Moderate credit growth at around 22 per cent and relatively higher deposit growth has placed the liquidity situation of banks in more comfortable zone.
However the incremental growth in deposits is at higher phase compared to that of the advances, putting pressure on NIMs. Moreover the asset quality of the banks is also witnessing significant deterioration with piling NPAs.
Most of the banks carry significant amount of restructured assets in books. With huge part of NPAs coming from unsecured portfolio, banks are reducing the share of retail loans, where the interest charged is relatively higher. This is further thinning down their interest spreads
The RBI and the government are keen on bringing down interest on deposits significantly. But banks are not keen in cutting their deposit rate lower than the interest on small savings.
So, considering the general reduction in interest rates sofar, the banking sector wants the interest on small savings to be brought down, to facilitate banks to replicate the same in deposits and advances further.
This move will also lead to increased investment in g-secs, and improve treasury income of banks in general and PSU banks in particular.
RBI has so far reduced CRR by 50 bps and repo and reverse repo by 150 bps each in 2009. Also the rate of inflation, calculated on point to point basis, touched -1.61 per cent for the week ended 6 June 2009 as compared to 0.13 per cent for the previous week and 11.66 per cent during the corresponding week of the previous year.
Inflation has dipped to negative for the first time since 1976-77, thanks to the higher base effect. Besides gearing up for the compliance with Basel-II accord, the sector is also looking forward to consolidation and investments on the FDI front.
The Union Budget 2009-10 is expected to focus on consolidation amongst the public sector banks, which will go a long way in strengthening this sector.
Liberalisation of branch regulations is also in focus to provide greater flexibility for banks to increase their presence in rural and semi-urban areas.
Some of the core expectations of the industry are as follows:
Industry expectations
Enactment of Banking Regulation (Amendment) Bill, 2005: In order to regulate acquisition of shares in banking companies, increase the flexibility on the statutory liquidity requirements and allow banks to lend to companies in which their directors are engaged.
Tax saving deposit under section 80C: To bring down the lock in period of term deposit from current 5 years to 3 years. Also permit premature encashment during such lock in period and pledge loan against these deposits. Also allow all kind of deposits across various maturities to be claimed as deduction under Section 80C instead of deposits with higher maturity.
Reintroduction of the Sub Section 10 (23) G of Income Tax Act:
Exemption of interest income gained from lending to infrastructure sector.
To step up lending to SSI and Export oriented units, these loans may be guaranteed by the government.
Non-Performing Assets: Allow deduction for provisions made by banks for non-performing assets in compliance with the guidelines issued by Reserve Bank of India, without any artificial restriction.
Withholding tax: Withholding tax should not be applicable on any income paid to a scheduled bank.
Home loan exemption under Sec 24: To increase the limit of deduction under Section 24 for interest on housing loan (for self occupied property) from Rs 1,50,000 to Rs 2,50,000.
Analyst expectations
By reducing the tenure of term deposits to 3 years, these deposits will be brought in par with other tax saving instruments such as ELSS funds. This will augment the deposit base of the bank to a large extent and will solve the asset liability mismatch problem for the banks.
Currently as per Sec 24(b) of the Income Tax Act, 1961 a deduction up to Rs 1,50,000 towards the total interest payable on the home loan towards purchase / construction of house property can be claimed while computing the income from Self Occupied house property. By increasing this deduction amount to Rs 2,50,000 we could see some spurt in demand from home loan segments.
Banks were allowed to claim the interest earned on long-term lending to infrastructure projects as an allowable deduction under section 10(23) (G) of IT Act.
This section was withdrawn in the Finance Act, 2007. Hence a reintroduction of this, would help banks to increase their credit exposure to infrastructure sector.
With the magnitude of NPAs increasing for banking sector as a whole, it's important for Asset Reconstruction Companies (ARCs) to take the lead in creating value to impaired bank assets. Providing clarity on the tax treatment for these entities would help putting in place an efficient set up for NPA resolution in the country.
Banks face huge problems in collating withholding tax certificates and claiming credit for the same in the tax return. Currently, withholding tax is not applicable to interest income (other than interest on securities) received by banks. The extension of this exemption to all incomes received by the banks will considerably reduce compliance cost without any loss to revenue.
Banks to watch
PSU (large cap)- SBI & PNB; PSU (mid cap) - IOB, Bank of India, Andhra Bank.
PVB - Axis bank, Kotak Mahindra, HDFC bank & ICICI Bank.
Outlook
Union Budget 2009-10 comes at a time when the banking sector is awash with liquidity, but the asset quality is deteriorating. The government is convinced that the deserving sectors needs to be provided with credit, but the concerns of the bankers are equally critical.
Whether the government will provide level playing field for bank deposits Vs small savings schemes remains to be seen, and this can lead to further softening of interest rate regime in the country.
There is divided opinion amongst bankers on the desirability of consolidation in the PSU bank sector, including SBI and its associates. Some indication in this regard is expected in the budget, which may be forced to take up some divestment in key sectors, including PSU banks.