Expert speak: A spotlight on the Banking Sector

Spotlight: Banking Sector by Saday Sinha, Research Analyst

•    RBI is the regulator for Banking & NBFC sector and hence its policy matters are more relevant for them. However, the key number which we watch closely is the net borrowing of the government. Increased government borrowing would crowd out private investments which in turn tend to increase market interest rates

•    Last year, government had estimated net borrowings to come at Rs.3.43 tn for FY12, however, it is likely to come higher at Rs.4.54 tn. Government’s higher borrowing kept the 10 year yield on higher levels during the third quarter (Oct to Dec ’11) and led to underperformance of the banking stocks

•    In January 2012, RBI had cut the CRR by 50 bps to 5.5% and it is widely expected that one more CRR cut may be on the anvil, which could infuse Rs.320 bn into the system. The CRR cut is definitely beneficial for banks as they could lend an additional 0.5% of deposits to people that were not earning any interest earlier

•    Inflation is likely to average around 6% in FY13 after factoring in diesel decontrol and recovery in INR. With inflation coming under RBI’s comfort zone, we might expect RBI to unwind its tight monetary policy stance in the beginning of FY13

•    On asset quality front, Indian banks are likely to witness rising stress on their loan book especially in sectors like Infrastructure, Aviation, Textiles, Agriculture, Construction and SMEs

•    For the upcoming budget, we expect recapitalization of PSU banks in the form of Tier-I capital, which is needed for their balance sheet growth

•    There could also be relaxation in the lock-in period for savings from five years to three years, which qualifies for tax benefits (section 80C). This is likely to increase the attraction of term deposits and make it at par with other tax saving instruments

•    Bankers have also asked the FM to increase the TDS limit on interest on bank deposits from 10K to 50K. This could help the banks in attracting more high-value term deposits, which will be positive if it comes in the budget

•    Another demand from the sector is for allowing banks to issue tax free Infrastructure bonds as they fund more than half of our Infrastructure funding requirement. However, we believe, status quo is likely to be maintained on both these above demands

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