Banks to benefit from lower govt borrowing

While the Budget proposal had no special gifts to offer to the banking sector, it has taken forward the recapitalisation programme for public sector banks. This will strengthen the PSB balance-sheets without stake dilution by the Government. The Rs 6,000 crore set aside for this purpose though, is lower than the Rs 20,157 crore infused in the current fiscal. That PSBs have, on an average, already achieved the 8 per cent Tier-1 capital ratio (core equity) mandated could be one reason for the lower amount set aside this year.

The beneficiaries of this would be the banks in which Government is planning to increase its stake to 58 per cent. This may include PSBs such as Bank of Baroda, Andhra Bank, Oriental Bank and Vijaya Bank. Andhra Bank, for instance, has got a capital infusion of Rs 648 crore, and going by the prevailing market prices the Government's share would only go up to 56 per cent from 51.5 per cent leaving potential infusion through a 2 per cent higher stake.

The Rs 6,000 crore infusion would translate in to Rs 75,000 crore of credit availability to corporates from the banking kitty.

Another positive which has emerged for banks in the proposal is the lower net borrowing by the Government.

From 3.45-lakh crore this fiscal, the borrowing has come down to Rs 3.43-lakh crore. This leaves more room for credit growth for banks.

Loan portfolio

On the credit front, increase in interest subvention for timely payment of agriculture loans would improve the asset quality for banks.

As of March 2010, around Rs 10,500 crore worth of agriculture loans were classified as priority sector non-performing assets (NPAs). The proposed move could result in some up-gradation in asset quality.

Agriculture target of Rs 4.75-lakh crore by March 2012 may not be a difficult target for banks given that they have already achieved Rs 4.11 lakh crore (outstanding) as of November 2010 as against Rs 3.75-lakh crore mandated.

Enhancement of priority sector housing loan limit to Rs 25 lakh may result in this space receiving higher interest from banks. Key beneficiaries would be SBI, HDFC, LIC Housing Finance, Dewan Housing. Continuation of a maximum subvention of Rs 15,000 for borrowers of loans up to Rs 25 lakh may also continue to drive the home loan demand.

The Finance Minister has proposed an amendment to give new banking licences to private banks.

While the licence itself may take a while to fructify it does pose a threat to existing players.

Currently, NBFCs, who are the competitors for banks, pose less of a threat given that they form only 9 per cent of the total financial assets.

A few issues remain unaddressed in the Budget proposal. It has not enumerated its plan for capital infusion into SBI.

This move was expected to happen in the next fiscal. Permit to float infrastructure bonds, a key wish-list in the banking space, too has not fructified.