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"I would rate the budget as good and realistic. " - Views on News from Equitymaster
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  • Feb 28, 2002

    "I would rate the budget as good and realistic. "

    Mr. P. S. Shenoy, Chairman and Managing Director, Bank of Baroda

    In an interview with Equitymaster.com, Mr. Shenoy gave his comments on the budget and its expected impact on the banking and financial sector.

    EQM: What are your comments on the budget? How would you rate it on a scale of 1 to 10?

    Mr. Shenoy: I donít think that I will be able to rate it on a scale of 10 just now. But I must say it is very good. It is a growth-oriented budget and bold steps have been taken like reduction on subsidies. Of course not withstanding the fact that the deficit is up. But reduction in the gap is a major step. I am very happy about it. The government as they say is biting the bullet. It is a very good sign that we are able to take hard decisions. Numbers wise there are many things that are good for the financial sector. Positive steps have been taken by increasing the outlay for the agricultural sector. The emphasis on infrastructure reforms especially for the power sector and roads is commendable. This will help credit off take improve that will be beneficial to us. For example, our bank had allocated Rs 50 bn for the power sector but we were not able to do anything with it due to lack of financial closure. The asset reconstruction company (ARC) being formed is also a good step. I was a part of the committee that recommended a model for the ARC. We will have to see what shape it takes. There is also a change in NPA provisioning that will be good for the banking sector. This will help the banks clean up their balance sheets and monitor NPAs. Then there have been steps like securitisation and foreclosure that are also positive.

    "Therefore, I would rate the budget as good and realistic. It is a hard decision making kind of a budget. "

    EQM: The administered interest rates have now been linked to the G-sec yields. Do you think that banks will revise their rates based on this?

    Mr. Shenoy: We will have to see the exact impact. The reduction was only 50 basis points. Actually the markets were expecting 150 basis points. Therefore, this may not move the market much. I do not see a cut in deposit rates. There may be a marginal cut of 25 basis points or so. However, the banks also need funds for the year-end and with deposits being on the lower side they might avoid cutting rates. If you look at the three-year rates for some banks, they are already as low as 7.2% to 7.5%.

    EQM: What would be the impact of allowing foreign banks to set up 100% subsidiaries in India? Do you think the competition will intensify for public and private sector banks?

    Mr. Shenoy: I donít think so. So many foreign banks are already coming into the country but many of them are closing also. Infact in todayís paper there was a mention of a foreign bank closing. 80% to 85% of the market share is still with the public sector banks. The foreign banks need to organize huge resources for success. It does not matter whether itís a subsidiary, 100% subsidiary or branches. How do these banks mobilize resources is the key factor for expansion. I donít think it is a significant threat to the public sector banks. The only threat for the public sector banks is technology upgradation. If that is done any kind of challenge can be tackled. Thus, it is not the structure but the ability to mobilise rupee resources.

    EQM: The government has not clarified on the FDI and FII issue on the banking sector? Could you interpret the same?

    Mr. Shenoy: If you see the RBI has relaxed the FDI investment in private banks to 49% and the cap for public sector banks is still at 20%. I think the investment for private sector banks of 49% includes FIIs also but I will have to look at it.

    EQM: Are you happy with the limit being 20% for public sector banks?

    Mr. Shenoy: Well, I had no expectations. What makes more sense to us is the reduction of government equity to 33%. That will be a major thing for us.

    EQM: The government had announced the reduction of its equity in the last budget. However, since then nothing concrete has happened. Any reasons for that?

    Mr. Shenoy: The bill is with the committee of the parliament. Once the committee clears it, it should be through. They have taken the necessary steps but it is taking time.

    EQM: Do banks pay higher interest to NRE deposits than domestic deposits?

    Mr. Shenoy: Earlier these deposits used have higher interest rates as they used to qualify for CRR exemptions. Since these exemptions have been taken out, it makes no difference. All rates are same now.

    EQM: Do you think will be you be able attract higher NRE deposits?

    Mr. Shenoy: I donít think so.



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