Sunday, March 17, 2013

Indian Union Budget 2013 Aftermath - An Outlook for the Banking & Insurance Sectors

The Indian Union Budget was presented in the parliament by the Finance Minister of India Mr. P. Chidambaram last week. News channels in India have been bustling with news about the Budget and how good or bad the budget will be over the past few days. As days go by, more and more clarity is emerging on the details and plans announced by our finance minister. Last week, we had an article in this blog titled "Budget 2013 - Highlights & Things you need to know about Budget 2013" where we took a high level view of the Indian Union Budget - 2013.

The purpose of this article is to go a step further and cover how the budget is going to affect the Banking and Insurance Sectors of our country. The idea is to understand the key developments that may impact the sectors in the coming year.

Overall Outlook For The Banking & Insurance Sectors: Positive

The Banking Sector is the life blood of the nation and not a single day goes by without some news about Banks or Insurance companies in the country. As expected, the Finance Minister had loads of plans that could affect banks. The following are some of the highlights that would impact the Banking & Insurance Sectors in India.

1. Before the End of the Financial Year ending 2013, the Finance Ministry is expected to provide Rs. 125.2 billion as additional capital infusion for 13 Public Sector Banks in India. This is set to increase to Rs. 140 billion in Financial Year ending 2014.

My Views:

Public Sector Banks in India have one of the highest Non-Performing Assets (NPAs) across the world. This is because, every time they make losses the government usually steps in and funds them with fresh capital. Where does this money come from?

Tax Payer Money

Essentially, the hard earned money that we pay as taxes is being channeled to fund banks that are unable to maintain their asset quality. They grant bad loans and try to write them off by taking funds from the Government. All this is because they have an unlimited supply of capital from the Government. Capital availability for public banks must be made in-line with private sector in order for the officials from banks to start doing their jobs properly.

What is a Non-Performing Asset?

A Non-Performing Asset from Banking perspective is a loan that is currently in default and the chances of the borrower repaying the money are low to nil.

Kingfisher Airlines is a prime example. SBI Alone has loans worth many thousand crores which KFA owes them. What will happen if Kingfisher declares bankruptcy? SBI will ask the Government for more money and the government will eventually give them the money while private sector banks are left to think how best to handle the losses...

If you ask me, this is not correct. Unfortunately, there is not much we can do about this. Hopefully things will improve in the coming years and the top management in Public Sector Banks start realizing their importance and behave responsibly.

2. The Finance Minister has proposed that India's first Women's Bank be set up. It will be a public sector bank (Owned by the Government) and will most probably begin operations around October or November 2013 if all the requisite approvals are in place. The budget allocated is around Rs. 10 billion

My Views:

I am not a Chauvinist and don’t intend on sounding like one but a "Women’s Bank" looks more like a populist theme with the elections that are coming up next year in mind. How different is this bank going to be in comparison to the existing numerous banks in the country? Practically speaking - The difference may be a result of who will work in the bank and who can open an account in the bank, but we already have millions of women working in Banks across India. This is just going to add yet another bank into the already overcrowded banking sector in India.

3. Funds for both Urban and Rural Housing are being proposed/set up. Rs. 60 billion for the Rural Housing Fund and Rs. 20 billion for the Urban Housing Fund. The funds will be distributed through the National Housing Bank through its Rural Housing Fund and Urban Housing Fund. The money will be used to lend loans to deserving citizens. A point to note is that the Urban Housing Fund is currently being created and is pending RBI Approval.

My Views:

An Infusion of 80 billion rupees into the market to lend loans to people to finance their housing dreams will result in significant growth in both the finance as well as the real estate markets across the country. It is a good step as long as the money performs its intended purpose and reaches the public.

4. Banks will now be able to act as Insurance Intermediaries/Advisors and sell insurance products. Most banks today sell only ULIP or Stock Market Related products. This new ruling will enable banks to sell even traditional insurance plans to its customers across its entire branch network.

My Views:

This is great news for both banks as well as for Insurance companies. Insurance co.’s are going to get additional sales channels and Banks are going to rake in additional revenue through commissions.

5. Insurance Companies can open up offices in Tier II Cities without approval from IRDA.

My Views:

Insurance Companies currently have to get IRDA Approval before they can actually set up offices in Tier II Cities. As a result, their presence is very limited in smaller cities across the country. With this new ruling, they can set up more offices in smaller cities and reach a wider target audience across the country. This will result in a significant boost in Income for Insurance Companies and will result in the Insurance Coverage across India. A Study conducted last year suggested that almost 70% of the population in our country do not even know about what Insurance is or know how to benefit from it. This new ruling will improve the penetration of Insurance into the semi-urban and rural areas of the country.

Final Verdict:

Even though the budget hasn't really given a huge boost to the finance sector in the country, it hasn’t dampened our spirits either. So, given the need for banking and insurance services in the ever growing population of our great nation, the banking industry and the insurance industry are expected to thrive and sustain their growth momentum next year too..

Happy Banking folks!!!


  1. RBI lowered the Repo Rate by 25 basis points , Please share your views on the relative impact. Following page for details.

    1. The repo rate is linked to the interest rate we pay when we take loans from banks because the latter always charges interest which is higher than the existing repo rate. Hence, lower repo rates could induce lenders into lowering the interest rates they charge from individual borrowers too, thereby making credit more affordable.

      So, we can expect cheaper loans from banks



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