Union Budget 2024: PSU bank stocks in focus amid expectation of capital infusion

Finance Minister Nirmala Sitharaman will present her seventh consecutive Union Budget on July 23. This will be the first budget under Prime Minister Narendra Modi’s third term in office. Like every year, public sector banks are expected to be in focus as they play a crucial role in providing financial stability to the economy while also facilitating capital formation.

Investors in the banking space would be keenly awaiting announcements on recapitalisation and privatisation of public sector banks in the Union Budget for FY 2024-25.

It is important to note that the chances of recapitalisation are less as the financial health of public sector banks has been consistently improving due to enhancements in asset quality and a rise in profitability.

No capital infusion for PSU banks since 2021-22

FM Sitharaman has not allocated capital to public sector banks in the past three Budget speeches. The government last offered capital support in FY 2021-22, when it allocated ₹20,000 crore for the recapitalisation of PSU banks. Before that, the Finance Minister had earmarked ₹70,000 crore as capital infusion for public sector banks in her 2019-20 Budget speech.

The final Union Budget 2024 will also include announcements about the privatisation of a few public sector banks.

Previously, Sitharaman had announced in Budget 2021-22 that the government intended to privatise two public sector banks, but no action has been taken on this announcement yet. Some media reports claim that smaller banks like Indian Overseas Bank and Bank of Maharashtra are on the government’s radar for privatisation, but there has been no official confirmation. Investors can expect some clarity on the government’s divestment plan for these lenders in the Union Budget 2024.

Fiscal deficit and borrowing targets to remain under watch

Markets will also examine fiscal deficit and borrowing estimates for FY 2024-25 before betting on public sector bank stocks. The Interim Budget 2024 has proven to be a shot in the arm for PSU banks, as the centre has lowered its fiscal deficit and borrowing targets.

Yields on government bonds had slumped, triggering a rally in shares of PSU banks as they reportedly hold a higher part of government bonds compared with private banks. A sharp drop in bond yields was a positive for the treasury portfolio of these banks.

If the government continues to show the same discipline on the fiscal deficit front, PSU banks can have more money on their balance sheets to use for their lending business.

Capex push could be a booster for public sector banks

The government’s push on infrastructure spending and capital expenditure can boost the corporate lending business of PSU banks, which would be a big positive for their share prices.

Tax relief may increase savings

On the deposits front, public sector banks are seeking tax relief from the government to mobilise more funds from the public. State Bank of India (SBI) chairman Dinesh Khara recently pitched for tax relief on the interest income earned by account holders. He said that any sort of relief on tax on the interest earnings can prove to be an incentive for depositors.

Currently, banks deduct tax on interest income earned on deposits (in all the bank branches) when it exceeds ₹40,000 a year. For a savings account, interest beyond ₹10,000 per annum attracts tax.

Banks are also seeking to bring fixed deposits (FDs) at par with other tax-savings instruments by reducing the lock-in for tax-saving FDs down to three years from five years. This may help lenders mobilise higher deposits, which can prove to be a major positive for shares of public sector banks.