Banking: Budget pros and cons - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Banking: Budget pros and cons

Mar 5, 2001

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

7 Stocks that Mutual Funds Can't get Enough of (Views On News)

Dec 1, 2021

Come hell or high water, these are the top Indian stocks which mutual funds never leave.

5 Indian Banks with the Lowest NPAs. Here's How they Did It... (Views On News)

Sep 27, 2021

These banks have managed to maintain their asset quality even in the middle of a pandemic.

PNB Reports an Over Three-Fold Jump in Net Profit as Provisions Fall (Views On News)

Aug 3, 2021

The reduction in provisions for bad loans and asset quality stability may have aided the lender's earnings.

Here's Why IndusInd Bank's Net Profit Doubled in the June Quarter (Views On News)

Jul 28, 2021

All you need to know about the latest quarterly results of IndusInd Bank.

Axis Bank's Stock Falls as Results Disappoint on Asset Quality (Views On News)

Jul 27, 2021

Axis Bank's net profit more than doubles on a spike in other income and lower provisioning.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.

5 Indian Companies Embracing Blockchain Technology (Views On News)

Nov 23, 2021

Blockchain adoption in India was slow in the past. Now, the technology is being well received.

More

Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Dec 3, 2021 (Close)

S&P BSE BANKEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS