Not much to bank on

M.V.S. Santosh Kumar

Disappointment over the limited progress on the much-hyped “financial sector reforms” and the soaring fiscal deficit made the BSE Bankex the biggest sectoral loser among the BSE indices on Budget day. Measures such as FDI for the capital-starved insurance sector and dilution of government stakes in banks found no mention; nor did consolidation or recapitalisation of weaker banks.

However, banks may see higher credit offtake from the enhanced outlays on infrastructure funding. Funding may become more flexible with banks being allowed to raise zero coupon bonds. In addition to lending to economically backward students and weaker sections, the government also extended the tenure of export credit subvention and incentivised farmers who pay interest on time by providing an additional one percentage point subvention. But these are earnings neutral for banks as they will be compensated.

The high fiscal deficit of 6.8 per cent projected for the year is negative for banks. High borrowings may adversely hit the profitability of the banks as yields may harden, leading to treasury losses. Margins will also be under pressure as SLR investments will yield less. In this regard, banks (Bank of Baroda, SBI) with a high credit-deposit ratio may be in a better position than the ones (Vijaya Bank and Allahabad Bank) with low credit-deposit ratios.

Banks have an opportunity to mitigate the risk of lending to infrastructure projects and earning good margins through the IIFCL refinancing scheme. While IIFCL, until April, 30, 2009, had sanctioned Rs 18,000 crore and has a cash surplus of around Rs 10,000 crore, it is up to the banks to fund the rest of the portion. Refinancing facilities for the Micro Small and Medium Enterprises (MSME) and rural housing worth Rs 4,000 crore and Rs 2,000 crore, respectively, will not affect the banks significantly as they can be classified under priority lending. Private banks and Foreign banks with limited presence in rural and MSME may benefit from these refinancing facilities

Banks have been allowed to raise zero coupon bonds which would reduce their cost of borrowing and help maintain an asset-liability match.

The Budget also moots a ‘Takeout Financing’ scheme, in consultation with banks, to facilitate lending to the infrastructure sector, which would enable a group of banks to jointly finance long-term loans without jeopardising asset-liability management. Branch de-licensing expected to be taken up this year, could help banks expand without knocking at the doors of the RBI.

The government has budgeted around Rs 2,011 crore for subvention on short-term credit to farmers. It also agreed to provide additional subvention for farmers who pay interest on time. This move may encourage farmers to become more credit-worthy and in turn reduce the amount of slippages. The government also extended the stimulus measure taken earlier on pre-shipment export credit by increasing the subvention period up to March 2010. The cost of subsidy/subvention announced for new borrowers will be borne by the government.

FDI in insurance and many other financial sector norms have been doing the rounds in the media since the Left’s exit from the government last year and quite a few expectations were built up ahead of the Budget But they have not materialised.

Markets also expected an increase in the credit threshold on housing loans to Rs 30 lakh, for reckoning as priority sector lending, which hasn’t come through. Banks may, however, receive respite from the removal of fringe benefit tax which may marginally increase profits.

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