Budget 2020: Will FM Sitharaman give small depositors a reason to rejoice?

Budget 2020 expectations: Union Budget 2020-21 expectations in the banking sector include a hike in deposit insurance cover for small depositors, market borrowing via stake sale, encouraging sale of non-core assets, strengthening bankruptcy code, capital allocation for four weak public sector banks (PSBs), and governance reforms.

The first big measure that many are expecting from the Finance Minister is a hike in deposit insurance cover. In fact, Sitharaman had earlier promised to revisit the Rs 1 lakh limit after Punjab and Maharashtra Co-operative Bank (PMC Bank) came under the watch of the Reserve Bank of India (RBI). The last review of deposit insurance limit took place some 27 years ago. A peek into the history shows that deposit insurance commenced in India with a limit of Rs 5,000 in 1968. This was revised to Rs 10,000 after two years in 1970. The next revision happened in 1976 when the limit was hiked to Rs 20,000. In 1980, the limit was changed again to Rs 30,000. The last revision took place way back in 1993 as the limit was increased to Rs 1 lakh. SBI Research pointed out a recent report that the deposit coverage in India is one of the lowest in terms of per capita income. Given the government's budget constraints, this measure would boost sentiments without putting any financial burden on the government.

FULL COVERAGE: Union Budget 2020

In the past, the government has amended the Insolvency and Bankruptcy Code (IBC) with an eye on prompt resolution of financial creditors' claims. The Budget is going to make a mention of higher recovery kicking in from IBC during 2021-20. The banks are likely to get the write back benefits as many stressed cases are going to be out of the IBC. Essar Steel resolution recently came as a bonanza for the banking sector. State Bank of India alone is expecting a bonanza of Rs 12,000 crore in the December quarter. Private sector lender ICICI Bank has reported outstanding December quarter numbers partly because of recovery in the Essar Steel case. There is also another good news on the asset quality front. For the first time in the last seven years, stressed assets have started to show a decline whereas fresh slippages are also reducing. These positive trends would greatly reduce the banks provisioning pressure, and preserve and release capital for growth.

Consolidation update is yet another area where Sitharaman is going to present the government's case. The benefits of consolidation would also accrue to PSBs as the branches and workforce would be a rationalised. The merger of 10 PSBs into four bigger banks is already underway. The government is strengthening the national presence of two PSBs and making four regionally focused banks. Together with SBI merger with associate banks and three-way merger of Bank of Baroda, Vijaya Bank and Dena Bank, the dozen large, national and regional banks are going to change the banking landscape. The Finance Minister would once again re-emphasise the government's efforts to strengthen the PSBs.

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Some attention may be paid to the four PSBs that are still under the RBI's prompt corrective action (PCA) framework. These banks are Indian Overseas Bank, UCO Bank, United Bank of India, and Central Bank of India. While the government is providing capital to these banks, there may be a mention of these banks coming out of the PCA framework, shedding the tag of a weak bank. IDBI Bank, which is now a private bank, is expected to come out of the PCA framework as it has got capital as well as a new promoter, LIC.

In the last Budget, the government had front-loaded capital worth Rs 70,000 crore in PSBs to boost their capital base. The four large PSBs - SBI, Punjab National Bank, Union Bank of India, and Bank of Baroda - have a capital adequacy ratio in the range of 13.50-15 per cent. The core equity ratio is around 10 per cent as against a required minimum of 8 per cent. Given moderate credit growth, stable NPAs, and the not so bad capital levels, the government will reiterate its commitment to provide capital whenever they need it.

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