The Telegraph
 
 
IN TODAY'S PAPER
CITY NEWSLINES
 
 
ARCHIVES
Since 1st March, 1999
 
THE TELEGRAPH
 
 
Email This Page
Captain Courageous bites the bullet

The budget has attempted to disperse efficiency to the rural sector, reduce interest outgo of the Centre and states on account of high-yield debt, create conditions for mergers of nationalised banks and to send signals abroad that Delhi now dares to take sensitive decisions by raising FDI ceiling in banks and telecom. But in the process, the finance minister has met the expectations of banks half way through. He has offered sops to FDI in banks, but still refused to extend the same to the PSU banks; he has reduced interest on small savings but asked banks to lend to SSIs and agriculture at a rate within a 2 per cent band of PLR; he has removed the cap on voting rights in banks but wanted private sector banks to lend for tractors in villages instead of cars to city dwellers.

On balance, however, banks are grateful to the finance minister. He has put an end to the woes of treasury managers in banks. During the last couple of months, the major concern for them was whether there will be a reduction in small savings rates. Now that the rate on small savings and PPF accounts have finally come down by one percentage point, banks will breath easy. Bankers feel it will now be a matter of time before the labour ministry also reduces interest rates in PF accounts in line with general trend of lower interest rates.

In order perhaps not to rub the swadeshi lobby in the ruling party on the wrong side, Jaswant Singh has kept away the nationalised banks from the purview of the FDI ceiling hike. That is, foreigners cannot buy into the nationalised banks but can now up their stakes in private sector banks. They will also have full voting rights on their shares. Many foreign investors may not find it very heartening. There are not many private sector banks up for grabs. But a number of nationalised banks may prove a good buy if the restrictions are lifted. Well, this cannot happen when the finance minister was actually looking at the next elections.

In fact, he deserves a cheer or two for showing the courage to reduce interest rates on small savings despite the election next year. He could do so since he had a number of sops for those who might be affected. The states for instance particularly those like West Bengal may not like it since this means less inflows into their coffers. But the swap of high cost debt offered is a very big relief. The Centre will now replace state government debts at 13 per cent interest with debts carrying lower interests. States will have a hefty reduction in expenditure on account of interest payment.

For banks also the Centre made an offer to buy back government paper yielding high interest. But the banks might not find the offer very exciting since the tax concession on the capital gains on these debt retirements is rather modest. Banks want the entire money so released from the bonds to qualify for tax relief if this is provided for bad debts. The tax concession under Section 72A of the Income Tax Act offered to nationalised banks merging with one another is a signal that there will now be many such mergers. Earlier this benefit was not available to banks. The two measures buy back of high yield papers at a premium and extension of income tax benefits on mergers are steps initiated to facilitate a reduction in the number of nationalised banks.

Private sector banks will have to open branches in rural areas, extend low cost loans to rural borrowers. Efficiency has a price and these banks will now have to pay it. Given the market structure these banks on their own would have moved to rural and semi-urban areas, more so since there is pressure on them to improve rural lending.

Top
Email This Page