Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Banking: Budget pros and cons - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Mar 5, 2001

    Banking: Budget pros and cons

    The current budget had the maximum announcement for the banking sector. Overall, the changes proposed by the Finance Bill, 2001 are positive for the banking and financial services sector as it aims to improve asset quality, provide more freedom & autonomy in the functioning of banks and move to reduce interest rates.

    We present here changes announced in the budget for the sector with impact analysis.

      Positives for the sector:

      1.  Reduction in tax rate:
      The tax on distribution of dividend has been reduced from 20% to 10%. Further, removal of surcharge (10%) will contribute in enhancing banks' profit growth as analysed in the following table.

      (Rs m) No. of Current Savings per share New % addition
        shares (m) EPS (Rs) Dividend tax Corporate tax EPS (Rs) to profits
      HDFC Bank 243 8.6 0.2 0.5 9.26 7.7%
      ICICI Bank 197 5.3 0.2 0.2 5.67 7.0%
      SBI 526 40.4 0.6 1.5 42.46 5.1%
      Bank of India 639 2.2 0.1 0.2 2.53 14.8%
      ICICI 785 15.4 0.6 0.2 16.20 5.2%
      HDFC 119 39.6 1.2 0.6 41.34 4.4%

      2. Cut in small saving interest rates:
      A 1% to 1.5% interest rate cut in small savings indicates diversification of funds towards the banking sector. Rate cut in small savings is positive for banks as they normally maintain a high rate of interest on deposits in order to match the returns offered by the government to the small savers. Also, relatively high interest rates on NSC and on PPF prevented banks from lowering term deposit rates. A rate cut in small saving rate is positive for banks as now they will be able to reduce their deposit rates, which could lead to a marginal improvement in their interest spread. Banks are also facing stiff competition from mutual funds in re-pricing the deposit rates. Lower interest rates regime will now create an equitable climate for bank deposits.

      3. More autonomy:
      With the removal of banking service recruitment board, individual banks can now have autonomy to recruit employees for the bank. This is likely to enhance the skill level in banks and will also bring operating efficiencies. This could be considered as a stepping stone for divestment of the public sector banks.

      4. Boost NPL recovery:
      Greater emphasis is given on recovery of non-performing loans (NPLs). Number of debt recovery tribunals (DRTs) to be increased from 22 to 29 to facilitate speedy recovery of dues of banks and financial institutions (FIs). Net NPL for the banking system is down to 7.4% in March '00 (from 14.5% in March '94). The measures initiated will lead to further improvement in the quality of assets for the banking sector.

      5. Repealing SICA:
      This will facilitate recovery of bad debts by banks and FIs, having a positive impact on their NPAs. Further, introduction of a legislation to facilitate foreclosure and enforcement of securities, in cases of default will enable institutions to realize their dues.

    The cut in bank rate a few days ago led to some banks affecting a cut in their PLRs but most banks refrained, as they could not reduce the deposit rate. Such an act of reduction in the lending rates would have put further pressure on the already strained margins. However, this will lead to an increase in the value of bank's investment portfolios and present an opportunity to book profits.

      Negatives for the sector:

      1. TDS on deposits:
      Currently if the interest on deposits exceeds Rs 10,000, tax at the rate of 10% is deducted. The government has now reduced this limit to Rs 2,500. This may lead to further splitting of deposits and some flight of deposits away from the banking system. With the lowering of dividend tax on mutual funds to 10% their relative attractiveness has also increased. Investors could divert their funds from fixed deposits to mutual funds to save tax.

      2. Reduction in limit u/s 80L:
      Tax exemption limit of Rs 12,000 on interest on fixed deposits has been reduced to Rs 9,000. This is likely to have a negative impact on inflow of retail deposits to the banks. Investors may shift to other competing products like debt mutual funds.

      3. Imposition of service tax:
      Most of the following specified services do not form a large proportion of the business on banks.

      • Financial leasing including equipment leasing and hire purchase by a body corporate.
      • Credit card services.
      • Merchant banking services.
      • Securities and forex broking.
      • Asset management, portfolio management, mergers & acquisition, pension fund management, custodial depository and trust services (excluding cash management).
      • Provision and transfer of financial information and data processing.

      As a result imposition of 5% service tax is not expected to impact their bottomline in a significant manner. For ICICI and Kotak Mahindra, leasing service is reasonably large. However, the service tax is unlikely to impact volumes. It is not likely to have major impact on their earnings, as it will be passed on to customers.

        1. Insurance of Kisan credit cards:
        This will be negative for state-owned banks like SBI as they will be bearing the burden of insurance premium. However, this negative is heavily outweighed by the above-mentioned positives from the budget.

        2. Clarification on VRS amortisation:
        A new section, 35 DDA, has been inserted in the Income Tax Act, which issues clarification on VRS expenditure. The section allows amortisation of VRS expenses over five years beginning from the fiscal year 2002. In other words tax deduction will be allowed only for the one fifth of the total expenditure every year starting from fiscal year 2002 and not before that. Banks, which had intended to charge their VRS expenses at one go may now wish to write them off over five years for tax benefits. Banks will not be able to realize the tax benefits in one year, which will effectively increase the time value of benefits. Had the banks charged off the expenses in the current year, the visibility of savings in wage cost and thereby profitability would have been better from next year.



      Equitymaster requests your view! Post a comment on "Banking: Budget pros and cons ". Click here!


      More Views on News

      IDFC Bank: Strong Trading Income Shields Credit Slowdown (Quarterly Results Update - Detailed)

      Aug 10, 2017

      IDFC Bank is taking steps to address contracting NIMs and successfully transition in to a retail bank.

      ICICI Bank: Loan Slippages Trending Downwards (Quarterly Results Update - Detailed)

      Aug 10, 2017

      Asset quality will be the key thing to watch out for going forward.

      Axis Bank: Outside Watchlist Slippages a Big Worry (Quarterly Results Update - Detailed)

      Jul 31, 2017

      Almost 74% of the watchlist as provided by the bank of Rs 226 billion in FY16 has turned into non-performing assets.

      Should You Take SBI Chief's Advice and Load up on SBI Shares? (The 5 Minute Wrapup)

      Jul 6, 2017

      Does the stock score on the value versus price equation?

      AU Small Finance Bank Ltd. (IPO)

      Jun 27, 2017

      Should one subscribe to the IPO of AU Small Finance Bank Ltd?

      More Views on News

      Most Popular

      A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

      Aug 10, 2017

      Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

      The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

      Aug 8, 2017

      'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

      Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

      Aug 8, 2017

      Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

      Signs of Life in the India VIX(Daily Profit Hunter)

      Aug 12, 2017

      The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

      Bitcoin Continues Stellar Rise(Chart Of The Day)

      Aug 10, 2017

      Bitcoin hits an all-time high, is there more upside left?

      Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
      Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

      LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

      SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

      Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
      Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 21, 2017 11:17 AM