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BANKS have welcomed the Union Budget proposal to allow them to raise capital through preference shares in the Union Budget 2005-06.

According to the Budget, banking companies have been allowed to issue preference shares, since preference share capital can be treated as regulatory capital under specified circumstances as per the Basel norms.

However, bankers are seeking clarity on the issue of whether the funds raised through a preference issue will be classified as Tier-I or Tier-II capital.

" As per the current norms, if the funds are being raised for a period of 12 years, it can be classified as Tier-I. For a period less than 12 years this comes under Tier-II. As per the latest Basel norms, it appears that this may come under the Tier-II category. But it would be nice if they allowed it as Tier-I", says Mr M. Venugopalan, CMD, Bank of India.

Mr A.K.Purwar, Chairman, SBI: " The Union Budget 2005-06 has a lot of interesting features. There is a good push to agriculture and I am personally committed to meeting the 30 per cent target set in this area."

"Allowing banks to issue preferential shares is also a good move and offers banks one more avenue to raise capital. On account of the unusual credit growth in the past year, all banks will go in for Tier-II issues next year. So this will make one more option for capital raising available to them".

Mr V.P. Shetty, CMD, Canara Bank: "The permission for issue of preference shares would help banks manage their Tier I capital. This will especially benefit banks which have reached the government holding of 51 per cent."

Referring to the proposed amendments to the Income Tax Act for tax exemptions in the event of bank amalgamations, he says these would help the industry in consolidation.

The Budget has introduced a new clause in the Income Tax Act - Section 72AA, which provides for tax setoffs in the event of amalgamations.

Mr M.S. Kapoor, CMD, Vijaya Bank: "The amendments to the Banking Regulation Act and the RBI Act are clear indications of bolder reforms and autonomy for the Indian banking system. Preference shares issuance will help the banking sector reach the Basel II norms."

Mr Y. Vijayanand, MD, State Bank of Mysore: "With Government securities losing flavour in the market, the changes in SLR/CRR would help banks meet their liquidity requirements. This is true especially in a situation where credit growth is maintaining a high growth. Changes in SLR/ CRR will also help in more effective implementation of the monetary policy."

Mr V.K. Chopra, CMD, Corporation Bank: "The proposals on statutory liquidity ratio (SLR) and cash reserve ratio (CRR) will boost the lendable resources of banks, resulting in more income for them. The initiatives on micro-finance sectorhas addressed the long pending demands of non-governmental agencies engaged in micro-finance activities.

The proposals on reforms in co-operative banking systemshows that the recommendations of A.Vaidyanathan Committee, constituted to look into co-operative banking system, may be accepted. States might bring down their holding in co-operative banks".

Mr Anantakrishna, Chairman and CEO, Karnataka Bank: "The proposal to introduce 0.1 per cent tax on withdrawal of Rs 10,000 and above in a day is something that nobody expected. It is a new tax. With this, the workload for banks will increase.The Minister has taken a good step with regard to micro-finance sector."

Mr Uday Kotak, Executive Chairman and Managing Director, Kotak Mahindra Bank: "The Budget lays down the roadmap for the role of the financial sector as the key engine for India's economic development. Increased role for commercial banks in micro-finance, flexibility to the RBI on SLR and CRR, development of Mumbai as the regional financial centre, development of the corporate debt and securitisation market, rationalisation of stamp duty on commercial paper and floatation of gold mutual funds are some of the positives for the development of the Indian financial sector."

Mr P.T. Kuppuswamy, Chairman, Karur Vysya Bank: "The Budget has balanced the two seemingly mutually exclusive domains of fiscal prudence and growth orientation coupled with poverty alleviation.''

"The removal of lower and upper bounds to the Statutory Liquidity Ratio and provision of flexibility to RBI to prescribe prudential norms are forward looking measures. "Banks would encounter difficulties in complying with the 0.1 per cent tax levy on cash withdrawals of over Rs 10,000 on a single day. Besides adding to the administrative processing load, the compliance would be difficult in the context of ATMs of banks which allow withdrawal of up to Rs 40,000 on a single day."

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Law soon to allow banks to issue pref shares

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