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Budget impact - Banking

Jul 10, 2014

Financial sector lies at the heart of the economy's growth engine. And banks are central to this growth. No wonder, the bank sector has garnered a fair share of spotlight in the NDA's maiden Union Budget.

Recapitalizing banks - but not with taxpayer money

Citing that financial stability is the foundation of a rapid economic recovery, greater emphasis has been laid out on strengthening the banking sector in the budget. The PSU banks would require Rs 2.4 trillion fund infusion by 2018. This would be necessary to be BASEL III complaint as well. Therefore, additional resources are expected to be raised in order to meet this huge capital requirement. The Budget has clarified that the capital for these banks will be raised through the sale of shares in banks to retail investors. This in turn will help government retain its majority shareholding in banks, without parting with precious tax payer funds.

In what could be termed as stand out proposition in the budget, the FM has agreed to provide additional autonomy to PSU banks. Now that's the need of the hour, we reckon. The government will also consider consolidation of PSU banks.

Furthermore, the RBI is also expected to undertake the responsibility of creating a framework for licensing small banks and other differentiated banks. Differentiated banks are local area banks that serve niche interests and are expected to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force. Private sector as we know is all set to see entry of new banks. The FM in its budget has ensured continuous authorization of universal banks in the private sector in the current financial year.

The budget has also laid out plans to help banks to fulfill the priority sector lending (PSL) targets. And so also to create infrastructure in agriculture and rural sectors across the country! In this regard, it has proposed to raise the corpus of Rural Infrastructure Development Fund (RIDF) by an additional Rs 50 bn. The target given in the Interim Budget stood at Rs 250 bn in the current financial year.

Focus on Insurance...

Further, taking into account the wide network of bank branches and the low penetration of insurance in the country, the budget spelt out that banks would act as business correspondents to sell/cross-sell insurance products. So while the insurance companies may give thumbs up to these decisions, banks with insurance subsidiaries would also largely benefit.

Infrastructure- a direct beneficiary

It's no news that the infrastructure development has remained the core of the NDA government's agenda since day one. Hence, undoubtedly, the budget has laid out plans of encouraging banks for long term infrastructure lending. To that effect, the banks would be permitted to raise long term funds to lend to infrastructure with minimum regulations (such as exemption from CRR, SLR and PSL). Here, not only the infra sector would be a direct beneficiary, but this would step-up bank credit too.

Subsidized funds for farm sector

Likewise, agriculture sector too receives major boost from the banks. To maintain a continuous flow of strong credit support, it is budgeted to provide Rs 8 trillion farm credit in FY15. In addition, the interest subvention scheme for short term crop loans will continue. Under this scheme, the banks extend loans to farmers at a concessional rate of 7%. Moreover, an additional 3% interest subsidy on farm loans has been proposed in the budget. That this would provide relief to the farmers and boost the agricultural sector going forward is imminent.

Relief to the lenders...

The rising non-performing loans of public sector banks has remained a matter of concern for one and all. In this regard, the government has proposed to set up six debt recovery tribunals at Chandigarh, Bengaluru, Ernakulum, Dehradun, Siliguri and Hyderabad. The government has proposed to work out effective means for revival of other stressed assets. In a stressed environment, faster recovery of bad loans would provide significant relief to the banks.

Some of the proposals listed above would have a positive effect on the banking sector over the longer term. For the PSU banks in particular, additional capital headroom and greater autonomy could mean a valuation re-rating over a period of time.

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