Banks to benefit from FM's proposals

As per the common minimum program (CMP), the budget has focused a lot on the need to improve credit to the agriculture sector and banks will be at the forefront of disbursing credit. Vagaries of monsoons impact the agriculture sector heavily and banks are vulnerable if monsoon fails. Also, the RBI has released new guidelines for banks with regards to agricultural lending. However, it is too early to ascertain the impact. The impact of these initiatives by the government will only be apparent over the long-term.

Banks are likely to benefit from increased lending to the infrastructure sector. This will come about in two ways i.e. direct equity participation and indirectly (corporates borrowing for expanding capacity). While this would provide an impetus to core advances of banks, the quality of such advances is likely to be better. In this light, there is relatively less NPA risk.

Reforms in the banking sector in the form of amendments to the Securitisation Act may strengthen the backbone of the financial sector.

A hike in the FDI in the insurance sector is likely to significantly raise investments in the nascent insurance sector. Domestic banks like ICICI Bank, ING Vysya, Kotak Bank and SBI who have joint ventures with international insurance majors will be able to infuse more capital into their insurance business. In the future, there may be an opportunity for these domestic banks to unlock value from such investments as well.

The banking and finance sector is witnessing a revival in credit offtake from the non-food segment. Also, with the government emphasizing on the need to boost credit to the agriculture sector, the issue of NPAs could resurface. While we believe that overall credit growth is likely to move into a higher growth trajectory as compared to the past, not all banks will be able to reap the benefit from such sector trends. In the past, falling interest rates have helped most public sector banks to significantly improve their profitability owing to large profits from trading activities. With interest rates expected to harden, these profits may dry out, thus affecting profitability. Investors need to tread cautiously at this stage, as only a few banks will be able to balance the growth prospects together with the emerging concerns in the sector.

Abolition of tax deducted at source on bank fixed deposits.

Increase in the foreign investment limit in Private sector banks to 74% and state run banks to 49%.

The Indian Banking Association (IBA) has suggested the relaxation for listed banks and financial institutions from adhering to accounting standards not synchronous with banking operations. (Globally there is separate set of accounting standards for banks under IAS - 42).

Tax benefits allowed to individuals in respect of housing loans may be continued.

Cut in small savings rates 1-1.5%

Limit for TDS on deposits reduced to Rs 2,500 from the current Rs 10,000.

Abolishment of banking service recruitment board

Setting up of Asset Reconstruction Company by June 2002.

Banks are now allowed to deduct 7.5% of their total income against provisions made by them for bad and doubtful debts.

Banks are given option to deduct up to 10% of their non-performing assets (NPAs) falling in the category of loss or doubtful assets from total income.

Bill on the banking sector reforms is to be introduced in Parliament.

Foreign banks permitted to operate in India with fully owned branches after the specific permission of RBI.

The SBI will have to lend at lower rates to the agricultural sector as well as SSIs. SBI will now offer loans in the range 2% above its Prime Lending Rate (PLR) or 2% below its PLR.

Tax exemption on interest on housing loans maintained at Rs 150,000 per year.

The government has agreed to buy back older government borrowing with high interest rates from banks.

Reduction in the interest rates on all small savings schemes by 1%.