IMPACT OF UNION BUDGET 2011-12

BANKING AND FINANCIAL SERVICES

Industry Snapshot

Banking: The sector witnessed an improvement in credit-offtake from Q3FY11, with the total
bank credit for Scheduled Commercial Banks (SCBs), registering a y-o-y growth of 24.6% to touch
Rs.3,763,213 crore as on December 31, 2010. This was led by the credit extended to telecom
companies to pay for the 3G and broadband wireless auctions during Q1FY11, low base effect and
a gradual broad-based pick-up in demand. Aggregate deposits with SCBs registered 16.6% y-o-y
growth to touch Rs.4,971,390 crore as on December 31, 2010, with much of the growth occurring
during Q1FY11. As liquidity tightened and credit-offtake picked up, most banks stepped up their
deposit mobilisation efforts by offering attractive interest rates on time deposits. Improving credit
offtake coupled with subdued deposit growth resulted in higher Credit-to-Deposit (CD) ratio across
most banks. The Incremental CD ratio for all SCBs rose to 107.8% at end-9MFY11. The
investment-to-deposit ratio fell from 33.1% in December 2009 to 29.1% in December 2010
indicating that banks were able to fund much of their incremental credit growth by liquidating their
investments. However, the scope for such funding is limited in future. Given the expected GDP
growth estimate for FY11 at 8.6% and RBI’s anti-inflationary policy stance, we believe the liquidity
deficit will continue.

Asset quality witnessed some pressure with the overall Gross NPAs as a percentage of Gross
Advances rising from 2.3% in FY09 to 2.5% in FY10. For FY11, taking into account the lower level
of slippages from restructured assets to NPAs as well as the improving economic scenario, the
Gross NPA ratio would be somewhat lower than our earlier projections of 3%.

In addition to the budgeted Rs.16,500 crore infusion during FY11, the GoI recently approved
additional capital infusion of Rs.6,000 crore. These funds would be used to raise the GOI stake to
58% in select Public Sector banks and lead to an improvement in capital adequacy levels.

Following the improved outlook on monsoon coupled with a pick-up in corporate earnings, we
continue to estimate advances growth to be in the range of 20-22% (led largely by increase in
demand from the infrastructure sector). We estimate deposit growth for FY11 to be in the range of
18-20%. We believe that the increase in credit offtake and higher C/D ratio will offset the impact of
rising interest rates on the NIMs to some extent. The scope for significant, across-the-board
treasury gains could be limited in the near term, given the hardening interest rate scenario.

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Professional Risk Opinion

 NBFC: Total assets of the NBFC sector witnessed good growth during FY10 and recovered after a
difficult year in FY09 that was on account of the global financial crisis. As per RBI’s report on
trends and progress of banking in India (2009-10), total assets of NBFCs (excluding non
systemically important non-deposit small NBFCs that account for less than 10% of the sector)
increased from Rs.5.60 lakh crore to Rs.6.57 lakh crore witnessing a YoY growth of 17.3%. There
was an improvement in asset quality for NBFC-Ds (deposit-accepting NBFCs category as Gross
NPA ratio (Gross NPA / Gross Advances) declined from 2.0% for FY09 to 1.3% for FY10. Gross
NPA ratio for NBFC-ND-SIs (non-deposit accepting systemically important NBFC) remained static
at 3.0% for FY10 compared with 2.9% for FY09. However the same improved marginally to 2.6%
as on June 30, 2010 due to the improving economic environment. NBFCs have improved their risk
profile by reducing the asset-liability mismatches as well as reducing exposure to unsecured lending.
Going forward NBFCs are expected to maintain the growth momentum along with the overall
economic growth.

Insurance: Growth in sales of automobiles and retail health helped the domestic non-life insurance
industry to grow at 14.5% in 2009-10, with the total premium collection at Rs.34,620 crore as
against Rs.30,352 crore in the previous year. The four public sector players - New India Assurance,
United India, National India and Oriental Insurance - share stood at 59.6% and private player’s
share was at 40.4% in 2009-10. Gross premium in the life insurance sector increased YoY by 19.7%
during FY10 with 23.1% growth in premiums of private life insurers and 18.3% growth in
premiums of LIC. However, the sector is still dominated by Life Insurance Corporation of India
(LIC) with a dominant market share of 70.1%. Going forward the new regulatory requirements by
IRDA on ULIPs might affect the growth of life insurance companies, however the impact is
expected to be a medium-term adjustment as long-term growth will be driven by increasing
penetration levels in India that are still low compared to other countries.

Mutual Funds: Total AUM (monthly average) of the industry increased by 52% YoY to Rs.7.47
lakh crore for March 2010 that reflected the overall growth in the stock markets and improvement
in market liquidity thereby increasing the AUM under debt schemes. As against this, AUM had
fallen by 7% during FY09.

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Budget Proposals
Sr PROPOSAL IMPACT

1. Rs.6,000 crore to be provided during 2011-12 to enable public sector

banks to maintain a minimum of Tier I CRAR of 8%.

2. Rs.500 crore to be provided to enable Regional Rural Banks to maintain a

CRAR of at least 9% as on March 31, 2012

3. Existing scheme of interest subvention of 1% on housing loan liberalized

further by extending the same to housing loans upto Rs.15 lakhs where
cost of house does not exceed Rs.25 lakhs

4. Existing housing loan limit enhanced to Rs.25 lakh for dwelling units
under priority sector lending

5. Central Electronic Registry to prevent frauds involving multiple lending on

the same immovable property to become operational by March 31, 2011

6. To enhance creditworthiness of economically weaker sections and LIG

households, a Mortgage Risk Guarantee Fund to be created under Rajiv
Awas Yojana.

7. In view of enhanced target for flow of agriculture credit, capital base of

NABARD to be strengthened by Rs.3,000 crore in a phased manner.
Rs.10,000 crore to be contributed to NABARD’s Short-term Rural Credit
fund for 2011-12. Corpus of RIDF XVII to be raised from Rs.16,000
crore to Rs.18,000 crore

8. Rs.5,000 crore to be provided to SIDBI for refinancing incremental

lending by banks to MSME (Micro, Small and Medium Enterprises)
enterprises.

9. To boost infrastructure development, tax-free bonds of Rs.30,000 crore

proposed to be issued by Government undertakings during 2011-12.

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Professional Risk Opinion

 10. Mutual Funds allowed to raise subscriptions from foreign investors who
meet KYC norms for equity schemes. Currently only FIIs and sub-
accounts registered with SEBI were allowed.

11. “India Microfinance Investment Fund” of Rs.100 crore under SIDBI to

help smaller MFIs maintain growth and achieve scale. Also “Women’s
SHG’s Development Fund” of Rs.500 crore to promote Self Help
Groups. Government is also considering putting in place framework to
protect small borrowers.

Impact on the industry

The proposed capital infusion of Rs.6,000 crore in PSU banks to maintain a Tier I CAR of 8% is
aimed at further strengthening their capital structure and fund credit growth. Infusion of funds into
Financial institutions (FIs) such as NABARD and SIDBI will enable them to channelise credit to
the agriculture and MSME segments. Select FIs would benefit from access to low-cost funds raised
through the issuance of tax-free bonds. Given the increasing levels of inflation, the enhancement in
limit for housing loans qualifying for priority sector exposures alongwith the liberalization of the
interest subvention scheme would act as an incentive for flow of resources to the affordable
housing segment. A clear picture on the entry of new private sector banks would emerge post the
issuance of guidelines by the RBI by end-FY11. Entry of private players is expected to improve the
banking penetration.

Foreign investors (in addition to the FIIs and sub-accounts registered with SEBI) can now invest in
Indian Mutual Funds thereby allowing these investors to access the expertise of the Indian fund
managers. As a result the subscriber base for the mutual fund industry will increase and is likely to
lead to higher assets under management. Also since a lot of mutual funds in India have tie-up / joint
venture with a foreign partner, their ability to use the foreign partner’s network to find investors
would also be high.

The measures on Microfinance and Self Help Groups indicate Government’s intent that the sector
is of critical importance for financial inclusion in the economy. While the amounts proposed of
Rs.100 crore and Rs.500 crore for India Microfinance Investment Fund and Women’s SHG’s
Development Fund respectively, are moderate in size, they indicate the intent of the Government in
supporting the sector. For larger MFIs there may not be substantial direct impact, however

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Government’s statement for putting in place appropriate regulatory framework has reduced the
regulatory uncertainty surrounding the sector.

Budget Impact
SEGMENT IMPACT COMMENTS

Banking Sector PSU banks and RRBs to benefit

Financial Institutions Select FIs to benefit from low-cost

funding/capital infusion

HFCs to benefit from concessional

Housing Finance Companies rates of borrowing against a larger
pool of qualifying housing loans

Mutual Funds Access to larger investor base

Regulatory uncertainty surrounding

Microfinance
the sector likely to reduce

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Professional Risk Opinion