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Sector Focus : Banking and Housing Finance

Banking and Housing finance
Key issues

In spite of the increasing presence of private sector banks, the banking sector in India is dominated by the Public Sector Banks which account for more than 80 per cent of the deposits, advances, branches and employees. The group also accounts for around 70 per cent of the sector's profits. While the government has announced its willingness to significantly reduce its stakes in PSU banks, effecting the same is likely to take time.

There is a discernible trend towards consolidation in the sector, recent instances of mergers among a few private sector bank bearing proof of the same. While consolidation issues are more complex in the case of PSU banks, the resounding response to the VRS schemes initiated by many public sector banks can facilitate a much needed restructuring in this group.

Relatively high level of NPAs, evident and latent, continue to be the biggest problem faced by the Indian banking sector. The expected tightening of domestic disclosure, accounting and capitalisation standards, as part of the transition to international best practices, can subject many banks to increased financial stress.

Budget impact

The 150 basis points cut in small savings deposit rate will lead to a decline in interest rates on both the borrowing as well as lending side. This can lead to increased off take of credit from the industry, thus fuelling growth in advances.

The spread, however, is likely to decline due to the lag effect on deposit costs and lower flexibility of the banks to reduce deposit rates, while the interest rate cut would have to be passed on to the borrowers immediately.

The effect would be more pronounced on the public sector banks which, typically, have a higher proportion of longer term deposits (almost 60 per cent of deposits over one year when compared with about 30 per cent for the new private sector banks).

The combination of impending reduction in deposit rates, reduction in 80L benefits from Rs 15,000 to Rs 9,000 and lowering of threshold interest income for TDS to Rs 2,500 per annum is likely to adversely impact the deposit growth of banks.

The reduction in tax payable on distribution of dividends of Indian corporates and income in respect of mutual funds, can also have an impact on deposit growth in the banking system, as mutual fund and capital market investments would now become more attractive.

The repeal of SICA and changes in Industrial Disputes act to enable retrenchment of staff will enable quicker restructuring of ailing industrial concerns.

This, along with the proposed introduction of the new legislation on foreclosure and enforcement of security is likely to improve recoveries from the non-performing assets, both in terms of quantum and timeliness.

The abolition of BSRBs will provide greater autonomy to the management of PSBs in recruitment at entry levels and allow lateral entry even for non-specialised posts so as to improve their competitive position vis-à-vis new private sector banks, which are gaining prominence.

The reduction of customs duty on gold is also likely to boost the gold business of the banks.

The introduction of service tax on certain banking and financial services is likely to impact the profitability of the banks, however, the impact would vary depending on the flexibility of the bank to pass on the cost and the proportion of income impacted by the proposed service tax.

Accelerated depreciation benefit for commercial vehicles is likely to increase demand for CVs in the next year and, in turn, boost the CV financing business for NBFCs.

The removal of 25 per cent divestment clause with respect to 100 per cent FDI in NBFCs, is likely to improve the flexibility of NBFCs promoted by foreign entities to capitalise their businesses in India.

The increase in interest deduction on interest payable on housing loans for self occupied houses from Rs 1,00,000 to Rs 1,50,000 is likely to provide further impetus to the Housing Finance business.

Rediff-CRISIL Budget Impact Analysis
Budget 2001

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