Budget 2012: Govt seeks fairy to give banks teeth

After having to fall back on the Life Insurance Corporation to recapitalize banks in 2011-12, the government is now looking at creating a holding company which will raise funds to invest in shares of public sector banks. Although the finance minister set aside Rs 15,890 crore for recapitalization of PSU banks, regional rural banks and Nabard, this may not be enough.
“The moot question is to find the source for recapitalization. Also, the banking sector requires Rs 1,10,000 crore to comply with the Basel-III norms and the government’s offer of Rs 15,890 crore is just a drop in the ocean,” said Naresh Makhijani, partner, KPMG. Banks across the world are engaged in a hunt for capital to meet with new capital requirements that have been decided by regulators worldwide. These capital norms drawn up under the aegis of the Bank for International Settlements in Basel are commonly known as Basel III norms.
Banks will get a boost in their efforts to mobilize low-cost deposits with interest income of up to Rs 10,000 on savings deposits being exempt from tax. For banks like Kotak Mahindra and Yes Bank, which offer higher returns on savings deposits, this provides one more attraction to draw customers. Also, the government’s move to directly credit subsidies to the poor through bank accounts will provide banks with low-cost float funds and new customers. “Effectively, the returns on savings account comes very close to term deposits on a post-tax basis — balances of around Rs 1.66 lakh (at 6% rate) to Rs 2.5 lakh (at 4% rate) give you tax-free returns,” said K V S Manian, president (consumer banking), Kotak Mahindra Bank.
In a move to take banking services to the hitherto unbanked, the finance minister has set banks a target of reaching out to all habitations with a population of more than 1,000 in the northeastern and hilly states. During the current fiscal, banks have already reached out to 70,000 habitations with a population of over 2,000.
The finance minister has also proposed the launch of ultra-small branches which would be manned by business correspondents. They would connect to the main bank’s servers through point of sales terminals, thus providing a boost to electronic payments. There is also a Budget proposal to convert all Kisan Credit Cards into electronic smart cards.
Budget 2012
Budget News 2012