UNION BUDGET 2012-2013 BANKING AND INVESTMENT

PRESENTED BY GROUP-II

ABSTRACT: The finance minister in his Union Budget speech said the government will provide capital support to the tune of Rs 6,000 crore to public sector banks during the next fiscal to strengthen their capital base. During the year 2010-11, the government will provide a sum of Rs 20,157 crore for infusion in public sector banks. As part of the recapitalisation exercise, the government approved infusion of Rs 6,211 crore into five banks in June 2010. Banks, which had got capital support from the government in the first tranche, included, Union Bank of India, Bank of Maharashtra ,IDBI Bank, UCO Bank, and Central Bank of India. The second tranche, announced earlier this month, also provided capital support for several public sector banks, including Corporation Bank, UCO Bank ,Indian Overseas Bank and United Bank of India . In addition, the finance minister also announced the recapitalisation of Regional Rural Banks (RRBs) As part of financial strengthening of regional rural banks, an amount of Rs 350 crore was given to these banks during this year

HIGH LIGHTS
Rs 15888 crore capital support to public sector banks and financial institutions Out of 82 regional rural banks in India completed the core banking solutions Finance ministry plans holding company PSU banks Government of India directed life insurance corporation of India(LIC) to pick preferential stakes in public sector banks Issue of Rs 30000 crore to be raised through disinvestment Reduction in securities transaction tax by 20 percent on cash delivery transactions Introduction of Rajiv gandhi equity savings scheme to allow for income tax deduction of 50% to new retail investors who invest upto Rs 50000 directly in equities Increasing Government stakes in banks with percentage less than 60% Propose to give Rs 3000cr to NABARD Discussions on to further liberalise FDI policy 6000cr capital infusion in 2011-12 for PSU banks RBI to issue guidelines on banking licenses this fiscal FII's permitted to invest in unlisted bonds

Budget 2011: Banking

In the current fiscal (FY11), the Indian Banking industry has had to deal with tight monetary policy and low liquidity. This is despite the economy expected to grow at a healthy pace of 8.6% this fiscal. The central bank raised interest rates 7 times, cumulatively increasing the repo rate (rate at which banks borrow from the RBI) by 1.75% and the reverse repo rate (rate at which RBI borrows from banks) by 2.25%. However, with inflation still off RBI's target 7% for the end of FY11, further rate hikes are still expected.

Liquidity still remains a major concern, with the level of tightness currently beyond RBI's comfort level. The widening gap between credit and deposit growth was one of the major reasons for the same. Credit growth in the country has been rapid with non-food credit growing at 24.4% as per December 2010 data. This is against a projection of 20%, showing a huge demand for funds in one the world's fastest growing economies. However, deposit growth has lagged growing only by 16.5%, against a projection of 17%, leading to an unsustainable liquidity situation.

Budget Expectations Clarification of stance with respect to issuing new back licenses, especially to NBFCs and industrial houses. Tax benefits on long-term infrastructure bond investments could be extended till FY12. Banks are expecting to also be given this window for fund raising. Previous budget allowed an additional Rs 20,000 deduction for investment such bonds; this limit may also see a hike. Higher exposure limits for banks to finance UMPPs (ultra mega power projects) and other power projects. Liquidity concerns need to be addressed as the situation has not completely eased yet. Further recapitalization of certain PSU banks

Currently, rules limit voting rights of foreign entities to 10% irrespective of the actual stake they hold. Bankers expect the government to remove this clause, allowing additional capital to flow into the sector. Financial inclusion needs to be addressed - incentives/subsidies need to be provided for banks to set up accounts/ branches in Indian villages as these have low transaction volumes and high servicing costs. More clarity on Microfinance Institutions (MFIs) also expected. The Government set up a Financial Stability and Development Council (FSDC), a regulatory body to oversee issues related to regulation, financial inclusion, and financial stability during the last budget. More clarity on the working of the same is needed.

BUDGET IS PRAGMATIC AND CREDIBLE: CHANDA KOCHAR

ICICI Bank Managing Director and CEO Chanda Kochhar has welcomed the Union Budget 2012-13. Kochar said that the Budget is pragmatic and credible.

"The borrowing is higher than market expected. Tapping the subsidies, we have to really watch how it is done. I am not hopeful that the RBI will be able to cut rates in April," Kochhar said FM in his budget made the following announcement for the Banking and Finance sector India Opportunity Venture Fund via SIDBI of Rs 50 bn To issue revised norms for banks priority sector lendinfy To set up financial holding company for recapitalization of banks To move National Housing Bank Amendment Bill To move Regional Rural Bank Amendment Bill Rs 158.88 bn for capitalization of PSU banks in FY 13 Propose electronic voting to up shareholder involvement IPOs of over Rs 100 mn to be in electronic form CONCLUSION: The constant hike in rates during the previous financial year has not been good for the economy. The Govt. should take some positive steps to control the monetary expenditures. Further, the banking sector is eager to see an imposition of a lock-in period for fixed deposits of 3-year tenures