Banks: Financial Services: Budget FY12 - A Preview -Anand Rathi Research

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Financial Services
Key measures expected to impact the sector are the government’s
fiscal deficit position, withdrawal of interest subventions, nod for
raising long-term tax-free infrastructure funds by banks and
reduction in the lock-in period for fixed deposits qualifying for tax
deductions. Companies expected to benefit are all banks and
infrastructure finance companies (REC, PFC, IDFC).



Expectations
 Government’s fiscal deficit not yoy rise significantly - to be ~4.8% of
GDP.
 Interest subventions for pre-shipment credit are expected to be
withdrawn.
 Relaxation in the lock-in period for fixed deposits – from five to three
years – to qualify for tax benefits under Sec.80C.
 Increase in the ceiling for TDS (tax deducted at source) on fixed
deposits.
 Allowing banks to raise tax-free infrastructure funds.
 Increase in the tax-deduction limit for retail infrastructure bonds from
`20,000 to `30,000.
Impact
 Government’s fiscal deficit at 4.8% of GDP is likely to augur well for
government bond yields. Consequently, banks are likely to see treasury
gains, as they (banks) have large investments in government securities.
 Withdrawal of interest subventions for pre-shipment credit is expected
to be neutral for banks
 Could increase the attractiveness of term deposits, and bring them on
par with other investment avenues
 Issuance of tax-free infrastructure bonds could help banks raise
additional funds at a lower cost and for longer maturities, enabling
them to have a better asset-liability match.
 Increase in the tax-deduction limit of retail infrastructure bonds is
likely to make these investments more attractive to taxpayers.
Consequently, infrastructure finance companies have better access to
long-term funding sources.


Companies affected
 Treasury gains are likely to be higher for all government-owned banks,
than for private banks, as the former have a relatively higher share of
G-Sec investments with longer durations.
 Relaxation of the fixed-deposit lock-in clause for tax-deduction
eligibility would benefit all banks.
 Raising tax-free bonds is expected to benefit all banks.
 Increase in the tax-deduction limit for retail infrastructure bonds is
expected to benefit the Industrial Development Finance Corp., the
Power Finance Corp. and the Rural Electrification Corp.