Finance minister Nirmala Sitharaman on Friday announced key reforms for foreign portfolio investors (FPIs), public sector banks and the auto sector among others. An upfront recap of PSU banks within budgeted levels, refinancing lines to housing financiers, and support for a credit guarantee for non-banking financial companies (NBFCs) are three of the key positives from the announcements, CLSA said in a research report.
The report said: “Capital infusion of Rs 700 billion in PSU banks is to be upfront rather than late in the year. This would mostly be via recap bonds, so it would be cash and fiscal-neutral."
"For HFCs [housing finance companies], the National Housing Bank will provide an additional refinancing line of Rs 200 billion over and above recent refinancing of Rs 100 billion. This would provide additional liquidity to HFCs at a cost of 8-9 percent," the report added.
Further, the brokerage noted that the NBFCs will be permitted to use Aadhaar-based KYC to speed up the process, which it contends, should reduce costs and improve efficiency for NBFCs and HFCs.
"PSU banks will work closely with NBFCs on a co-origination model to ensure that NBFCs’ reach and banks’ funding can be leveraged. This should be positive for credit to SMEs [small and medium-sized enterprises] and commercial vehicles/auto loans," the report added.
Meanwhile, the potential negative factor that the brokerage is largely concerned about is the repo rate. "So far, RBI [the Reserve Bank of India] has lowered the repo rate by 100 basis points but banks have cut term deposit and lending rates 20-25 bps. We expect transmission to continue, supported by easier liquidity," said CLSA.
It added: “While the government has not directly asked banks for a commitment to cut rates, moral persuasion can be a risk to margins. We need to see how banks manage this in a margin-neutral way.""A 5 bps lower margin can drag FY20 sector earnings down 4 percent."