Budget 2012: FM's handout to banks will not be enough

Financial services was one of the few sectors that received some favours in an otherwise lacklustre Union Budget. The biggest announcement about the sector came in relation to the  recapitalisation of public-sector banks, regional rural banks and Nabard.

Finance Minister Pranab Mukherjee said he was allocating Rs 15,888 crore in the new financial year starting 1 April.

Dipen Shah, head-fundamental  research at Kotak Securities, said, “While they committed almost Rs 16,000 crore, it consists of public-sector undertakings (PSUs), commercial banks, rural banks, Nabard and other PSU financial institutions. How much finally comes to PSU banks remains to be seen.”

Mukherjee said a financial services holding company would also be set up to sort capital requirement issues of state-run banks. A central Know Your Customer (KYC) depository will also be developed in the new financial year, the finance minister said.

In other measures, the Budget also proposed a credit guarantee fund for education loans to ensure adequate credit is available for good students.

On the flip side, the agricultural credit target for the financial year ending March 2013 was raised to Rs 5,75,000 crore. This represents an increase of  Rs 1,00,000 crore over the target for the current year. Agricultural loans have been a major cause of band loans for banks and raising the target would increase the threat to the asset quality of banks.

In addition, there are some doubts about the effect of allowing the Kisan Credit Card at ATMs. Will ATM use be allowed without links to savings accounts? And who ensures the use of the money withdrawn at an ATM ? What if the funds are used for purposes other than agricultural? Details are still unclear.

Overall, the Budget didn’t inspire investors too much and the BSE Bankex, an index of banks, closed Friday  almost 2 percent down, losing most of its earlier trading gains.