Policy

Budget Analysis: Banks have little to cheer about

Aarati Krishnan BL Research Bureau | Updated on February 28, 2013

From the banks' perspective, it is also a worry that the Budget has asked them to lend more to agriculture, at Rs 7 lakh crore from Rs 5.75 lakh crore in the previous Budget.

Banks don’t have much to cheer in the Budget, but it has dealt a particularly hard blow to public sector banks. For them, the much-awaited ‘recapitalisation’ turned out to be a damp squib.

The Budget has earmarked only Rs 14,000 crore for infusing capital into these banks this year (in 2012-13, the number was Rs 12,000 crore). But as per the Reserve Bank of India estimate, the government will have to infuse additional capital of Rs 90,000 crore into these banks over the next five years. The markets expected at least Rs 18,000 crore this year. The capital adequacy ratio of PSU banks as of December 2012 was 12.2 per cent only just meeting the comfort level of the RBI at 12 per cent. With bad loans on the rise and higher provisioning cutting into internal accruals, capital infusion is crucial.

From the banks' perspective, it is also a worry that the Budget has asked them to lend more to agriculture, at Rs 7 lakh crore from Rs 5.75 lakh crore in the previous Budget. This again would be negative for all PSU banks already weighed down by loan quality concerns in the agriculture sector. Banks like Punjab National Bank, Bank of India, Bank of Baroda, State Bank of India, etc already have an exposure of more than 12 per cent to the agriculture sector.

The Government will continue with the additional 3 per cent interest subvention scheme for farmers and extend it to private banks too. Under the existing interest subvention scheme, farmers get short-term crop loans at 7 per cent interest. If the loan to the bank is promptly repaid then the effective rate of interest to the farmer works out to 4 per cent, with the government bearing the extra interest.

Now, the Government has brought about a level playing field between private and public sector banks by asking the latter to join this subvention scheme too. Private banks will now be able to meet their lending target to the priority sector, by offering the concessional rates of interest to agriculture as well. Under priority sector norms, banks need to lend 40 per cent of their Adjusted Net Bank Credit to the priority sector. Agriculture and micro and small enterprises (MSE) are two major sectors that receive priority sector lending apart from education, housing etc.

Published on February 28, 2013

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