With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds.

The revived credit offtake (both from the food and non food segments) and technological reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel accord, the sector is also looking forward to consolidation and investments on the FDI front.

Key Positives Amendment to Securitisation Act: The amendment proposed to make it mandatory for borrowers who prefer an appeal to the Debt Recovery Appellate Tribunal (DRAT), to deposit upfront 50 % of the amount decreed by the DRT (Debt Recovery Tribunal). However, the DRT can reduce the upfront payment to 25 per cent. The said amendment reduced the possibility of defaulters delaying the recovery process through frivolous appeals. One time transfer of assets from AFS to HTM: The RBI initiated one time transfer of investments from AFS to HTM category safeguarded the banks' investment portfolio to the vagaries of the interest rate movements. Tax breaks for consolidation: The finance ministry proposed amendments in the tax laws to offer tax breaks under section 72A in all involuntary amalgamations of banking companies- that are initiated through the action of RBI. Tax breaks will also be offered to FIs merging with banks. Higher margin on advances against shares: To reiterate its concern over the huge FII inflows and hinting at its possible "temporary" nature, RBI has increased the margins on all advances against shares from 40% to 50%. The regulator has also advised banks to raise the minimum cash margin of 20% to 25%. The move is aimed to protect banks that fund investments, against a sharp drop in share prices. FII limit from 20% to 49% in PSU banks: MoF is considering raising the FII limit from 20% to 49% - the maximum possible in PSU banks, so as to allow PSU banks to issue ADRs and GDRs while keeping the overall government equity limit of 51%. Overseas listing will not only bring better transparency and efficiency in the banks' operations but also enable the banks access global capital markets at competitive rates. Clarity on the risk evaluation front: RBI's draft guidelines for implementation of Basel II in India clarified the ambiguity that was persisting on the 'approach' to be adopted for risk evaluation. Keeping in view the goal to have consistency and harmony with international standards, the RBI decided that all banks in India should adopt ' standardized approach' for credit risk and 'basic indicator approach' for operational risk.		Key Negatives Liquidity crunch: The SEBI dictate that Mutual funds will not to be allowed to invest in bank deposits might create liquidity crunch for the banks in the short term, forcing them to accept deposits at higher rates and paring their interest margins. Hike in wages: The 8th bipartite wage settlement that paved the way for 13.25% hike in wages has caused accumulation of huge arrears to the tune of Rs 66 bn to be paid to the bank employees across the industry. The hike in wages was more than what the banks had expected and provisioned for and therefore the entities will have to provide for them in the coming quarters. Interest rate dampener: The interest rate movement in the short term is likely to be with an upward bias. Although a marginal hike will not trigger any sensitivity, an upward movement in inflation, leading to a parallel rise in interest rates may put the current credit growth on hold. Impediments in sectoral reforms: The hike in the FDI cap in private banking sector to 74% and a revision in the voting rights to make it commensurate with equity holding were expected to bring sea changes in the Indian banking scenario. However, opposition from Left and resultant cautious approach from the North Block may hamper the reforms to materializing in the near term.

Budget 2005-06: Complete Coverage

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.