The government's focus on sustaining inclusive growth, financial stability and higher credit to deserving sectors were evident in the Union Budget 2010-11. By ensuring that the banks are adequately capitalized and have enough scope to grow their franchise and loan book, the budget ensured that banks play a major role in the economy's growth in the coming fiscals.
By passing on the mantle to banks for facilitating infrastructure funding, financing PPP projects, SME funding, loans for export oriented industries as well as interest waiver to farmers, the sector has been offered a lot to look forward to for its growth in this fiscal. More importantly allocating a sizeable amount to IIFCL for it to refinance bank loans to critical sectors is expected to go a long way in enhancing the banking sector's contribution and participation in infrastructural and economic growth. The creation of an apex regulatory body will bring in the much needed coordination between the multiple regulators in Indian financial system.
Budget Measures
The RBI will give additional branch licenses to private sector banks and NBFCs that meet the central bank's eligibility criteria.
An additional sum of Rs 165 bn will be offered to the under-capitalized public sector banks to ensure that all PSU banks are able to attain a minimum 8% Tier-I capital by FY11.
Banks' target for agricultural credit for the year FY11 has been enhanced to Rs 3,750 bn.
IIFCL which refinances bank lending to infrastructure projects will enhance its disbursements from Rs 90 bn in FY10 to Rs 200 bn by FY11
Under the Debt Waiver and Debt Relief Scheme for farmers, the period for repayment of the loan amount by farmers has been extended by six months from December 31, 2009 to June 30, 2010.
Scheme of 1% interest subvention on housing loan upto Rs 10 lakh, where the cost of the house does not exceed Rs 20 lakh has been extended by a year upto March 31, 2011
With a view to strengthen and institutionalise the mechanism for maintaining financial stability, an apex-level Financial Stability and Development Council will be set up. Without prejudice to the autonomy of regulators, this council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion.
Budget Impact
Recapitalisation of PSU banks will means that the under-capitalised banks do not fall short of capital to grow their loan book and at the same time are able to comply with Basel II norms.
Sanctioning additional branches to private sector banks and NBFCs will mean that the banks will be able to grow their franchise at a faster pace and accordingly grow their balance sheet sizes.
Higher target for agri credit and extension of loan repayment tenure for farmers may lead to some NPA problems in this sector.
Discounted interest rates on low cost housing will be benign for banks having presence in non metro areas as well as for housing finance companies
The apex financial sector governing body will help mediate between the multiple regulators present in Indian financial system like the RBI, the IRDA, the PFRDA and the SEBI.
Company Impact
Banks like IDBI and OBC that currently stand undercapitalized will receive additional capital under the PSU banks’ recapitalization scheme.
Private sector banks like Axis Bank, HDFC Bank, ICICI Bank and Yes Bank that are looking at aggressively going their franchise will benefit with the additional branch licences. Further NBFCs whose banking applications were rejected earlier may also benefit with this scheme.
Housing finance companies like HDFC and LIC Housing Finance as well as PSU banks like SBI, PNB and Union Bank of India that have extended presence in the semi urban and rural areas will benefit from the interest sops offered to loan on low cost housing.
The government's focus on sustaining inclusive growth, financial stability and higher credit to deserving sectors were evident in the Union Budget 2010-11. By ensuring that the banks are adequately capitalized and have enough scope to grow their franchise and loan book, the budget ensured that banks play a major role in the economy's growth in the coming fiscals.