Economic Survey 2020 has signs for what banks can expect from Nirmala Sitharaman's budget speech

• Chief Economic Advisor KV Subramanian's latest survey has a dedicated chapter for the country's banking sector.
• The report outlined the benefits of bank nationalisation that has been a topic of heated ever since the then Prime Minister Indira Gandhi ordered the move fifty years ago.
• This is yet another signal of how keen, or not, the Narendra Modi government is in selling stake in state-owned banks.
• "Existing unsold housing inventory can be cleared and the balance sheets of both bank/ non-bank lenders cleaned if the real estate developers are willing to take a ‘hair-cut’ by allowing the house-prices to drop," the survey said.

Chief Economic Advisor KV Subramanian's latest survey has dedicated a lot of time and space to delve into the problems, and possible solutions, of the country's banking sector.

The survey was generous in its praise for the nationalisation of banks, which was undertaken by Prime Minister Indira Gandhi in 1969. "In 2019, India completed the 50th anniversary of bank nationalization. It is, therefore, apt to celebrate the accomplishments of the 3,89,956 officers, 2,95,380 clerks, and 1,21,647 sub-staff who work in Public Sector Banks (PSBs)," the latest Economic Survey said.

However, this was a significant departure from the stance of the Narendra Modi administration's view on the issue so far. As recently as in 2017, Modi called the government ownership of banks 'Indira Gandhi's drama' and claimed that he has a chance to undo it.

Not the first applause for nationalisation

But Subramanian is not the first person from the Modi government to laud the role of public sector banks, while a big chunk of the Bharatiya Janata Party's vote bank, especially corporate India and market participants, have been pushing the government move to privatise more. Recently, even trade minister Piyush Goyal batted for the state-owned banks saying 'privatisation' may not be the panacea.

If these were to be taken as a signal for what Finance Minister Nirmala Sitharaman may have her in her budget speech on February 1, it may be fair to expect additional capital for PSU banks, and very little in terms of stake sale.

As the survey highlighted, "In 2019, when Indian economy is the fifth largest in the world, our highest ranked bank—State Bank of India— is ranked a lowly 55th in the world and is the only bank to be ranked in the Global top 100."


There is support for disinvestment outside banks

A chapter in the Economic Survey analysed the performance of 11 public sector companies before and after they privatised between 1999-2000 and 2003-04. "Analysis shows that these privatized CPSEs, on an average, perform better post privatization than their peers in terms of their net worth, net profit, return on assets (ROA), return on equity (RoE), gross revenue, net profit margin, sales growth and gross profit per employee."


But just pumping money into PSU banks may not be enough

Budget 2019-20 announced an infusion of ₹70,000 crore into Public Sector Banks (PSBs) to boost credit and investment in the economy. As of November 2019, ₹60,314 crore has been infused from this provision.

India's government banks are so inefficient that the amount of money, ₹1.4 lakh crore, written off by banks is as much the country's total food subsidy. "Over ₹4,30,000 crore of taxpayer money is invested as Government’s equity in PSBs. In 2019, every rupee of taxpayer money invested in PSBs, on average, lost 23 paise," the report said. " In contrast, every rupee of investor money invested in “New Private Banks” (NPBs)—banks licensed after India’s 1991 liberalization—on average gained 9.6 paise."

This may be a cue for the government to tighten the leash on bankers before they can get their pound of flesh from the taxpayer's kitty.

Investment in digitising government banks

Not just that, there may be a push to bring these state-owned banks up to speed with investment in digital capabilities to make them more contemporary and allow them to compete with the more advanced peers from the private sector. "The survey suggests use of FinTech (Financial Technology) across all banking functions and employee stock ownership across all levels to enhance efficiencies in PSBs," Subramanian's report said.



If Sitharaman were pay heed to this advice, she may set aside a dedicated amount for the digital transformation of these banks. This will also provide an opportunity for the likes of Tata Consultancy Services (TCS), Infosys, HCL Tech, and Wipro, who have experience in similar projects that they have carried out for global firms in the banking, financial services, and insurance space.

There may be additional push for banks to increase lending

The share of corporate loans in non-food credit peaked in 2013. The subsequent decline led to the economic slowdown 2017 onwards. Fall in credit starts showing in GDP growth four years later, Subramanian said while explaining his report.

Here's market veteran Vallabh Bhanshali of ENAM Group, explaining the impact of lack of credit on the economy.


Boost home sales to save banks

The Economic Survey also highlighted the mess in India's real estate. While the demand for new homes has been sliding, the builders are struggling to repay loans, the prices of apartments have barely moved down.


Any push to expedite repayment of loans may be bad news for builders but a great move for potential home buyers who are sitting on the fence. "Existing unsold housing inventory can be cleared and the balance sheets of both bank/ non-bank lenders cleaned if the real estate developers are willing to take a ‘hair-cut’ by allowing the house-prices to drop," the Economic Survey said.

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