The key measure expected to have a negative impact on the sector is lending at some ceiling rates to specific sectors and activities โ agriculture, infrastructure, SMEs, exporters, education and affordable housing. The companies expected to be affected are all banks, especially PSU banks.
Key measures expected to have a positive impact on the sector are the de-regulation of the small savings rate, reduction in the lock-in period for FDs qualifying for tax deductions and tax breaks for infrastructure and housing lenders. The companies expected to benefit from these are all banks, and infrastructure/housing lenders - IDFC, PFC, HDFC, LIC Housing Finance.
Expectations
* A mechanism for banks to lend at some ceiling rates to specific sectors and activities such as agriculture, infrastructure, small and medium enterprises, exporters, education and affordable housing. The difference between these rates and the โmarketโ rates may be directly provided by the government, partially or fully.
* Relaxation in the lock-in period for fixed deposits, from five years to three years, to qualify for tax benefits under Sec 80C. The ceiling for TDS on fixed deposits could also be increased.
* De-regulation of the small savings rate
* Tax breaks to housing finance/ infrastructure lending companies: up to 20 per cent of profits derived from such projects are exempt. This is expected to be raised to 40 per cent.
* Lending by banks to power projects/NBFCs financing power projects, housing loans below Rs3m (currently Rs2m) is likely to be considered as priority sector lending.
Impact on the sector
* Banks would be nudged to reduce lending rates/adhere to ceiling rates for lending to focus sectors. Margins would be hurt, as the banking system has raised a large portion of its liabilities at high rates in the recent past.
* Relaxation in the lock-in period and/or ceiling for TDS on interest earned would increase the attractiveness of term deposits, and bring them on par with other investment avenues.
* Any reduction in the small savings rate would give banks more flexibility to lower deposit rates, meaning lower cost of funds for banks, helping them protect their net interest margins to an extent.
* Tax breaks to infra/housing lenders would increase profitability and capital adequacy of housing/infrastructure lenders, encouraging them to further disbursements. Banks could also join in, if the PSL status is extended to housing loans up to Rs 3 million.
Companies impacted
* Ceiling rates for certain loan categories would impact bank lending yields for all banks.
* De-regulation, of the fixed deposit lock-in clause and the small savings rate, would affect all banks positively.
* Tax breaks for lending to infrastructure / housing are expected to benefit HDFC, LIC Housing Finance, IDFC and PFC.
(The report has been prepared by Clyton Fernandes and Kaitav Shah of Anand Rathi Securities.)