Financial services sector to benefit from enhanced expenditure

The Union Budget has unveiled several measures that would positively impact the overall economy. However, the financial services sector would see benefits only in the long term, mostly through the enhanced expenditure announced by the finance minister, said industry participants.

The financial services space is a major indirect beneficiary as the Budget announced large spending in the infrastructure sector and proposed higher investments in affordable housing that will have a trickle-down effect through increased credit off-take.

The introduction of the bill relating to resolution of financial firms, concessional withholding rate of 5% on interest earned by foreign entities in external commercial borrowings and listing and trading of security receipts would also help players in the financial services sector in the long run.

Finance Minister Arun Jaitley said the government will invest as much as Rs 3.96 lakh crore to boost the infrastructure sector in FY2017-18. He said National Housing Bank will refinance individual housing loans of about Rs 20,000 crore in the same period. The Budget also gave infrastructure status to the affordable housing segment. 

Kaushal Shah, associate director and head of the financial services sector at Kotak Investment Banking, said the expenditures announced by the finance minister have an investment focus with an intent of asset and skill creation against consumption expenditure through sops and subsidy. 

“Significant investments in the housing sector and infrastructure status to affordable housing ensure targeting one of the basic necessities, housing. This will not only spur business activity but also allow massive flexibility to housing finance companies. The eventual beneficiaries would primarily be small- to mid-market customers, who typically take single-digit loans. With this, the investor fan-following will only increase for the housing and MSME sectors'', he said. 

Kapil Wadhawan, chairman and managing director, DHFL, said, “The infrastructure status given to affordable housing sector has been a long-pending demand by the real estate sector that will provide a boost in volume of construction activity across the country”.

Credit off-take towards affordable segment of housing will augment supply especially for both stake holders—the first home buyer and developer—who will now have access to cheaper funding.

However, Rajnish Dhall, co-founder of Micro Housing Finance Corporation Ltd, said the infrastructure status is beneficial to real estate companies. Hence, there is no immediate benefit for finance firms. Finance companies will benefit only after the supply of affordable houses increases following increased funding, he said. 

Thanks to the surplus liquidity created by demonetisation, the banks have already started reducing their lending rates, including those for housing. In addition, interest subvention for housing loans has also been announced.

Both affordable housing and listing of securities under securitisation are targeted to solve different issues and will only strengthen the overall financial services sector, said Shah.

The bill relating to resolution of financial firms is expected to contribute to the stability and resilience of the financial system and protect the consumers of financial institutions. 

Specifically, with the infrastructure status, affordable housing companies can tap the international debt investors. 

Kumar Saurabh Singh, partner, Khaitan & Co, said, “Together with the benefit on the masala bonds and infrastructure status, the affordable housing companies will have increased accessibility to investors. After gaining the infra tag, these companies would be able to raise offshore loans under automatic route which is not allowed currently under the automatic route. However, this would require amendment to the RBI regulations which would also spell out the policy clearly''.

Since the Budget has made housing finance companies and infrastructure firms more attractive for the investors, there would be increased investments into the country from global institutional investors, said Prakash Nene, managing director at Multiples Alternate Asset Management Pvt. Ltd. 

Sanjay Kukreja, managing director at ChrysCapital, said, “The Budget is attractive from the fiscal prudence point of view. Positive measures include reforms on donations as well as the scrapping of FIPB, which replaces the delayed system with a smoother and faster process for companies seeking approvals.” 

“Reducing the tax deducted at source in the lower bracket would benefit the informal sector as it lead to rural and semi-urban consumption, eventually creating roll-over benefits for the financial services sector as the money saved would likely go towards asset creation such as two-wheeler and housing purchases'', he said. 

Other fillips to the sector

The focus on resolution of stressed legacy accounts of banks continues. The legal framework has been strengthened to facilitate resolution, through the enactment of Insolvency and Bankruptcy Code and the amendments to the SARFAESI and Debt Recovery Tribunal Acts. In line with the ‘Indradhanush’ roadmap, the Budget has provided Rs 10,000 crore for recapitalisation of banks in FY2017-18.

Listing and trading of security receipts issued by a securitisation company or a reconstruction firm under the SARFAESI Act will be permitted in SEBI-registered stock exchanges. This will enhance capital flows into the securitisation industry and will be helpful to deal with NPAs of banks.

The Budget also proposed to increase allowable provision for non-performing assets (NPAs) from 7.5% to 8.5%, thereby reducing the tax liability of banks. 

Presently, institutions such as banks and insurance companies are categorised as qualified institutional buyers (QIBs) by SEBI. They are eligible for participation in IPOs with specifically earmarked allocations. It is now proposed to allow systemically important NBFCs regulated by the RBI and above a certain net worth, to be categorised as QIBs. This will strengthen the IPO market and channelise more investments.

“The listing of securitised asset needs amendments in the existing regulations by SEBI and RBI before these announcements to take effect. Overall, as a policy move, this is welcome but marketing these assets is a challenge and could see participation from only a few institutions. ARCs can list these units in a similar fashion as NCDs which give them one more avenue to raise capital,'' said Singh.

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