BUDGET 2012-13BANKING SECTOR

PRESENTED BY-

RISHAV RAJ

BUDGET- 2012-13

SOME HIGHLIGHTS

EXPECTED GROWTH OF GDP - 6.9%INCLUSIVE GROWTHSERVICE TAX : 10.30% 12.36%PSU’s BANKS PLANS FOR FY13 = Rs.15,888 CR

RBI is the regulator for Banking & NBFC sector and hence its policy matters are more relevant for them.

Last year, government had estimated net borrowings to come at Rs.3.43 tn for FY12, however, it is likely to come higher at Rs.4.54 tn.

In January 2012, RBI had cut the CRR by 50 bps to 5.5% and it is widely expected that one more CRR cut may be on the anvil, which could infuse Rs.320 bn into the system. The CRR cut is definitely beneficial for banks as they could lend an additional 0.5% of deposits to people that were not earning any interest earlier.

Inflation is likely to average around 6% in FY13 after factoring in diesel decontrol and recovery in INR. With inflation coming under RBI's comfort zone, we might expect RBI to unwind its tight monetary policy stance in the beginning of FY13.

On asset quality front, Indian banks are likely to witness rising stress on their loan book especially in sectors like Infrastructure, Aviation, Textiles, Agriculture, Construction and SMEs.

For the upcoming budget, we expect recapitalization of PSU banks in the form of Tier-I capital, which is needed for their balance sheet growth.

There could also be relaxation in the lock-in period for savings from five years to three years, which qualifies for tax benefits (section 80C). This is likely to increase the attraction of term deposits and make it at par with other tax saving instruments.

Bankers have also asked the FM to increase the TDS limit on interest on bank deposits from 10K to 50K. This could help the banks in attracting more high-value term deposits, which will be positive if it comes in the budget.

Another demand from the sector is for allowing banks to issue tax free Infrastructure bonds as they fund more than half of our Infrastructure funding requirement. However, we believe, status quo is likely to be maintained on both these above demands.

¾ Proposes to provide Rs159bn for capitalisation of Public Sector Banks, Regional Rural Banks and other financial institutions including NABARD

National Housing Bank, SIDBI, NABARD, Regional Rural Banks, Indian Stamp etc. This attempts to roll forward the process of financial sector legislative reforms

¾Target for agricultural credit raised by Rs1,000bn to Rs 5,750bn in FY13

The Government is committed to protect the financial health of Public Sector Banks and financial institutions

The Finance Minister announced a move to recapitalise public sector banks through infusion of Rs 15,888 crore.

The recapitalisation is part of the Government's commitment to support public sector banks. These norms will require banks to bring in larger amounts of capital.

RECAPTALISATION

The government has proposed to extend intrest rate subvention of 1 per cent on home loans up to Rs 1.5 milLion.

For 2012-13 banks have been directed to lend Rs. 5,750 billion to the farmers.

PSBs are expected to receive majority of the Rs.159 billion allocated for recapitalization of government financial institutions up from Rs.60 billion budgeted in 2011-12.

As per the budget, Rs.100 billion will be allotted to NABARD for refinancing of RRBs to lend to small and marginal farmers for crop loans.

We believe the RBI’S ability to cut interest rates will be impeded by high fiscal deficit levels. This could adversely impact investments and credit growth in 2012-2013.

CONCLUSION The banking space may also witness a spurt in growth in their business next fiscal.

POSITIVE NEGATIVE

The budget has proposed to provide a sum of Rs 15,888 crore of capitalisation for the public sector banks, regional rural banks and other financial institutions

The fiscal deficit is expected to be 5.1 per cent of the GDP for FY13. For financing this deficit the government will do market borrowing of Rs 4,79,000 crore

LAST WORDS…

Overall the budget was neutral for the banking space

The budget did not provide any guidance for the licensing of new banks in the private sector

There is a possibility of creating a public financial holding company to raise resources to meet the capital requirements of the PSU banks under examination

THANKS