Budget 2015-16: Credit offtake of banks will improve
Zarin Daruwala February 28, 2015With the planned increase in infrastructure spending of about Rs 70,000 crore especially in the roads sector and the launch of the five UMPPs, the credit offtake of banks is set to improve.
Other initiatives like the establishment of the National Investment and Infrastructure Fund and issuance of tax free infrastructure bonds will also spur growth in the infrastructure sector, which in turn will be beneficial for credit offtake.
Introduction of the Public Contracts (Resolution of disputes) Bill is expected to streamline the process for resolving disputes arising in public contracts.
This is a welcome step since there are a lot of EPC companies having huge receivables due to unsettled disputes. A quick resolution of disputes is sorely needed to ease the cash flow stress of these companies and consequent improvement in asset quality of banks that have lent to the EPC companies.
The comprehensive Bankruptcy Code will bring about an early resolution of loans outstanding to distressed companies. For example, Chapter XI in the US has been a time-tested model for reviving companies under distress.
A Bankruptcy Code that meets global standards and provides necessary judicial capacity will be of great benefit to banks and financial institutions, which today struggle for recovery due to endless legal battles with errant companies.
The move towards cashless transactions is a significant move that will benefit retail banking. This will increase transparency in financial transactions and will reduce the amount of cash in the system.
The Pradhan Mantri Jan Dhan Yojana covered a large part of the non-banked population that now has the RuPay debit card for carrying out cashless transactions. This move will further assist banks and the government in tracking financial transactions.
Setting up of the autonomous bank Board Bureau that will select heads of public sector banks and also help them in capital raising through innovative means is a positive for the whole sector because well capitalised banks are an integral part of a growing economy.
The potential of a growing economy can only be realised through a healthy banking system that is well capitalised.
Overall, the Budget has outlined some very important initiatives for the banking sector especially in light of the current economic scenario and while increased credit offtake in FY2016 will probably be higher, other announcements like the Public Contracts Bill, comprehensive Bankruptcy code, cashless transactions and setting up of the autonomous Bank Board Bureau are all very important moves that will definitely strengthen and empower this sector in the coming year.