It is now time for the Budget wishes for the banking industry. With economic slow down being the major issue at present, the bankers' main concern is to fund growth without facing any hurdles.
The obvious choice according to bankers which has be acted upon in the Budget 2009-10 is infrastructure funding. With the latest statistics though in marginal terms showed revival of economic growth, pick up in the pace investment cycle, the banking sector expects sweeping measures so that they can play a vital role in intermediating between the demand and supply of funds.
The credit offtake (both from the food and non-food segments) is yet to be revived, the structural reforms are needed to pave the way for a change in the dynamics of the sector itself.
Besides gearing up for the compliance with Basel-II accord, the sector is also looking forward to consolidation and investments on the FDI front.
MS Sundara Rajan, chairman and managing director, Indian Bank said , "There should be reintroduction of the Sub Section 10 (23) G of Income Tax Act. Also, I am in favour of the interest income gained from lending to infrastructure sector should be exempted from the IT Act. It will help us lend more to the infrastructure sector. Otherwise also it will increase our substantial savings."
According to Allen CA Pareira, CMD, Bank of Maharashtra, the long term deposits spanning 7-14 years which are necessary for infrastructure funding must get income tax rebate, because as a banker can't pay high rate of interests for such deposits.
Moreover, the financing to the infrastructure sector should also get income tax rebates, he added. RR Nair, director and chief executive, LIC Housing Finance, "I would like to see a possible increase in tax concession on housing loans from the currently existing limit of Rs 1.5 lakh to Rs 2 lakh . Also, the loan repayment deductible under the relevant section of the income tax act, which is clubbed with a number of other options like mutual fund, provident fund and others, with an upper limit of Rs 1 lakh should be hiked to Rs 1.5 lakh. Moreover, there should be separate provision for capital repayment..''
Sudip Bandyopadhyay's, managing director, Reliance Money, in his budgetary expectations said the new UPA government has raised hopes of all the market participants significantly in the run-up of this year's budget.
"I expect removal of STT on Security transactions and opening up/ further relaxation in FD norms in sectors like insurance, organised retail, banking, There should be announcement of specific steps for disinvestment in large PSUs.and introduction of separate category of investments for individuals in infrastructure bonds issued by PSUs with full tax exemption as this would facilitate channelising huge retail savings into infrastructure)."
However the Indian Banks Association has demanded that bank deposits should be brought under section 80 L for income tax deductions and tax deducted at source (TDS) on savings accounts should be removed for making the same more attractive. The IBA has reiterated that the ceiling of Rs 15,000 for TDS on interest earned on bank fixed deposits should be raised and simplification of service tax and fringe benefit tax norms should be effected..
The leading association like Confederation of Indian Industry (CII) and Ficcihave said that there should be relaxation in the lock-in period for bank savings to qualify for tax benefits from five years to three years and FII or FDI limit in PSU banks should be increased from 20% to 49%. The banks should be provided with additional source for augmenting their capital base ahead of implementation of the advanced version of Basel II.
Bankers also want targeted access to long term debt finance from overseas would help. Even though the bank credit to infrastructure has been growing, it would be neither feasible nor desirable for banks to finance the bulk of incremental financing needs.
Therefore, the role of long-term financing institutions such as insurance companies, provident and pension funds and NBFCs has to be enhanced. To do so, the corporate bond market needs to be strengthened by implementing the Patil Committee recommendations expeditiously, they said.
They also added that priority needs to be given to the development of a market for securitized assets. Some liberalization is necessary in the investment guidelines of these institutions, matched by greater reliance on the judgment of the boards managing them.
While acknowledging the government's increasing commitment to establish clear and stable regimes in all infrastructure sectors the bankers wants that while making in policies and regulations , the government should focused its attention primarily on road, urban and power sectors in the near term. The bankers say that in the road sector, particularly, the state highways--which constitute 4 % of the road network, but carry 40% of traffic are grossly under-funded and recommend that the facilitating framework created by Madhya Pradesh should be replicated in other states.
The key components of the Madhya Pradesh model include a special legislation for state highways, a master-plan (including a comprehensive database, a schedule for implementation based on prioritization and identification of corridors for PPPs) and creation of a state highway authority.
The central government needs to play a more active role in steering development of state highways and formulating a common framework. The bankers said such initiatives would strengthen the three pillars of infrastructure: availability of long-term finance, policy and regulatory frameworks and capacity to implement those frameworks.
Giving examples of China's experiment with large-scale infrastructure funding Justin Yify Lin said China's economic stimulus of 1998-2002 provides an example of a successful fiscal policy strategy that targeted binding constraints on productive growth. This example also illustatres the possibility of combating deflation effectively .
In the midst of the Asian financial crisis when sharp economic slumps in Indonesia, Korea, Malaysia, Philippines and Thailand prompted all her neighbours to depreciate their currencies, the government of China issued an estimated RMB600 billion in bonds specifically to finance infrastructure. Analysts said the total amount may have indeed total of four times more of bank loans, private and local government.
As a result, China went through deflation and still recoded a an average growth rate of 7.8 %, the highest at that time with a very low inflation.
An important feature behind this result is that most of the projects in the stimulus package were targeted to the release of bottlenecks to growth. Examples of these include the highway system, port facilities, telecommuications and education.
For example , the highway in China increased from 4,700 km in 1997 to 25, 100 km in 2002.
The Chinese economy got out of deflation in 2003, annual GDP growth rate reached 10.8 % in 2003-08, 1.2 % point higher than the average annual growth rate of 9.6% in 1079-2002. The high growth rate led to an increase in government revenue, which allowed public debt to decline from about 30% of the GDP in the 1990 to about 20% in 2007.
It is time for a great Indian model on infrastructure funding
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