Limited as it is in its scope, the Interim Budget 2009-10 of the Union government has made only a few references to the banking sector. Focusing on the imperative need for developing the rural sector, banks have been asked to lend to farmers at sub-prime lending rate. Banks would be compensated by the exchequer to the extent of the interest loss.

The other announcement is about recapitalisation of public sector banks to enable them to attain a capital adequacy ratio of 12 per cent. Referring to the Agricultural Debt Waiver and Debt Relief Scheme for farmers, it is revealed that the total debt waiver and relief have amounted to Rs.65,300 crore covering 3.6 crore farmers.

Three’-fold increase in farm credit

Since 2003-04, credit disbursements to the agricultural sector have gone up from Rs.87,000 crore to about Rs.2.5 lakh crore in 2007-08 marking a three’-fold increase. Continued government interest subvention in 2009-10 has been announced "to ensure that farmers get short term crop loans up to Rs.3 lakh at 7 per cent per annum." This farmer-friendly gesture, though appears to be a helping hand on the eve of the general election, is necessary to augment private investment in agriculture, which is stagnating in the recent years.

If farmers borrowing up to Rs.3 lakh can get bank loans at 7 per cent per annum, there is a need for regulating the interest rates charged by the microfinance institutions for loans much smaller than Rs.3 lakh. But who will bell the cat?

Financial health

The interim budget speech makes a special reference to the outcome of the financial sector reforms, stating, "over past years, technological, institutional and legal reforms in the financial sector have resulted in public sector banks achieving significant improvement in their financial health. The asset quality has improved and NPAs have declined considerably from 7.8 per cent on 31 March, 2004 to 2.3 per cent on 31 March, 2008" (pertains to gross NPA as net NPA for public sector banks is less than one per cent during FY2008).

During FY2009, there could be a marginal increase in gross NPA as a result of the impact of global financial meltdown and the resultant decline in economic activities at home which is likely to affect recovery of bank dues during the last quarter of FY2009. Housing and retail credit may be the culprits in the case of a few banks.

Recapitalisation

The Indian banking sector, barring a couple of banks, has attained the capital adequacy ratio of 9 per cent, as stipulated by the Reserve Bank of India. However, to comply with the Basel-II stipulations, they have to move towards reaching a CRAR of 12 per cent. For this, the Budget states: "government would recapitalise the public sector banks over next two years to enable them to maintain Capital to Risk Weighted Assets Ratio (CRAR) of 12 per cent and to ensure that credit growth continues to sustain economic growth."

In the case of regional rural banks, it is disclosed that "the Central government has contributed Rs.652 crore for the capitalisation of RRBs up to 31 December, 2008." During the last four years, the government of India has initiated the process of amalgamation of the weaker regional rural banks. Without much dislocation, 196 of them have been amalgamated into 85 banks. By this process, their operational areas have been enlarged.

One omission in the reference to these banks in the Budget speech is the establishment of a new regional rural bank - Puduvai Bharathiar Grama Bank in Puducherry. Incidentally, this bank was established after a gap of 27 years after the last bank was opened under the Regional Rural Banks Act 1976.