X

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: Betting on reforms - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Mar 23, 2002

    Banking: Betting on reforms

    While the budget has curtailed fiscal concessions for other sectors, it has extended benefits to the banking sector. Even though the quantum of concessions given to the sector may not benefit it directly, itís a step in the right direction to improve the structural problems faced by the banking industry.

    The biggest challenge worrying the sector today is, the availability of quality assets. The gross non-performing assets (NPAs) of the public sector banks escalated to Rs 566 bn as on September 2001 from Rs 548 bn on March 2001 and Rs 530 bn on March 2000. Rising NPAs not only reduces the sectorís yield on advances but it also has an adverse impact on profitability of banks. Although public sector banks possess rich branch network and manpower, their resources remains underutilized. Inefficient debt recovery tribunals, unclear foreclosure and bankruptcy laws discourage banks to make optimum utilization of their resources.

    NPA analysis
    Growth in gross NPAs Net NPAs as a % of advances
    Particulars FY00 FY01 FY00 FY01
    Public sector banks 2.60% 3.20% 7.40% 6.70%
    Private sector banks 2.30% 26.80% 5.40% 5.40%
    Foreign banks 10.90% 17.50% 2.40% 1.90%
    All SCBs 2.90% 5.80% 6.80% 6.20%
    SCBs: Schedule commercial banks

    To help the sector in dealing with the menace of NPAs, the government has clubbed together three separate bills on foreclosure, securitisation and ARC (asset reconstruction company) into the Banking Sector Reforms Bill. The proposed bill is expected to clear the way for the assets reconstruction companies to tackle the growing problems of NPAs on which banks are yielding no income. An ARC would buy NPAs from banks, securitise it and sell it to the potential investors. The proposed ARC will be a pilot project. The equity participation for the proposed ARC is being worked out with banks, FIs and multilateral agencies. The idea of roping in multilateral agencies like Asian Development Bank (ADB) and International Finance Corporation (IFC) in the ARC is to attract foreign investors in the upcoming market for securitised NPAs. The benefit of these moves, however, depends on how soon and effectively these plans are implemented. If ARC is going to depend on the staff deputed by weak banks, its recovery chances for NPAs are doubtful.

    Increasing the allowance for bad and doubtful debts from 5% to 7.5% of net profits of banks (before provision) would encourage banks to clean up their accounts by going for accelerated provisioning. The measure is expected to benefit banks with large-scale operations and with higher operating margins, as they will save more taxes compared to a bank with lower operating margins. However, as a proportion of net profits, the taxes saved will remain at around 1% of net profits for all banking companies.

    Another indirect advantage given to the sector was introduction of dividend tax. Banks are likely to benefit from the removal of the tax-efficient status of debt schemes of mutual funds, which benefited investors in the higher tax brackets. Short-term debt mutual funds have received large inflow of funds in the last two years. But liquid and money market mutual funds would now no longer be attractive with the removal of tax saving opportunity. Consequently, these funds are expected to flow into the banking system, which will lower cost of funds for banks.

    The reduction of small savings rate by 50 basis points and proposal to link these rates to yields on government securities would remove structural rigidities in interest rate administration for the economy as a whole. It will provide a level playing field for the banks with flexible interest rate regime. Also the ceiling of Rs 200,000 on Government of India relief bonds will bring back investors to banks fixed deposits.

    To improve the efficiency of the sector, the budget has opened up the sector for foreign banks. The Government of India has given an option to foreign banks to either operate as branches of their parent or to set up subsidiaries. In case a foreign bank decides to operate as a subsidiary it will have to adhere to all banking regulations, including priority sector lending norms, applicable to Indian banks. On the one hand priority sector lending norms for foreign banks will increase to 40% from 32%, on the other, they will have an advantage in terms of widening their reach. Foreign banks are presently required to take a branch licence before opening a branch. But now under the proposed subsidiary set up, they will have to only inform the apex bank. The government is also proposing to relax the maximum ceiling of voting rights of 10% for such subsidiaries. This move is expected to increase the penetration of foreign banks in India, leading to healthy competition in the banking system. Several foreign banks operating in India may choose the subsidiary route for the benefits it offers in terms of geographical expansion and lower taxes. The subsidiary route would also make the consolidation process easier. Permitting higher foreign direct investment in the private sector banks will facilitate the consolidation process. However, it will increase competition for domestic banks particularly in the retail-banking segment.

    Significant steps have been also taken to develop the debt markets. Banks are one of the most active players in the government securities (G-Sec) market. The transactions in this market are conducted either through telex or on phone. However, the introduction of negotiated dealing systems (NDS) will facilitate electronic bidding in auctions and secondary market transactions in G-Sec. It will also help in dissemination of information on trades on a real time basis, which was hitherto not available. The launch of Clearing Corporation of India (CCIL) will address the need for efficient securities settlement system. These measures will widen the breadth of the markets, providing liquidity to the banking system.

    The government is initiating measures to make the sector globally competitive. However, its results will be reflected only in the long term. Falling interest rates have impacted the sectorís performance in terms of interest margins and profitability in the near term. However, with an expected revival in the economy, loan demand would pick up, reducing pressure on interest spread. Increase in government spending on roads and power sector, good agriculture growth, lower interest rates and recovery in commodity prices are some of the factors which would fuel the credit off-take.

     

     

    Equitymaster requests your view! Post a comment on "Banking: Betting on reforms ". 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?

    More
    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

    S&P BSE BANKEX


    Aug 18, 2017 (Close)

    COMPARE COMPANY

    MARKET STATS