The Hindu Business Line : Banking on industrial growth

PRIMA facie, the Budget numbers look promising for the banking industry. Compared to the Interim Budget, target market borrowings of the government have not increased. The critical factor, however, is the credibility of these numbers.

If the actual borrowing for the year exceeds targeted borrowing, then liquidity in the system will be affected. This need not automatically lead to an increase in interest rates, as much would then depend on the RBI's responses, flow of money from across the borders and the credit growth scenario. Consequently, the Budget has now left the banking industry on tenterhooks, and bankers would be hoping that industrial growth does pick up.

Industrial growth would resolve a number of issues for the banking industry. It would ensure that targeted tax collection is achieved and that would reduce the need for the government to borrow more. It would also allow the banks to increase the proportion of advances to deposits mobilised. Such an increase would help the banks maintain spreads at present levels, even if liquidity is reduced and interest rates rise.

Otherwise, the Budget does have good news for the banking industry. Administered interest rates have been kept unchanged and the Finance Minister has made a commitment to maintain the benign interest rate environment. Fiscal incentives to the tractor industry and the agri-processing industry will ensure that lending to the sector is more attractive. That would help banks meet the target for increase in credit to the rural sector and keep politicians off their backs.

The Budget has also made management of bad loans a little less challenging; the necessary amendments to the Act governing recovery of bad loans and sops to the textile sector will help in this regard.

The increase in the sectoral cap on insurance is also positive for large banks such as SBI, ICICI and HDFC. This allows them leeway in structuring the capital of their insurance ventures in accordance with their growth requirements. The move to enhance the cap on equity investments also allows them more leeway in financing industrial ventures and trading in the capital market. These measures, however, will be of little consequence if industrial growth does not pick up. That is needed for banks to ensure a smooth transition from a regime of falling interest rates to one of steady-state interest rates with an upward bias.