The capital requirements of public sector banks (PSBs) are expected to be limited to ₹10,000-20,000 crore during FY2021 for 8-10 per cent credit growth, credit rating agency ICRA said in its pre-budget comments on the banking sector.

Since the capital requirements are not sizeable and are based on the expectation of improved earnings, ICRA expects banks to raise this amount themselves from the markets.

However, if the Government of India (GoI) decides to provide capital to enable PSBs transition to IND-AS’ (Indian Accounting Standards), banks will be required to make credit provisions on expected loss basis for standard but overdue exposures. In such a scenario, the agency expects the capital requirements of PSBs to be higher, at around ₹70,000-1 lakh crore.

“After the sizeable capital infusion of ₹2.66 lakh crore into PSBs during FY2018-20, their capital position has improved from that of FY2017. With further provisioning on stressed loans, we expect the remaining PSBs to also exit the RBI’s prompt corrective action framework and turn profitable in FY2021,” ICRA said.

Retail segment

The agency attributed the lower growth in the loan books of Non-Banking Finance Companies (NBFCs)/Housing Finance Companies (HFCs) in 2019-20, when compared with the five-year average, to the funding challenges faced by these entities.

At the same time, the credit demand was impacted as retail borrowers adopted a wait-and-watch policy, especially in the case of home loan purchases.

Despite the decline in interest rates last year, ICRA said it is apprehensive that the asset quality pressure in the retail segment would worsen, given the slow GDP growth; consequently, the uptick in consumption would be imperative for improvement in the credit profile of entities in the financial sector.

The agency suggested that increased tax incentives for first-time home buyers such as extension of additional tax deduction for interest paid on loans borrowed beyond March 31, 2020 and increased allocation under PMAY (Pradhan Mantri Awas Yojana), could help boost the demand for housing loans, especially in the affordable housing segment.

Also, increased allocation under Affordable Housing Fund (AHF) will provide long-term funds to HFCs/Banks for housing loans and extension of the partial credit guarantee scheme for first loss beyond June 30, 2020, for purchase of high-rated pooled assets of NBFCs could help in improving the fund flow to the NBFC/HFC sector .

Further, in line with the Government’s focus on infrastructure growth, ICRA recommended that the Credit Guarantee Enhancement Corporation for infrastructure financing could be set up, as announced in the previous budget, and more clarity on the role of Government-sponsored NBFCs in the infrastructure financing space could be provided.

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