Financial Daily from THE HINDU group of publications
Wednesday, Mar 01, 2006
Money & Banking - Budget
A draft of demands
Over the past three years, the concept of financial inclusion delivery of banking services to all classes of society has found greater resonance in both New Delhi and Mumbai. That trend has continued in this Budget, although demands have been moderate.
The Finance Minister has not done anything that will exacerbate the strained liquidity situation. He has done the needful to provide a fillip to infrastructure investments.
Profitability of the banking sector that is now finely balanced will not change much, while credit growth looks set to rise further.
The Finance Minister has proposed agriculture credit to grow at nearly 22 per cent in FY 2007. That might happen even without intervention from the Government.
Banks now view rural finance as a growth area. That the incidence of bad loans in agriculture in the past has not been significantly higher relative to loans to industry has helped.
Importantly, despite banks achieving the target, growth in agriculture credit is below the average credit growth. That could be the case even in the ensuing financial year as well. Clearly, agriculture credit growth is not constraining banks ability to serve other sectors. Disbursements to food processing will henceforth be counted under priority sector .
For banks that are struggling to cope with advances growth, this will provide greater flexibility in picking and choosing projects to lend to.
That could help enhance the overall yield on the advances portfolio.
The demand for disbursal of short-term credit of up to Rs 3 lakh to farmers at a rate of interest of 7 per cent could be a cause for concern, even only a minor one.
At 7 per cent, these loans would be loss-making propositions for most public sector banks.
Luckily for the banking sector, these demands from the Finance Minister come with a promise of necessary support.
The Finance Minister, however, has not made any budgetary allocation for this interest subsidy.
A more significant issue for banks is the size of market borrowings. Size of market borrowings has increased only by 13 per cent.
Given money supply has generally increased by at least 15 per cent per annum over the past decade, increased government borrowings will not add to the growing liquidity problem. In addition, the Finance Minister has also converted some special securities to tradeable securities.
The Finance Minister has also given in to a key demand of the banking industry tax benefits for long-term bank term deposits. Liquidity though will continue to remain under pressure and how RBI responds to the situation will as usual determine profitability of public sector banks.
Private sector banks though are set to make the most of the robust growth in credit in the backdrop of declining liquidity.
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