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Big-bang booster for banks

Calcutta, Feb. 28: Proposals in Budget 2003-04 for the banking and the financial sectors are likely to spur overseas investment in the sector, bankers say.

In a bid to integrate India with the global financial system, Union finance minister Jaswant Singh today raised the foreign direct investment ceiling in the banking sector from 49 per cent to 74 per cent to enable global banks to set up subsidiaries in India, as well as to invite investment in private banks.

Singh added that private banks would be encouraged to open branches in rural areas to service both the farm and non-farm sectors there. Moreover, the Banking Regulation Act of 1949 would be amended to remove the restriction of 10 per cent voting right irrespective of the shareholding.

The government would also extend the benefit of Section 2A of the Income Tax Act to nationalised banks. Any banking company can now merge with a nationalised bank with consequential tax benefits.

In his budget speech, Singh said the government is determined to contain the problem of NPAs and ensure a credit market that functions efficiently. The government will also come up with legislations to enable smooth functioning of the Credit Information Bureau set up to address the menace of bank NPAs.

The government also directed all banks to extend credit to the agriculture and SSI sectors at 2 per cent below and above the prime lending rates.

Reacting to the government’s move to hike the FDI limit from 49 per cent to 74 per cent in the banking sector, Ashish Guha, CEO Lazard India said the banking sector was already witnessing a number of mergers and acquisitions and hiking the FDI limit to 74 per cent would encourage this activity further.

United Bank of India chairman and managing director Madhukar said that hiking of the FDI limit in banks will help the government introduce global accounting and banking standards in India.

The Union Budget further said that a large proportion of the banks’ holding of Central government domestic debt, contracted under the high interest regime of the past, is thinly traded. With the softening of interest rates, ordinarily, such loans should command a premium over their face value. In effect though, banks are often unable to encash this because of limited liquidity. The government today proposed to offer a buy back of such loans “entirely on a voluntary basis” from banks in need of liquidity, or of encashing the premium for making provisions for their NPAs thereby improving their balance sheets, or otherwise.

The premium to be offered will be set on a transparent basis. If the banks declare the premium received as business income, for income tax purposes, they will be allowed additional deduction to the extent that such income is used for provisioning of their NPAs.

Madhukar said the banking sector was anticipating such a move.

“All these are SLR investments by banks. Through this offer the government will be able to reduce high coupon debts. The premium that will be offered will not be too much. The ultimate aim of the government is to reduce financial cost.”

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