Impact of Union Budget 2021 on banking sector

Introduction
The Indian Banking Industry has a crucial role in the economic development of the country. Let's discuss the impact of recent announcements made in Union Budget 2021 for recovery of banks, privatisatiation of some public sector banks and provisions made by government to recover banks from the risk of increasing NPAs post moratorium period.

A) Capital Infusion of ₹20,000 cr. In Public Sector Banks:

Just like the last 2 Financial Years FY19 and FY20, this year also there is capital infusion of ₹20,000 crore in Public Sector Banks by the government. Government and the financial ministry is extending their support to PSU Banks by this capital infusion, in the coming years as well, if the situation demands.

B)  Proposal to Set up a Bad bank to Consolidate Stressed Assets: 

What is Bad Bank?

• It is an Asset Reconstruction Company. Bad Bank means segregation of assets . In Simple words, Bad Banks separate the good assets/loans from bad assets/loans.
• A good step to build the profitability by improving asset quality of banks as with the help of the setting up of Bad Banks, there will lesser provisioning required. 

Current Condition of Bad Assets:

• There are ~ ₹2.25 lakh crore bad loans currently which will fall under bad bank scenario.

What is the process:

•  It can run itself as an  Asset Reconstruction Company.
•  Or, can approach other Asset Reconstruction Company to whom it can sell its bad assets. The Amount received will be distributed accordingly as per the share of the banks.

What Will Asset Reconstruction Company Do:

• It will buy bad assets/loans of banks/financial institutions.
•  Resolve the bad assets over a period of time.
•  Assist all the banks (including Public sector as well as Private Sector) to clean up their balance sheet.
•  Thus, help in taking a step towards healthy credit growth in economy

Increasing Gross NPA of Banks (%)

• As per RBI’s Financial Stability Report (FSR), NPA of the Public Sector Banks can vary between the range of 16.2% - 17.6% by September 2021. 
• Whereas in case of Private Sector Banks, the Gross NPA rate can go as high as 8.8%.
• In case of foreign banks, if we talk about the worst case scenario it can reach upto 6.5% and best case would be  4.5%.
• Overall, the consolidated Gross NPA of entire Indian Banking sector can range between 13.5% - 14.8%
• These NPA numbers can lead to adverse situation in public banking sector. Bad Bank concept will help in providing banks the scope of profitability and growth, as after its  set up, banks don’t need to keep aside their profit amount for the provisioning of their bad assets.
• Bad Bank concept will also play important role in boosting credit growth and overall recovery in economy post COVID-19

C) Privatisation of 2 Public Sector Banks and Stake Sale in IDBI Bank:

The next big announcement is Privatization of 2 Public Sector Banks (Names not yet disclosed) and also stake sale in IDBI bank. Private investors are known to have 2 expertise, which are:

i) Financial Expertise: In comparison with PSU Banks, Private Sector Banks and NBFC have much control over the NPA’s figures. Few PSU Banks are having gross NPAs in the range of 20%-25%. Through the Privatisation of Banking sector, GoI is seeking financial expertise of private sector.

ii) Technological Expertise: Through this Privatisation, Government is seeking to achieve that technological expertise and technical know-how in the public sector banks.

PSU Banks considered for privatisation :

 Punjab Sind Bank and Bank of Maharashtra are supposedly the two PSU banks that will be privatised

Possible reason for Privatisation of these banks:

i) Gross NPAs : Punjab & Sindh & Bank of Maharashtra currently have ~5.9% and 7.7% Gross NPAs as on Sept'20

ii) Both these banks were excluded from mergers last years and Government undertook Capital Infusion to the tune of  ₹5,500 crore in Punjab and Sind Bank in FY21 and  ₹7,800 crore  in Bank of Maharashtra in FY18 & FY19.

D.Banks performance Post Announcement:

• There is a strong rally in Banking Stocks after the budget announcement . Bank NIFTY has displayed a rally of ~10-15% post budget announcements 
• Performance of Banking Stocks are as follows: