Post by bhumika on Jun 9, 2006 21:20:19 GMT 5.5
2006-07: Banking
Having witnessed historic growth rates in terms of credit offtake, the banking sector saw itself getting transformed from treasury income reliant to core income (NII) reliant in the previous year. The revived credit offtake (both from the food and non-food segments) and technological reforms paved the way for a change in the dynamics of the sector itself. However, liquidity constraints and capital shortage (for compliance with Basel II accord) posed encumbrances to the sector's margin and asset growth respectively. Consolidation and investments through the FDI route continue to remain in the sector's 'wish lists'.
Budget Measures
• Banks to increase disbursements to farmers to Rs 1,750 bn by FY07 (with addition of 5 m farmers) and open a separate window for self-help groups (SHGs). Additional 0.4 m SHGs to be credit-linked by FY07 in association with NABARD.
• Farmers to be extended short-term credit at interest rate of 7% p.a. with an upper limit of Rs 0.3 m on the principal amount.
• Net capital support to banking sector (by way of issuance of special non-tradable government securities), standing at Rs 228 bn at the end of 9mFY06, to be restructured by their conversion to tradable SLRs.
• Fixed deposits with tenures of not less than 5 years to be included under Section 80 C for tax exemptions.
• Loans to food processing sector to be included in the priority-sector lending basket.
• Bill on insurance sector to be introduced in FY07.
• ATM operations and collection services provided by banks in public issues to be brought under the service tax net.
• Banking Cash Transaction Tax to continue for some more time until the AIR system is able to capture all significant financial transactions.
Budget Impact
• Inclusion of long term FDs under tax saving instruments may facilitate the mobilisation of deposits for banks that are constrained for low cost funds to meet the incremental credit demand. This will prove to be especially beneficial to banks like SBI that have a large and well-diversified franchise.
• Conversion of the non-traded securities to traded GSecs will facilitate banks to offload the excess SLRs and access additional liquid resources for catering to the increasing credit needs of the economy.
• Mandation on banks (especially PSU ones) to hike their agricultural lending may resurface the problem of NPAs for these banks. Also, the interest rate of 7% to be offered to farmers will be approximately 350 basis points sub-PLR, thus pressurising margins for banks.
• Imposition of service tax on ATM operations may discourage usage, thus increasing operational costs for banks. Also, this may dissuade banks from entering into ATM sharing networks. However, banks are likely to pass on the same to the customers.
• Imposition of service tax on collection services provided for public issues - to dampen fee income for banks.
Sector Outlook
• The budget has offered 'sweetened pills' to the banking sector. While on the one hand, inclusion of long term FDs under tax exemptions and conversion of non-tradable GSecs into tradable SLRs provides greater liquidity to the sector (sweeteners), on the other hand, forced lending to agricultural sector coupled with compromised margins (NIMs) could dampen profits. Also, given that the tax exemptions are offered only on high cost (long term) FDs, the measure is not expected to significantly pare cost of deposits for banks. Discouraging the use of ATMs may add to the sector's already growing cost to income ratio. Service tax on fee income (for collection services) may further marginalise the other income component.
Amendments to the Banking Regulation Act are yet to be 'tabled' and the reforms expected therein will be subject to their subsequent approval. Enhanced lending to agriculture and priority sectors will require banks (especially PSU banks) to exercise more caution on the NPA front.
While we expected the structural factors such as credit growth and quality improvements to continue, cyclical ones such as margins pressures and liquidity constraints remain possible deterrents
Having witnessed historic growth rates in terms of credit offtake, the banking sector saw itself getting transformed from treasury income reliant to core income (NII) reliant in the previous year. The revived credit offtake (both from the food and non-food segments) and technological reforms paved the way for a change in the dynamics of the sector itself. However, liquidity constraints and capital shortage (for compliance with Basel II accord) posed encumbrances to the sector's margin and asset growth respectively. Consolidation and investments through the FDI route continue to remain in the sector's 'wish lists'.
Budget Measures
• Banks to increase disbursements to farmers to Rs 1,750 bn by FY07 (with addition of 5 m farmers) and open a separate window for self-help groups (SHGs). Additional 0.4 m SHGs to be credit-linked by FY07 in association with NABARD.
• Farmers to be extended short-term credit at interest rate of 7% p.a. with an upper limit of Rs 0.3 m on the principal amount.
• Net capital support to banking sector (by way of issuance of special non-tradable government securities), standing at Rs 228 bn at the end of 9mFY06, to be restructured by their conversion to tradable SLRs.
• Fixed deposits with tenures of not less than 5 years to be included under Section 80 C for tax exemptions.
• Loans to food processing sector to be included in the priority-sector lending basket.
• Bill on insurance sector to be introduced in FY07.
• ATM operations and collection services provided by banks in public issues to be brought under the service tax net.
• Banking Cash Transaction Tax to continue for some more time until the AIR system is able to capture all significant financial transactions.
Budget Impact
• Inclusion of long term FDs under tax saving instruments may facilitate the mobilisation of deposits for banks that are constrained for low cost funds to meet the incremental credit demand. This will prove to be especially beneficial to banks like SBI that have a large and well-diversified franchise.
• Conversion of the non-traded securities to traded GSecs will facilitate banks to offload the excess SLRs and access additional liquid resources for catering to the increasing credit needs of the economy.
• Mandation on banks (especially PSU ones) to hike their agricultural lending may resurface the problem of NPAs for these banks. Also, the interest rate of 7% to be offered to farmers will be approximately 350 basis points sub-PLR, thus pressurising margins for banks.
• Imposition of service tax on ATM operations may discourage usage, thus increasing operational costs for banks. Also, this may dissuade banks from entering into ATM sharing networks. However, banks are likely to pass on the same to the customers.
• Imposition of service tax on collection services provided for public issues - to dampen fee income for banks.
Sector Outlook
• The budget has offered 'sweetened pills' to the banking sector. While on the one hand, inclusion of long term FDs under tax exemptions and conversion of non-tradable GSecs into tradable SLRs provides greater liquidity to the sector (sweeteners), on the other hand, forced lending to agricultural sector coupled with compromised margins (NIMs) could dampen profits. Also, given that the tax exemptions are offered only on high cost (long term) FDs, the measure is not expected to significantly pare cost of deposits for banks. Discouraging the use of ATMs may add to the sector's already growing cost to income ratio. Service tax on fee income (for collection services) may further marginalise the other income component.
Amendments to the Banking Regulation Act are yet to be 'tabled' and the reforms expected therein will be subject to their subsequent approval. Enhanced lending to agriculture and priority sectors will require banks (especially PSU banks) to exercise more caution on the NPA front.
While we expected the structural factors such as credit growth and quality improvements to continue, cyclical ones such as margins pressures and liquidity constraints remain possible deterrents