The next five years of prime minister Narendra Modi-led NDA government is likely to speed up some of financial services agenda. The banking industry has seen clean up of balance sheets, a work that is still going on. The NBFC sector, which had supported consumption, is now facing asset-liability mismatches. Following are the issues that should catch the attention of the new government:
1) Consolidation in the PSB space
The last five years of BJP-led government saw a beginning of consolidation in the public sector banking space. Five associate banks of State Bank of India (SBI) got merged with the parent. The exercise was smooth as in the last decade, the government was able to merge only a couple of associate banks. Similarly, the Bank of Baroda (BoB), Vijaya Bank and Dena Bank merger is already going through the integration process. IDBI Bank also saw LIC coming in as a new promoter. So, there was some movement in the consolidation drive, which is likely to speed up. The government had earlier talked about creating a few large banks of international size.
2) Investment holding company
The government had also set up a Bank Board Bureau (BBB) for recommending top-level appointments in PSBs. The next logical step was to set up an investment holding company (IHC) for housing the stake of the government. IHC was planned to raise funds and take powers to appoint directors in the banks. There is likely to be more progress in the creation of IHC.
3) Framework for resolution of stressed assets
The biggest policy initiative by the BJP-led NDA government was in the area of faster restructuring and bankruptcy proceedings in case of corporate failure. There are already amendments to make the code more efficient but the enabling environment was not able to keep pace with changes. For example, the 'Project Sashakt' had come out with a plan to form Alternative Investment Fund (AIF) and Asset Management Company (AMC). The February 12 circular of the Reserve Bank of India (RBI) was also struck down by the Supreme Court. The market is currently awaiting the RBI's response to bring back the restructuring schemes.
4) RBI's surplus capital
The Bimal Jalan committee will be submitting its report to the government soon on RBI's surplus capital. There are indications that the surplus capital will be in the region of Rs 1-3 lakh crore. This transfer of capital to the government will provide a great relief as government finances are already constrained to support the public sector banks. This can be used to recapitalise the PSBs, which are in dire need of funds.