Budget 2012: Agenda for banking sector this year

The government and the Reserve Bank of India (RBI) is half done on financial inclusion. More branches are being opened. Four elements of inclusion have also been articulated: a basic bank account with an overdraft facility; entrepreneurial credit on the lines of a Kisan credit card; an accumulating savings product; and a remittance facility. This is a step ahead from just opening no-frills accounts. The ecosystem for inclusion is ideal. The Unique Identification Authority of India (UIDAI) is trying to link its Aadhaar number with a bank account; the banking system is computerised through core banking solution and interlinked; branch licencing is eased; payment of government benefits to individuals is mandated through bank/post-office accounts; banks can appoint business correspondents (BCs) to solve the last-mile problem; the commercials of loans to clients (other than agricultural loans) have been de-controlled; the National Rural Livelihoods Mission is rolling out its programme with the basic architecture of self-help groups (SHGs). Never in the history of banking have so many things happened simultaneously. Each initiative is driven by a primary agenda of business/development, with inclusion as an additional agenda operating on marginal costs. For instance, core banking solution of banks are done for purposes of efficiency, but will benefit inclusion. In spite of all this there is no euphoria on the inclusion front. The horse has been taken to the water, but there are constraints. ? The policy is credit oriented. The credit market is distorted with multiple players. SHGs with subsidies; agricultural loans with write offs; microfinance loans with unclear legislation. That space is a mess. ? There is reliance on one big idea. The current big idea is BCs. BCs add four layers of costs: cost of agency, added risk cost due to one/two more layers of cash transit, cost of the BCs' technology and the cost of carrier of information. The clients do not add revenues commensurate with costs. While this should be pursued, the banks have not thought of other ideas except for kiosk banking. ? Banks are expanding, thanks to villages with a population of 2,000; they have been mandated to open branches in all habitations with 5,000 population. The outlets have increased; the staff has not correspondingly increased. Dumping anything on BCs without considerations of risk is a welcome idea for them. ? There is no interoperability between the BC and bank's own core banking system. The agenda of inclusion subject to one person's capability to deliver at the last mile. It just does not provide a choice. Click here to visit our budget page So what should we chase in the coming year? ? Make banking a pleasure. For a year, just talk of savings instead of loans; talk of safety of money instead of interest rates; talk of building up household level equity and a strong foundation. This is Swabhimaan. ? Provide for inter-operability between BC and multiple banks, multiple channels. Give the poor the choice of all services that a regular customer gets. ? Explore alternatives to reach out to customers. Take lessons from microfinance: the poor do not desperately need walk-in transactions at the counter, they are happy with predictable choupal transactions.Divide the transactions into ones that can be planned and emergency. Reach out through an extension mechanism to meet planned transactions at the choupal. Use BC/agent/extension counter. ? Provide technology options: the poor will use ATMs and do mobile transactions if they are offered. ? Recruit young professionals from local colleges. If microfinance institutions could make these people work at odd hours, they would work for a bank. Decentralise, and delegate; allow people to take risks; back up the field with RTI and CVC issues; banking will get unleashed. _ Provide for local solutions. Delegate product development and specific product pricing to zonal offices. ? Involve cooperatives, microfinance institutions and NGOs. They are the ones who provide the local flavour.

Basically, there is nothing the government could do on the supply side. It had done what it could. It is time to fix the demand side.

Budget 2012: What will impact auto, banking and real estate?
It seems to be a complicated Budget for Mr Pranab Mukharjee. The growth rate is declining, inflation has touched its peak, interest rates are constant at higher levels and fiscal deficit expected to be very high and to add glitter to the gloom expectations are very high in terms of personal tax structure. We could not meet our GDP growth targets whereas our expenditure and fiscal deficit targets have surpassed. Inflation for the year is expected to be around 7.5 to 8%. Rising cost of imports especially crude oil and declining rupee is another cause of concern for the govt. Budget may be tricky this time for the individuals as well as corporate. Following can be important points related to individuals: Tax Slab for male candidates may increase to Rs 2.10 lakhs from Rs 1.80 lakhs and for women it may go up to Rs 2.25 Lakhs from Rs 2.00 Lakhs. Deduction under section 80C may increase to Rs 1.50 Lakhs instead of Rs 1.00 Lakhs. Whereas, additional limit in infrastructure bonds may remain same. There can be announcements on Direct Tax Code relating to implementation from next financial year. Few new services will be added to the service tax basket. Food security bill will be introduced during the Budget and a specified fund would be allocated for the food security in the country.

Following sectors may be impacted during Budget: Automobile: Increase in excise duty on diesel vehicles is certain and it may be accompanied by petrol vehicles as well. Whereas, there may be a sharp cut in import duty on vehicles imported to India. Diesel price de-regulation is in conversation since a longtime, but the Govt will get rid of it by increasing nominal amount of duty on the same. Automobile industry will be impacted mildly negatively after the announcements. We are also expecting sharp decline in the sales numbers of diesel vehicles after Budget. Automobile companies will be forced to increase the prices of vehicles and suffer losses on the back of declining sales numbers. The price increase may range from 3% to 6%. On the other hand, RBI's credit policy may bring sigh of relief by cutting interest rates during March or most probably in April. Another area of concern for automobile sector is; rising crude oil prices due to disturbance in Iran. Nothing seems to be positive for the sector. We hold underperform rating on the overall sector. Banking: There can be certain guidelines on the banking industry during Budget speech. Finance minister may guide banks to have stringent credit policies to avoid defaults. There can be clarity on issuing new banking licenses which would further increase competition in the industry. Again, banking industry would face ups and downs throughout the year. There

would be increased liquidity on the back of the declining interest rates but demand would be slow because of slow-down in real estate and automobile industry. International situations would also add pressure to the banking industry. Increasing defaults from the corporate would put a question mark on the assets quality of the banks. We believe banks would be neutral through-out financial year 2012-13. Real Estate: Govt is working on introducing independent regulatory body for the Real estate sector. Govt has appointed a committee to perform the primary research and assigned the responsibility to design the structure for regulatory body. There can be further clarity on the development in the same area. Few new regulations or acts can be introduced or amended related to residential and commercial properties. This is one of the most unorganized industries in India. It's the prime focus of the Govt. to stream line real estate industry in order to control black money and flow of funds within the country. This step would benefit large cap companies in the segment of construction and contracting. Now, the intermediation process in the real estate industry would be more regulated and with hassle free procedures. There would be more income for the Govt in terms of tax collection from the sector. Rental income would also be part of effective tax structure now. If Govt. will introduce regulatory body the industry may emerge as a victor in the coming years. Retail:

FICCI has highlighted the following proposals for the Retail Industry in its pre-budget memorandum. A Retail Policy should be considered for promulgation by the government which will help modern retailing grow from strength to strength in India. An empowered committee under the Minister may guide and supervise implementation of the Retail Policy and take appropriate decisions. The empowered committee should have representatives from industry bodies such as FICCI, CII, RAI etc and retail industry as well. In order to augment the living standards of people in the city, the government could look at creating Retail and Entertainment Zones (REZ) similar to SEZ and IT parks. Retailers in REZ should get benefits like exemption from stamp duty, octroi, and cheaper power. In order to enable mergers and amalgamations in loss making retail companies, so that the amalgamated entity is able to carry forward the predecessor losses, section 72A of the Income Tax Act 1961, should be extended to retail companies, as currently the retail companies do not come under the definition of industrial undertaking, which is one of the mandatory conditions for carrying forward of losses under section 72A for any M&A. Currently 200% weighted deduction is permissible for in-house approved R&D under section 35 (2AB), however the same is restricted to manufacturing organization. Retail is not considered as manufacturing, however retail companies also incur substantial R&D expenditure, which is very

much required for growth and survival of the industry. Hence this benefit should be extended to retail companies. Supply chain investments by retailers help support infrastructure development in logistics across the country and positively impacts industries like agriculture. Thus supply chain investments need to be incentivized as follows: Exemption for capital imports of supply chain equipment including hand held scanners, forklifts, cold chain equipment etc. Duty and tax exemption on supply chain automation products (Hand-held scanners, Warehouse management software and associated services) Special tariff loans for warehousing and back-end processing Increase in the maximum limit of reimbursement (currently expected to be 50% of Rs. 10 Cr.) proposed by the Ministry for Food Processing under the scheme for financing building up of cold chains by the Industry for: Refrigerated storage centre Refrigerated transportations Refrigerated processing centre Amendment in Prevention of Food Adulteration Act: Manufacturer should be solely responsible for contents of packed products to avoid unnecessary harassment of retailers. Amendment to Legal Metrology Act 2009 particularly in relation to the offence by the Company wherein Director can sub-delegate and nominate one of the supervisory level employees who is directly responsible to the Company for the conduct of day to day business. Review stock limits under Essential Commodities Act. Mandate the adoption of Bar Codes using global identification standards by all manufacturers and exports under the Legal Metrology Act. Uniform legislation allowing shops to operate 365 days and extended hours. Incentivize states for a model Shops & Establishments Act. Amendment in APMC Act that would allow the retailers directly procure vegetables and fruits from the farmers, invest in them to help drive yields, quality of yield, storage and processing capacities.

Fast moving consumer goods industry(FMCG)

sector this year too expect more disposable income in the hands of consumers with a restructuring of income tax slabs in line with the Direct Taxes Code (DTC) Bill. DTC is expected to come into force in the next financial year and is aimed at simplifying tax laws and lowering tax rates. "The FMCG industry's key expectations from the Budget include a consistency in fiscal policy to enable companies to plan for medium term and thereby aid new investments; and measures to manage fiscal deficit by judicious spending," says Kimsuka Narsimhan, Chief Financial Officer, Pepsico India. Budgetary measures should also sustain concessions for Agro based industries to incentivize investments, she says. Industry insiders also expect a phasing out of the Corporate Service Tax, which increases the cost of products, thereby threatening sale and margins, and an ushering in of the Goods and Services Tax. The standard excise duty at 10 per cent is expected to be maintained in the budget. "The sector also expects a revision under section 80-IA, whereby the definition of infrastructure can be amended to include rural infrastructure. Defining rural infrastructure will provide incentives to people to make investments in rural projects and will provide them some exemption and tax relief. At present, there is no exemption for such projects," says Krishan Malhotra, Partner at audit firm KPMG. Section 33-A, which specifies tax incentives for processing tea, can be extended to include coffee and tobacco processing, he says
Automobile industry The automobile industry Monday appreciated Finance Minister Pranab Mukherjee for not changing excise duty rates and welcomed the tax concessions for environment friendly vehicles. "It is a neutral budget for the auto sector. We had expected a hike in the excise duty rates. The tax sops given for electric and hybrid vehicles are a move in the right direction. However necessary infrastructure should be there for these technologies to gain ground," Y.V.S. Vijay Kumar, executive vice president and business head, Hindustan Motors said. An industry analyst, preferring anonymity, said: "The tax sops given to the electric vehicles will not make any major impact. It will be for small segment of vehicle." While presenting the budget for 2011-12 in the Lok Sabha, Mukherjee said: "The Indian automobile market is the second fastest growing in the world and has shown nearly 30 per cent growth this year. "World over, substantial investments are being made in the field of hybrid and electric mobility. To provide green and clean transportation for the masses,National Mission for Hybrid and Electric Vehicles will be launched in collaboration with all stakeholders." In order to popularise electric vehicles, Mukherjee proposed full exemption from basic customs duty and a

concessional rate of central excise duty of four per cent on batteries imported by manufacturers for the replacement market. This is expected to reduce the battery cost when an electric vehicle user goes for replacement of his old battery. "Fuel cell or hydrogen cell technology is a promising green technology for the automobile sector. I propose to extend the concessional excise duty of 10 per cent to vehicles based on this technology," Mukherjee said. He also said full exemption from basic customs duty and special countervailing duty on specified parts of hybrid vehicles will be given while reducing the excise duty to five per cent from the current 10 per cent to encourage domestic production. Mukherjee also proposed to reduce the excise duty to five per cent on manufacture of kits for converting fossil fuel vehicles to hybrid vehicles. While scrapping the refund-based excise duty for factory-built ambulances and offering the tax concession outright, Mukherjee extended the refund-based excise duty concession for taxis with a seating capacity up to 13 people including the driver. According to Angel Broking, a stock broking firm, the broader measures like increased focus on rural and infrastructure spending would support long-term growth of the auto sector.

Banking: The finance minister in his Union Budget speech said the government will provide capital support to the tune of Rs 6,000 crore to public sector banks during the next fiscal to strengthen their capital base. During the year 2010-11, the government will provide a sum of Rs 20,157 crore for infusion in public sector banks to maintain Tier I CRAR at 8% and increase the government equity in some banks to 58%. As part of the recapitalisation exercise, the government approved infusion of Rs 6,211 crore into five banks in June 2010. Banks, which had got capital support from the government in the first tranche, included, Union Bank of India , Bank of Maharashtra ,IDBI Bank , UCO Bank and Central Bank of India . The second tranche, announced earlier this month, also provided capital support for several public sector banks, including Corporation Bank , UCO Bank ,Indian Overseas Bank and United Bank of India . In addition, the finance minister also announced the recapitalisation of Regional Rural Banks (RRBs) As part of financial strengthening of regional rural banks, an amount of Rs 350 crore was given to these banks during this year. Highlights of Union Budget's allocation to the sector:

? Interest subvention on housing loans extended by one year ? Propose to give Rs 3000cr to NABARD ? Infra sector FII cap for bonds with 5-year residual maturity ? To raise corpus of rural infra development fund to Rs 18000cr vs Rs 16000cr ? Discussions on to further liberalise FDI policy ? To move to direct cash subsidy for fertilisers, kerosene ? Mulling nutrient-based subsidy policy for urea ? Propose to create an equity fund of Rs 100cr for MFIs ? Propose to create a women's self help group with a corpus of Rs 500cr ? 6000cr capital infusion in 2011-12 for PSU banks ? RBI to issue guidelines on banking licesnes this fiscal ? FII's permitted to invest in unlisted bonds ? FII limit in corporate bonds in infra is being raised by additional USD 20bn ? Will allow registered FII's to participate in Indian MF industry: ? SEBI registered MF can access foreign investors after fulfilling KYC norms ? SEBI registered mutual funds to accept subscription from foreign investors ? NRI's are allowed to invest in mutual funds Impact: Strengthening of the banking sector through capital infusion of Rs 20,000 crore is welcome and will give boost to credit growth. Issue of new banking licenses has been discussed and so this will improve sentiment and provided transparency and strong eligibility norms are in place for such licenses, the banking sector will widen and deepen with more players coming in. Corpus of Rs.100 crores for Micro finance sector equity support will give a boost to the small MFIs.
The IT sector: HYDERABAD: The information technology (IT) sector is disappointed at Finance Minister Pranab Mukherjee's union budget for 2011-12 for not extending tax incentives and hiking the Minimum Alternate Tax (MAT). The IT sector in Hyderabad, a key IT hub in the country, feels the finance minister failed to meet its expectations, especially on the demand to continue tax incentives to small and medium enterprises under the Software Technology Parks of India (STPI) scheme. B.V. Mohan Reddy, head of IT sector committee of the Confederation of Indian Industry (CII), Andhra Pradesh chapter, told reporters that medium and small businesses were put at a disadvantage by Mukherjee's silence on extending tax benefits. "We had given a number of representations to the finance minister but we feel that he has not met our expectations. We wanted Sections 10A and 10B to be extended one more year, at least for small and medium businesses," he said. Reddy, who is also the chairman and managing director of Infotech Enterprises, said after the direct tax code (DTC) comes into effect April 1, 2012, the direct benefits will automatically disappear.

"The finance minister was silent about it, which made us believe this particular tax incentive 10A and 10B will no longer be applicable and this has put small and medium businesses into a disadvantageous position," he said. The IT and IT-enabled services (ITeS) sectors also criticised the hike in MAT from 18 to 18.5 percent. Reddy said that since the MAT was also applicable to all special economic zone (SEZ) units, the hike was a disadvantage for them. The sector had already put forward its argument before the finance minister that globally the MAT was not more than one-third of the corporate taxation. "Even assuming that corporation tax is at 34 percent or 34.5 percent, we believe that MAT should not have been more than 10 or 11 percent," Reddy said. The sector had also sought some clarity on agreements with various countries for avoidance of double taxation, and feels these expectations have not been met.