The Global Financial crisis in FY09 has fundamentally changed the structure of banking and financial markets the world over. The Banking and Financial Sector in India has provided stable economic environment and acted as the growth engine for the economic development of the country during the period of global slow down. The Finance Minister said that the Indian banking system has emerged unscathed from the crisis. Meanwhile, he expressed the need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy and improve access to banking services.

Some of the provisions in the budget that could have a direct and indirect bearing on the Banking industry are as follows-

Budget Provisions

• The Government proposed to provide Rs 16500 crore to Public Sector Banks to ensure that they are able to attain a minimum 8% Tier-I capital by 31 March 2011. Of that total 16500 crore, Rs 1500 crore is provided for subscription to Tier-I instrument for capitalization of Central Bank of India, UCO Bank, Vijaya Bank and United Bank of India.
• Government proposed to provide additional capital to RRB's to support increased lending to the rural economy.
• The Central bank is considering additional banking licenses to private sector players. The Non Baking Financial Companies (NBFC) may also be considered if they meet the RBI's eligibility criteria.
• With a view to strengthen and institutionalize the mechanism for maintaining financial stability, the government has proposed to set up an Apex level Financial Stability council. This council would monitor macro prudential supervision of the economy including functioning of large financial conglomerates and address inter regulatory coordination issues.
• Government targets a net borrowing figure of Rs 345010 crore for FY11, as against 398000 crore for FY10.
• Credit flow into the agricultural sector has been targeted at Rs 375000 crore for FY11.
• The government has allotted Rs 700 crore for payment of subsidy to nodal agencies i.e. Reserve Bank of India and National Housing Bank, so as to provide 1% interest subvention on housing loans up to Rs 10 lakh. The interest subsidy will be routed through the scheduled commercial Banks and the housing finance companies registered with National Housing Bank. The interest subsidy will be available for a period of one year.
• The debt wavier and Debt Relief Scheme for farmers, for repayment of the loan amount has been extended by six more months from 31 December 2009 to 30 June 2010.
• As a part of Agricultural Financial Institutions, the Government has granted Rs 984.65 crore through National Bank for Agriculture and Rural Development for strengthening cooperative Credit Structure.
• The government has provided Rs 12000 crore for releasing funds to lending institutions against debt waiver and debt relief to farmers. This also includes provision for payment of interest to lending institutions.
• The present effective domestic corporate tax rate of 33.99% has been reduced to 33.22% in case of income exceeding Rs 1 crore, as a result of reduction in surcharge from 10% to 7.5%.
• Minimum Alternate Tax (MAT) rate for domestic companies is increased from 15% to 18%.
• The Government proposes to introduce GST and DTC from April 2011.
• The Government is intending to formalize a symbol for Indian Currency, which would capture the country's ethos and culture.

Budget Impact

Although the net government borrowings have declined, the government has rolled back Central Excise duty on all non petroleum products from 8% to 10% advalorem, restored basic duty of 5% on crude petroleum, 7.5% on diesel and petrol and 10% on other refined products. Further, central excise duty on petrol and diesel is enhanced by Rs 1 per liter each. All the above steps are set to increase the inflation further which is already hovering at 14 months high (8.6% - for January 2010); thus pushing RBI to take monitory measures in its next review.

Even at the point of serious discussion on consolidation of Banking industry, RBI's consideration of allotting new banking licenses to private sector players along with NBFC's has cheered the Private players. However, this move is likely to impact banks, as there would be more chase for low cost deposits which would impact CASA and market share of the deposits of the banks. On the other hand, many of the unbanked area can be covered if the licenses were given to the organizations having focus on the rural regions.

Capitalization of Public Sector Banks and Regional Rural Banks will make them stronger so that they have adequate capital base to support increased lending to the economy as well as to provide stable banking system. Banks like Allahabad Bank, UCO Bank, Dena Bank, State bank of India and Syndicate bank may be the key beneficiaries which can tide up the capital requirements.

Outlook

The incentives to the farmers in the form of debt relief and interest subvention may not bring much of negative impact on the sector, as it allow banks to write off their sticky loans on their loan books. The capitalization of public sector banks is also a welcoming note to the PSU Banks.

The Finance Minister has projected that the fiscal deficit for FY 2011 will come down to 5.5%, compared to 6.7% in FY 2010. This has brought down the net borrowing for the current fiscal compared to the previous fiscal. The Government of India has projected the net market borrowing for FY 2011 at Rs 345000 crore compared to 398000 crore in FY 2010. The RBI has also hiked CRR by 75 bps to 5.75% in its latest monitory policy, which is fully effective from 27 February 2010. This is set to absorb nearly Rs 36000 crore of excess liquidity from the market. However, on the macroeconomic front, the government has paved inflation to spiral up in the coming months with the increase in the excise duties and increase in the petrol and diesel prices. This pressurizes RBI to take monetary measures so as to curtail the inflation and thus impact the banking sector. By and large, Budget has not given any big surprises to the Indian Banking Industry.

But the inflation is already higher, and may increase further due to hike in fuel prices and also due to pass through effect of hike in excise duty from 8% to 10%. This will affect the yields on government securities in general and short to medium term papers thereof in particular, and affect the treasury income of the banks.

Powered by Capital Market - Live News