The Union Budget 2013-14 will benefit government banks through equity infusion and gradual easing in stress on infrastructure loans, said India Ratings. However, the continued focus on growth in agriculture credit may keep non-performing loans (NPL) levels elevated.
The planned equity injection of Rs 140 billion in FY14 will maintain the support momentum that the government initiated in FY09. More importantly, the finance minister reiterated the government's commitment to ensure that its banks ''always'' meet the Basel III capital norms. The capital requirements, under the Basel III regime, will substantially pick-up after FY15 and peak in FY18.
The creation of a level playing field for private sector banks by extending them the interest subvention scheme for farmers will improve their competitiveness in rural areas. However, the 22% growth targeted in agriculture loans may maintain the pressure on NPLs, particularly for government banks, as NPLs in this sector have been amongst the highest in FY13.
Some easing of stress in the infrastructure sector may emerge with the setting up of a regulatory authority for the road sector, though improvements may not be noticed immediately. Asset quality pressure may ease if investments-and thereby growth-is stimulated by the proposed investment allowance.
Fee income of banks with strong networks could benefit from the permission to act as insurance brokers. Trading income could be boosted if the bond market reacts positively to the minister's commitment to lower the fiscal deficit, though the detailed calculations of bringing the deficit down need to be examined. Long-term efficiencies of government banks might improve by installing ATMs in all branches, though the near-term impact on cost/income ratio is negative. The plan to revive the post office network by installing core-banking software to offer real-time banking services may compete with banks' remittance and liability products.
The announcement of the first all-women bank is a pioneering effort, possibly based on the micro finance institutions (MFI) model where the borrowers are mostly women. If successful, this could become the hub around which the currently struggling MFI sector could rally.