Banking Sector – Union Budget 2013 Expectations

The Banking sector is one of the most important sectors in the country and its prospects are directly correlated with the economic health of the nation. In the last six months, there have been big bang reforms from the government end, reviving the overall sentiments in the sector. Despite the same, there are serious concerns about the twin deficit (fiscal and current account) in the country. These would impact the overall growth prospects of the country. Currently curbing the twin Deficit is the hour of call and hence one must watch out for the Budget announcement with regard to the current fiscal deficit and the estimated fiscal numbers for the next financial year.

The RBI Governor D Subbarao has said that it sees some concerns on the Current Account Deficit (CAD), which would reduce the possibility of a rate cut in the forthcoming monetary meet. The entire banking space is awaiting the Budget announcement for Finance Minister’s guidance. Like always, this time too, the markets have some expectations from the Finance Minister (FM). However, before going forward with those, let’s take a look at last year’s Budget announcement, especially pertaining to the banking sector:

Following are some of the key Budget announcements made last year (FY 2012-13) with respect to the Banking Sector:

• It proposed to provide a sum of Rs 15,888 crore of capitalisation for Public sector banks, regional rural banks and other financial institutions including NABARD.
• A need for the development of a central ‘know your customer’ depository was mentioned, to avoid multiplicity of registration and data up-keeping.
• The government had announced a financial package of Rs 3,884 crore for waiver of loans of hand-loom weavers and their cooperative societies.
• Fiscal deficit was expected to be 5.1% of the GDP for FY13. For financing this deficit, the government made market borrowings of Rs 5,75,000 crore, which was higher by Rs 1,00,000 crore from that of the previous year. Higher market borrowings further had an upward pressure on the interest rates.
• A possibility of creating a public financial holding company to raise resources to meet the capital requirements of PSU banks under examination.

• In the recent past, the FM has estimated the FY13 fiscal deficit to be at 5.3% and then expects it to fall gradually by 60 basis points every year till it touches 3%. This means that one can estimate the fiscal deficit for FY14 to be at 4.7%. The markets have already discounted the same. However, it is still awaiting a clear road-map as to how we are going to achieve the said target. If the Budget strongly convinces that it can achieve the estimated mark, then it would be a thumbs-up for the markets as well as for the banking sector. One has to check out the government's forecast on the revenue and the quantum of borrowing front, which has a correlation with the interest rates.
• To boost the savings habit and to enhance the deposits in the banks, the government might come out with some changes in the five-year tax saving fixed deposits schemes. The horizon may come down to 3 years, in order to attract more investors. 
• The markets are also expecting the government to give a green signal to banks for them to raise funds by issuing tax free bonds which would help them in their Asset Liability mis-match. We believe that the limit for the tax free bonds that are currently issued by infrastructure companies could be raised, but the probability of banks getting a nod in the same is quite low. 
• Lastly, the most important aspect, especially from the point of view of Public sector banks (PSBs), is capital infusion. This year the government has planned to infuse around Rs 16,000 crore. However, for the next year this figure could approximately reach Rs 20,000 crore. This is because right from the beginning of the next fiscal, the banks would gradually have to start implementing Basel III norms requiring higher capital in its business. PSBs like Bank of Baroda, Union Bank of India, Bank of India are among the banks which might benefit from this move.     

Overall, capital infusion in the PSBs would be coming from government’s end and hence there is no serious issue on that front. The market and the banking space as a whole are majorly watching out for the fiscal consolidation road-map and the probability of achieving the same.

Nevertheless, we would be updating readers on the Budget Review and would hence request you to keep visiting our website, the Budget page in particular.