From BETA- The Finance & Investments Club of IIMA Budget Series Issue 3 12th March, 2012

Banking
The year 2011 was rather turbulent for the Indian economy as it was steered by series of downbeat economic and geopolitical events, both in India as well as across the globe. As the Reserve Bank of India (RBI) adopted an anti-inflationary monetary policy stance to tame the inflation, it took a toll on the economic growth rate and on the performance of the banks as it diminished due to high interest rate regime and slowdown. The NPAs of banks have gone up substantially due to high interest rates and high capital requirements as per Basel-III norms have been recommended by RBI. Keeping all these events in mind, Indian banking industry have high expectations from this budget. Some of our expectations for banking are: 1. Lock-in-period for tax saving FDs to be reduced to 3 years Equities in India are exempted from long term capital gains tax and attract a minimal 10% short term capital gains tax .Apart from this both dividend income and returns from equity-linked mutual fund schemes are not being taxed presently. Banks are thus demanding reduction in lock-in-period for tax saving FDs to 3 years for bringing them at par with deductions with equity linked products. Banks to be allowed to raise funds through issue of tax-free infrastructure bonds Banks had been arguing for long time that they are finding it hard to raise long-term resources for infrastructure projects. With infrastructure development likely to remain a key focus area in the coming budget, it is likely that Banks will be allowed to raise long-term funds through issue of tax-free infrastructure bonds (like IFCs). This will help them in raising the necessary funds and maintaining cash reserve and statutory liquidity requirements. Governments net market borrowings to be higher than FY11 The most important thing for the banking sector this time around would be fiscal prudence from the government. If the fiscal expenditure and deficit is restrained, this would create headroom for the RBI to cut rates and would be a big positive for banks. If government announces higher borrowing it would affect banks negatively and put significant pressure on yields amid tight liquidity. Higher Capital infusion into PSU banks The government has already announced that it is committed to providing adequate capital to public sector banks. It is likely that government will allocate a high sum (higher than last years Rs 6000 crore) as part of the bank recapitalisation proposal which help PSU banks to meet 8% Tier-I capital requirements and enhance lending operations. Increase in FDI limit for the insurance sector from 24% to 49% With insurance penetration still languishing at 6% in India these is a high need for foreign investment in insurance sector. Raising the cap on FDI limit will provide enough incentive to foreign companies to invest in Indian insurance sector. This will create required capital in the industry and help the sector expand much faster. Subodh Bhandari p11subodhb@iimahd.ernet.in

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