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Banking Sector in Pain

The Budget has posed a lot of negative questions for the banking sector

Kredent Finance says that the Budget has taken a huge step back, as far as the banking sector is concerned

Key Takeaways

The Budget FY1009-10 was a budget for the “AAM ADMI” where the government distributed generously. Since there were no tax cuts, nothing on disinvestment roadmap and FDI policy or any other popular reforms talked about so much in the media, the markets crashed with Sensex sliding nearly 900 points and Nifty by around 300. The biggest reason for the crash is nothing but OVER EXPECTATION, as we mentioned in our pre budget analysis (report dated 3rd July 09) that this hype created by the media is a cause of concern.

Among the populist reforms, the government has provided extra thrust on the infrastructure growth, which it believes will lead to a higher overall growth. A goods and services tax (GST) will be introduced from April 1, 2010, which will subsume all indirect taxes and will levy only value-added production so that manufacturers don’t pay taxes twice.

India’s fiscal deficit is expected to widen to a 16-year high of 6.8 percent of gross domestic product from a revised 6 percent
Government provided for only Rs 11.3 bn this year from the sale of stakes in state-run companies, much below the street expectations and the result of economic survey

Banking Sector in Pain

One of the biggest losers out of the Union Budget 2009-10 is the Indian banking sector. A combination of reduction in interest rates, extension of payment dates clubbed with a mounting deficit have spelled a dooms day for the Indian banking sector.

The finance minister has also said that the banking and financial services companies will not be considered for the process of disinvestment, this will also lead to a dearth of the much needed capital to comply with the applicable BASEL II norm.

However the government did mentioned that they will take the necessary steps to recapitalize the PSU banks, which is the only positive for the sector.

The government has increased the amount of necessary allocation for banks to underdeveloped sections of society, these kind of loans are likely to put strains on their balance sheet and profitability.