Allow public to hold more equity in PSU banks: Survey

Advocating banking sector reforms, the Economic Survey suggested on Thursday allowing the public to hold greater equity in public sector banks and aligning of voting rights in banks with equity holdings.

"Align voting rights in banks with equity holdings. Allow public to hold greater equity in public sector banks within the policy of maintaining social control management," said the Survey tabled in Parliament.

The survey also suggested passage of the Banking Regulation (Amendment) Bill 2005.

Noting that the credit market suffers from structural rigidities, the survey said, it may have been reinforced in the recent years due to a high credit demand encouraging the banks to raise deposits at higher rates for maintaining long term liquidity.

"These high rates have now come in the way of cutting lending rates at a pace which is consistent with the current outlook on inflation and the need for stimulating demand," it said.

Inflation in terms of Wholesale Price Index fell marginally to minus 1.3 per cent for the week ended June 20 against --1.14 per cent in the previous week.

Highlighting the performance of the banking sector during 2007-08, the survey said the gross non-performing assets of scheduled commercial banks as proportion of total assets declined to 1.3 per cent against 1.5 per cent in the previous year.

The survey said interest rate income or spread defined as the difference between interest income and interest expenses of scheduled commercial bank was 2.35 per cent against 2.58 per cent in the previous year.

Highest spread during the year at 3.79 per cent was observed in respect of foreign banks followed by old private banks at 2.4 per cent and public sector banks at 2.15 per cent.

Net profit of the banking sector increased to Rs 42,726 crore (Rs 427.26 billion) in 2007-08 against Rs 31,203 crore (Rs 312.03 billion) in the previous year.

The survey also noted that the continued boom in the economic activity which had for the third year in succession led to significant expansion of credit by banks, moderated during 2008-09.

Though the bank credit to commercial sector witnessed strong growth in the first half of the year, it decelerated particularly in the second half of 2008-09.

For the full year, the bank credit to the commercial sector expanded by 16.9 per cent only, compared to a growth of 21 per cent in 2007-08.

Overall credit growth moderated to 17.3 per cent from level of 22.3 per cent in 2007-08. In terms of absolute values also, the expansion in the bank credit during 2007-08 was of the order of Rs 4,30,724 crore (Rs 4,307.24 billion) which decelerated to Rs 4,08,099 crore (Rs 4,080.99 billion) in 2008-09.