EFFECTS OF DEMONETIZATION ON THE FINANCIAL SECTORs OF INDIA

By The Editorial Board of TJEF

(Anil Shankar, Gandhali Inamdar and Isha Varma)

Introduction

Demonetization has been the buzz word since November 8th 2016 when our Prime Minister made the historic announcement about the decision to discontinue the 500 and 1000 rupee notes. This historic decision has affected almost all the sectors. Some have benefited while others have suffered. This paper intends to analyze the effects of demonetization on the major financial institutions and the Indian economy in general.

Effects of Demonetization on Banking sector

Since the advent of asset quality review (AQR), there has been a rise in the number of NPAs. To get an idea, the GNPA of banks is 6 lakh crore as of June, 2016 which is 8.2% of the total loans1. These are only the NPAs as there are an equal number of restructured loans which might transform to NPAs in future.

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Figure 1: Total NPAs as of March 2016, Source: Finance Ministry

A recent data provided by the Finance ministry, which has been depicted in Figure 1, shows that 5.3 lakh crore of the 6 lakh crore NPAs are under the public sector banks. It’s clearly visible that there has been a rise in the NPAs from October 2015. This can be attributed to the ever greening of loans which led to the creation of a distorted picture of the banks. Though the asset quality review led to the identification of such NPAs which were previously classified as standard, the problem of NPAs existed since the 2008 financial crisis but remained hidden due to the above mentioned reason.

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Budget Impact Analysis – Auto Sector

By Dhanyakumar M H

Expectations from Industry:

  • Cut in corporate tax from 30 to 25%
  • Implementation of the vehicle scrappage scheme
  • Incentives for hybrid and electric car production to be extended
  • Removal of connection between size of car and tax
  • Push for infrastructure to offer a quality road in the long run

What Budget has to offer?

  • Personal Income tax:
    • Increase in zero income tax slab from 2.5 lakh to 3 lakh
    • Reduction in income tax from 10% to 5% for income between 2.5 to 5 lakh

Increases in household disposable income. Provides a boost to first-time auto buyer preferably two-wheeler or entry level car.

  • Infrastructure development:
    • Better the infrastructure in the country, is an incentive and encouragement for Auto Industry
    • Budget is seen as a pro-development and this would boost the sales of MHCV, HDCV and heavy equipment
  • Goods and Service Tax:
    • Implementation of GST is confirmed, but there was no message to Auto industry regarding the removal of the link between size and taxation.
  • Rural Income and Agriculture:
    • Mission of doubling farmer income would help increase the disposable income
    • Interest waiver for 60 days due to the impact of demonetization is a welcome move
    • Expected to see a 4.1% increase in Agri output

Increase in rural income would help two wheelers, tractor and entry level car manufactures. It may also help an LCV segment of commercial vehicles.

  • Market Reaction: Advance in stocks
    • Bajaj Auto, Hero Motocorp and TVS Motor
    • M&M, Maruti Suzuki, Eicher Motors, Tata Motors and Ashok Leyland
    • Escorts and VST Tillers
    • Auto Ancillaries are also shown an advancement in stock prices

Conclusion:

Overall the budget has not met the expectation of the auto industry and there was no surprise as well. But the move towards reducing personal income tax and push for rural India is welcomed. As this would increase the disposable income, industry expects an increase in sales of two wheelers, tractors, entry level cars and finally MHCV & HDCV because of push to infrastructure development. Industry is hoping to see more revival post GST implementation as there will be zig-zag in tax structure.

Budget Impact Analysis – Banking & Financial Sector

By Payal Sachdeva and Tuhina Kumar

Expectations

  1. Increase in tax concessions on bad loan provisioning as the Asset Quality Review by RBI has led to a steep increase in provisioning.
  1. The total requirement of capital infusion by banks till march 2019, as gauged in 2015, is 1,80,000 crores out of which the government has committed to allocate only 70,000 crores under the Indradhanush plan. The rest is expected to be raised by the banks from the markets. This may be difficult due to low valuation of the banks.
  1. Disinvestment in PSU banks to below 51% to help raise capital.
  1. Higher allocation to infrastructure, housing and urban development as a boost in the commodity sector would improve the banks’ asset quality.
  1. Provide a roadmap of incentives for a digital push.
  1. Enhance capital expenditure for credit demand revival.

Announcements made in the Budget

  • Abolishment of FIPB: The Foreign Investment Promotion Board (FIPB) will be abolished in 2017-2018. FIPB is the body responsible for approving FDI proposals which are not cleared through the automatic route. Since 90% of the FDI inflows are through automatic route, the government has taken up this measure. Also, it focusses on ease of doing business.
  • Housing Finance:  Under the government’s aim to provide housing for all by 2020, the government proposed various measures. National Housing Bank (NHB) will refinance loans worth 20k crore in 2017-2018. This move saw a rise in stocks of HDFC (3.6%) and LIC Housing Finance (2.78%).
  • Tax relief on Masala Bonds: The government has announced that the rupee-dominated offshore bonds, called masala bonds will be subjected to a lower tax deducted at source (TDS) of 5%. This would be applicable retrospectively from 1st April 2016. This has been done to provide relief arising due to the appreciation of rupee against a foreign currency.
  • Law on Money Laundering: To curb money laundering by high net worth individuals via fake long-term capital gains, the government has tightened the screws on long-term capital gains. Only those equity investments are eligible for long-term capital gains where securities transaction tax (STT) has been paid.
  • Move to attract FPI: In order to attract funds from FPI, the finance minister made a proposal to exempt category I and category II FPIs from the provision of indirect tax transfer. Category I foreign portfolio investors include foreign central banks, sovereign wealth funds, and government agencies.
  • Recapitalization of banks: The government is going to infuse 10,000 crores out of the 70,000 crores committed under the Indradhanush plan for recapitalization of banks.
  • Set up PARA: An idea to set up a centralized Public Sector Asset Rehabilitation Agency (PARA) that will take over banks’ largest and the most challenging bad loans. PARA will help reduce NPAs and restructured loans.
  • Amendment in SARFAESI Act: The amendment in the SARFAESI act will allow listing and trading of security receipts issued by securitization company or a reconstruction company on SEBI-registered stock exchanges. This will boost capital flows in the securitization industry and aid in dealing with NPAs.
  • Mudra Yojana: The Pradhan Mantri Mudra Yojana has been allocated 2.44 lakh this fiscal as it exceeded the target of 1.22 lakh crore allocated in the year 2015-16.
  • Attempt to push Digital Economy: In an attempt to promote digital transactions in the Indian economy, the allocation to BharatNet Project has been increased by Rs 10,000 crore in 2017-18 which will connect 150,000-gram panchayats with high-speed broadband. Also, BHIM, an Aadhaar-based mobile wallet, would be promoted under two schemes, a referral bonus scheme for individuals and a cashback scheme for merchants.
  • The Role of SIDBI: Moreover, the government wants to ease loan disbursement, where the Small Industries Development Bank of India (SIDBI) would refinance credit institutions for extending unsecured loans to borrowers at reasonable interest rates based on their digital transaction history.

Conclusion

The government has met most of the expectations except for more capital infusion in the banks.  Thus, markets reacted positively to the budget and financial stocks shot up. Both Nifty and Sensex closed at a 3-month high of 28000 and 8700 respectively.

Stock Recommendation

The government’s move towards affordable housing is likely to push CanFin Homes as its loan portfolio is skewed towards the same.