Financial Daily from THE HINDU group of publications
Saturday, Mar 01, 2003
Money & Banking
No big bang, but...
NEW DELHI, Feb 28
THE expected big bang announcement on freeing of foreign direct investment (FDI) limit in banking ended in disappointment.
Instead of lifting the 20 per cent cap on FDI in State Bank of India (SBI) or other nationalised banks as was being expected by the capital markets, the Finance Minister, Mr Jaswant Singh, limited his tampering with the limits to only the private sector bank where FDI of `at least 74 per cent' would be allowed against the previous 49 per cent.
The move would help banks such as Centurion Bank, that is presently looking to induct a strategic partner but was facing constraints due to the 49 per cent cap.
Investment in banks for larger investors and those seeking strategic equity stake have also been made attractive by that announcement that the voting rights restriction of 10 per cent irrespective of the shareholding would now be abolished. Suitable amendments in the Banking Regulation Act would be incorporated for the purpose.
On the non-performing asset (NPA) front, the Finance Minister announced that a new legislative framework would be announced for the recently set up Credit Information Bureau that enables banks and FIs to access information on each others' borrowers. "The Government is determined to contain the problem of non-performing assets (NPAs) and ensure a credit market that functions efficiently," Mr Jaswant Singh said.
Along with this, the Government has also announced a plan to replace the banks' high interest bearing holding of Government debt. The buyback would be at a premium over the face value of the securities on account of the softening of interest rates. However, initiating such buyback would be left entirely to the judgment of the banks themselves.
Mr Jaswant Singh said that the move has been thought of since a large portion of the banks' holding of government paper has been contracted at a high cost. Moreover, banks are unable to encash the securities on account of inadequate liquidity.
The premium to be fixed on the securities would be arrived at in a transparent manner.
However, providing a carrot to the banks to go ahead for the buyback that would reduce the Government's long-term interest burden on these securities, Mr Jaswant Singh has said that if the banks declare the premium received as business income then for income-tax purposes they will be allowed additional deduction to the extent such income is used for provisioning of their NPAs.
Analysis by Suresh Krishnamurthy
BOTH public and private sector banks have reason to cheer. The Budget proposals can give further impetus to the attempts by public sector banks to strengthen their balance-sheet. The proposal to allow for greater control by majority stakeholder will benefit private banks.
For all banks, the impact of the several Budget proposals is:
Some of the proposals have a bearing only for public sector banks and old private banks such as Lakshmi Vilas Bank, Federal Bank. They are:
For private sector banks such as HDFC Bank, ICICI Bank, ING Vysya Bank and Karur Vysya Bank the impact of the proposals is:
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