The financial services sector is still reeling under pressure because of the deterioration in asset quality. The non-banking finance companies (NBFCs) are in desperate need of funds from the banking sector. There is also lot of responsibilities on the shoulders of state-owned general insurance companies to underwrite government-sponsored 'crop insurance' and 'medical insurance'. The market is expecting some directional measures from the Union Budget 2019 as this will be the first budget of prime minister Narendra Modi-led NDA-2 government.
Public sector banks (PSBs) need an urgent capital infusion. Faced with deteriorating asset quality, higher provisioning and lower profitability, banks need capital for their normal lending operations. Half a dozen banks are already in the prompt corrective action (PCA) framework of the Reserve Bank of India (RBI). As per the framework, banks with weak financial metrics are put under RBI's watch and cannot lend.
Utilising RBI's surplus capital
There are expectations of a transfer of RBI's surplus capital in a staggered manner to government in next few years. There should be some reference to RBI's surplus capital and its utilisation for infusing capital to PSBs in the Budget 2019.
Roadmap for consolidation
After the successful merger of five of the associate banks of State Bank of India, the government had announced the three-way merger of Bank of Baroda, Vijaya Bank and Dena Bank. There is a likelihood of the government going ahead with a three-way merger approach to create a few large banks in size.
More powers to Bank Board Bureau
The Bank Board Bureau (BBB) advises the government on the appointment of key managerial personals. The role of BBB can be expanded to include other areas of governance in banks. This may include asset quality and recovery or human resources. Similarly, the next logical step after BBB was to create a Bank Investment Company (BIC) as a holding company to house government stakes. It could also be allowed to raise resources for PSBs.
There is a need for creating more NCLT and NCLAT benches to speed up the cases referred to bankruptcy code for faster resolution. Currently, a large number of cases being referred to Insolvency and Bankruptcy code (IBC) cause delay.
Merger of state-owned general insurance companies
There are four state-owned general insurance companies: New India, National Insurance, Oriental Insurance and United India. These companies mirror each other in terms of business focus, quality of service and technology set up. The government is already discussing various options from stake sale to mergers. The state-owned general insurance arms need strengthening as government has specified plans to scale up crop insurance and medical insurance coverage for wider set of people in far-flung rural areas.
IPO preparation for LIC
The government is facing a funding crunch to execute its capital expenditure plans and run social schemes such as Pradhan Mantri Kisan Samman Nidhi and Mahatma Gandhi National Rural Employment Guarantee Act due to large fiscal deficit. There are expectations that the government may launch the public issue of Life Insurance Corporation. Even a small stake sale will have potential to generate huge resources for the government.