BFSI News, ET BFSI

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Russell Gaitonde, Partner at Deloitte said, “This year’s budget was a fairly difficult act that the government had to achieve given that this year was a very unusual one with the global pandemic. The economy needed a lot of fiscal stimulus to get back on the path of recovery and i am glad that the hon’ble finance minister has gone down the path of giving the requisite fiscal stimuluses in terms of the investments proposed to be made in the infrastructure sector as well as the PSU divestments plans and recapitalisation of PSB banks. It is a road map that the FM has put out saying that the government intends to bring down the fiscal deficit to 4.9% by FY26. It’ll take around 5 years for the government to bring down the fiscal deficit but clearly there is an intention and path they have in mind.”

He added, “If you look at the budget in terms of balancing the books, the FM had to raise funds from somewhere. One option was to either increase the taxes or to effectively do it by way of a divestment plan. Had there been an increase in taxes which the FM has not done, there would have been a lot of human cry and created a negative sentiment. To balance that out the plan of the government is to go down the path of disinvestments which is the right thing to do.”

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Veena Sivaramakrishnan, BFSI News, ET BFSI

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The resolution framework for stressed assets has been in the works for sometime from the time of Project Sashakt itself and the AMC-ARC structure has been attractive leading to competition because there is now an expectation that there will be competition in this market so the price discovery would get better because NPAs don’t have a mechanism by which they’re traded.

Veena said, “AIFs coming into fray would allow other players to also enter into this market which is not permitted directly and certainly the first step in the right direction.”

On the framework, she says, “ARC purchases bad debt and looks at recovering directly from the borrower and is fairly limited. With an AMC coming into picture means there’s a specialist in the frame who can provide the know-how on actual resolution and outside IBC.”

An expert AMC will play a role in restructuring an account and therefore arrive at a resolution.

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