Moderate credit growth at around 22% and relatively higher deposit growth has placed the liquidity situation of banks in more comfortable zone. Thanks to the series of rate cuts implemented by RBI so far this fiscal. In 2009 alone, RBI has reduced CRR by 50 bps and repo and reverse repo by 150 bps. However the incremental growth in deposits is at higher phase compared to that of the advances, putting pressure on NIMs.
The other important issue is the asset quality of the banks that is undergoing a significant deterioration with piling NPA's. Most of the banks carry significant amount of restructured assets in books. With huge part of NPA's 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 budget has raised total expenditure to more than 10 lakh crore for the first time taking the fiscal deficit up to Rs 400996 crore (Rs 4009.96 billion), which amounts to 6.8% of the GDP.
The government resorts to market borrowing to bridge the gap between revenue and expenditure. The borrowing of the central government more than doubled to Rs 306000 crore (Rs 3060 billion) in 2008-09 compared to Rs 145146 crore (Rs 1451.46 billion) budgeted for 2008-09.
However, the interim budget 2009-10, has placed the market borrowing at Rs 361782 crore (Rs 3617.82 billion) for 2009-10. But as per the revised estimates put in the full budget for 2009-10 today, the actual borrowing for the current fiscal would be of the order of Rs 451093 crore (Rs 4510.93 billion).
Budget provisions:
Increase Farm Credit: The FM has further increase the farm credit target for 2009-10 at Rs 325000 crore compared to Rs 287000 crore targeted in 2008-09.
Subvention of 1% to be paid as incentive to farmers: The Budget continued the Interest subvention scheme for short-term crop loans up to Rs 300000 per farmer at the interest rate of 7% per annum. Also additional subvention of 1% to be paid from this year, as incentive to those farmers who repay short-term crop loans on schedule. Also additional allocation of Rs 411 crore over Interim Budget 2009-10 was made for the same.
Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by six more months for farmers owing more than 2 hectare of land. The Union Budget 2008-09 allowed these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of 30th June 2009. Currently this facility has been extended from 30th June, 2009 to 31st December, 2009.
Setting up of separate task force for those not covered under the debt waiver scheme: The government also announced that it will set up a task force to examine the issue of debt taken by a large number of farmers in some regions of Maharashtra from private money lenders who were not covered by the loan waiver scheme announced last year.
Other provisions:
- The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner.
- To allow scheduled commercial banks setting up off-site ATMs without prior approval subject to reporting.
- To provide banking facilities in under-banked/un-banked areas in the next three years. A sub-committee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same.
- The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least one Centre/Point of Sales (POS) for banking services in each of the un-banked blocks.
Budget impact
The Union Budget 2008-09 has focused on farm credit. The agriculture sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. The one-time bank loan waiver of nearly Rs 71000 crore (Rs 710 billion) to cover an estimated 40 million farmers was one of the major highlights of the last Budget. This Union Budget has provided further six months extension of 25% rebate on loan for farmers owing more than 2 hectare of land. With Government bearing this burden, banks would not be affected much. It will only help banks to clear their most stubborn NPA accounts on banks book.
Moreover the emphasize on hiking promoter shareholding in Public sector banks, expanding network with ATM's, opening of banking centre in un-banked blocks are some of the positive moves for the sector.
On the flipside, the spike in government borrowings is set to adversely affect the treasury income of banks in general and public sector banks in particular, through rise in yields on government securities.
Outlook
The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking sector as a whole. However it has increased the Government borrowing to Rs 451093 crore (Rs 4510.93 billion) compared to Rs 361782 crore (Rs 3617.82 billion) targeted in the Interim Budget 2009-10.
This is likely to push the Bond yields high moving forward. Despite ample liquidity in the system, the 10 year benchmark yield has zoomed above 7% levels owing to rise in borrowing target. Hardening of yields is likely to affect treasury profits of banks in general and Public sector banks in particular.
