With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds.
The revived credit offtake (both from the food and non food segments) and technological reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel accord, the sector is also looking forward to consolidation and investments on the FDI front.
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Mr. Anuj Kumar (Head - Strategic Planning, Centurion Bank)
Clarity on FDI in private banks
Clarity on voting rights in private banks
Risk weightages for Capital Adequacy purposes should be moved closer to Basel II norms
Rationalisation of tax structures - simplify direct taxation and push implementation of VAT
Reduction of subsidies and non infrastructure spending to bring the fiscal deficit under control |
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CII and FICCI
Voting rights should be made pari-passu with the shareholding in private sector banks
Encourage consolidation, allow private banks the benefit of carry forward and set off of accumulated losses
Permit banks to raise long-term funds and exempt these from SLR and CRR
Allow deduction for initial contribution of capital by banks in asset reconstruction companies (ARCs) and exempt ARCs from tax
Reactivate project financing by strengthening development financial institutions so that long-term funds are available for 10-15 year duration to the corporate sector at a lower 5-6% interest rate |
| Budget 2002-03 |
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Budget 2003-04 |
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Budget 2004-05 |
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| Cut in most administered interest rates by 0.5% (by 50 basis points) from March 1, 2002.
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. |
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The FDI limit in private sector banks has been raised to 74% from the existing 49%.
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%. |
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The government proposed to double credit to the agriculture sector in the next three years.
Significant emphasis on making credit available towards infrastructure development.
Inter-institutional group comprising select banks and financial institutions incorporated to ensure speedy conclusion of loan agreements for infrastructure projects. Nearly Rs 400 bn will be kept aside by this consortium for infrastructure support.
Task force to be set up to explore reforms in the cooperative banking sector.
Securitisation Act to be amended.
FDI in the insurance sector to be hiked from 26% to 49%. |
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[Read more on Budget 2004-05] | |
| Key Positives |
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Amendment to Securitisation Act: The amendment proposed to make it mandatory for borrowers who prefer an appeal to the Debt Recovery Appellate Tribunal (DRAT), to deposit upfront 50 % of the amount decreed by the DRT (Debt Recovery Tribunal). However, the DRT can reduce the upfront payment to 25 per cent. The said amendment reduced the possibility of defaulters delaying the recovery process through frivolous appeals. |
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One time transfer of assets from AFS to HTM: The RBI initiated one time transfer of investments from AFS to HTM category safeguarded the banks' investment portfolio to the vagaries of the interest rate movements. |
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Tax breaks for consolidation: The finance ministry proposed amendments in the tax laws to offer tax breaks under section 72A in all involuntary amalgamations of banking companies- that are initiated through the action of RBI. Tax breaks will also be offered to FIs merging with banks. |
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Higher margin on advances against shares: To reiterate its concern over the huge FII inflows and hinting at its possible "temporary" nature, RBI has increased the margins on all advances against shares from 40% to 50%. The regulator has also advised banks to raise the minimum cash margin of 20% to 25%. The move is aimed to protect banks that fund investments, against a sharp drop in share prices. |
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FII limit from 20% to 49% in PSU banks: MoF is considering raising the FII limit from 20% to 49% - the maximum possible in PSU banks, so as to allow PSU banks to issue ADRs and GDRs while keeping the overall government equity limit of 51%. Overseas listing will not only bring better transparency and efficiency in the banks' operations but also enable the banks access global capital markets at competitive rates. |
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Clarity on the risk evaluation front: RBI's draft guidelines for implementation of Basel II in India clarified the ambiguity that was persisting on the 'approach' to be adopted for risk evaluation. Keeping in view the goal to have consistency and harmony with international standards, the RBI decided that all banks in India should adopt ' standardized approach' for credit risk and 'basic indicator approach' for operational risk. | |
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| Key Negatives |
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Liquidity crunch: The SEBI dictate that Mutual funds will not to be allowed to invest in bank deposits might create liquidity crunch for the banks in the short term, forcing them to accept deposits at higher rates and paring their interest margins. |
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Hike in wages: The 8th bipartite wage settlement that paved the way for 13.25% hike in wages has caused accumulation of huge arrears to the tune of Rs 66 bn to be paid to the bank employees across the industry. The hike in wages was more than what the banks had expected and provisioned for and therefore the entities will have to provide for them in the coming quarters. |
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Interest rate dampener: The interest rate movement in the short term is likely to be with an upward bias. Although a marginal hike will not trigger any sensitivity, an upward movement in inflation, leading to a parallel rise in interest rates may put the current credit growth on hold. |
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Impediments in sectoral reforms: The hike in the FDI cap in private banking sector to 74% and a revision in the voting rights to make it commensurate with equity holding were expected to bring sea changes in the Indian banking scenario. However, opposition from Left and resultant cautious approach from the North Block may hamper the reforms to materializing in the near term. | |
Budget 2005-06: Complete Coverage
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