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Saturday, Mar 01, 2003

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No big bang, but...

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THE expected big bang announcement on freeing of foreign direct investment (FDI) limit in banking ended in disappointment.

Instead of lifting the 20 per cent cap on FDI in State Bank of India (SBI) or other nationalised banks as was being expected by the capital markets, the Finance Minister, Mr Jaswant Singh, limited his tampering with the limits to only the private sector bank where FDI of `at least 74 per cent' would be allowed against the previous 49 per cent.

The move would help banks such as Centurion Bank, that is presently looking to induct a strategic partner but was facing constraints due to the 49 per cent cap.

Investment in banks for larger investors and those seeking strategic equity stake have also been made attractive by that announcement that the voting rights restriction of 10 per cent irrespective of the shareholding would now be abolished. Suitable amendments in the Banking Regulation Act would be incorporated for the purpose.

On the non-performing asset (NPA) front, the Finance Minister announced that a new legislative framework would be announced for the recently set up Credit Information Bureau that enables banks and FIs to access information on each others' borrowers. "The Government is determined to contain the problem of non-performing assets (NPAs) and ensure a credit market that functions efficiently," Mr Jaswant Singh said.

Along with this, the Government has also announced a plan to replace the banks' high interest bearing holding of Government debt. The buyback would be at a premium over the face value of the securities on account of the softening of interest rates. However, initiating such buyback would be left entirely to the judgment of the banks themselves.

Mr Jaswant Singh said that the move has been thought of since a large portion of the banks' holding of government paper has been contracted at a high cost. Moreover, banks are unable to encash the securities on account of inadequate liquidity.

The premium to be fixed on the securities would be arrived at in a transparent manner.

However, providing a carrot to the banks to go ahead for the buyback that would reduce the Government's long-term interest burden on these securities, Mr Jaswant Singh has said that if the banks declare the premium received as business income then for income-tax purposes they will be allowed additional deduction to the extent such income is used for provisioning of their NPAs.

Analysis by Suresh Krishnamurthy

BOTH public and private sector banks have reason to cheer. The Budget proposals can give further impetus to the attempts by public sector banks to strengthen their balance-sheet. The proposal to allow for greater control by majority stakeholder will benefit private banks.

For all banks, the impact of the several Budget proposals is:

  • Growth in retail loan portfolio will not be under threat since sops for housing loans have been continued

  • Threat of rise in interest rates reduced. due to cut in coupon rates for small savings, relatively smaller rise in Government borrowings and proposal to buyback high-coupon debt Such a reduced threat suggests losses from Treasury may be non-existent in the year ahead allowing for further improvement in balance sheet strength

  • Reduction in lending rates for smaller borrowers — such as SSI and agri-advances — who are now subsidising large borrowers can lead to further pressure on spreads for all banks

    Some of the proposals have a bearing only for public sector banks and old private banks such as Lakshmi Vilas Bank, Federal Bank. They are:

  • A large reduction in proportion of theNPAs in one stroke is now possible — profit on buyback of high-coupon debt is to be set-off against NPAs

  • If high coupon securities are replaced with floating rate securities then it will be even more positive for PSU banks; Otherwise, the banks will remain vulnerable to interest rate increase.

  • The accrual of profits on buyback of debt to set-off against NPAs is timely. Norms for recognition of NPAs get tightened from the following year

  • PSU and old private bank stocks may attract market interest in the wake of dividend tax exemption.

    For private sector banks such as HDFC Bank, ICICI Bank, ING Vysya Bank and Karur Vysya Bank the impact of the proposals is:

  • Greater control for promoters with the removal of cap on voting rights Private banks have been made attractive for acquisition — with the FDI limit raised to 74 per cent and removal of restrictions on voting rights.

    Article E-Mail :: Comment :: Syndication

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