What the Budget does

• For 2008-09, agricultural credit target set at Rs 280,000 crore, with short-term crop loans continued to be disbursed at 7% per annum. Initial provision of Rs 1,600 crore made for interest subvention in 2008-09.
• PSU banks and regional rural banks (RRBs) to offer debt waiver on all agricultural loans disbursed upto March 2007 and due until the end of December 2007. Complete debt waiver on all loans given to small and marginal farmers. The banks will also launch one time settlement (OTS) scheme in respect of other farmers for all loans that were overdue on December 31, 2007 and which remained unpaid until February 29, 2008. Rebate of 25% against payment of the balance of 75% under OTS. The total value of relief to be offered to farmers is estimated at Rs 60,000 crore.
• The government has advised PSU banks and RRBs to add at least 250 rural household accounts every year at each of their rural and semi-urban branches. Further, the banks have been asked to recruit individuals such as retired bank officers and ex-servicemen as business facilitators or credit counselors.
• Public sector banks have been asked to include Indira Awas Yojana (IAY) houses under the differential rate of interest (DRI) scheme and lend up to Rs 20,000 per unit at an interest rate of 4%.
• Parent company allowed to set-off the dividend received from its subsidiary company against dividend distributed by the parent company; provided that the dividend received has suffered DDT and the parent company is not a subsidiary of another company.
• Banking Cash Transaction Tax (BCTT) being withdrawn with effect from April 1, 2009.

Also read: How Budget affects your stocks

Impact on sector

• PSU banks are expected to face pressure on their net interest margins until the subsidy for waiver of agricultural loans and one time settlement of loans is released from the government.
• The cost of adding more rural households in their rural branches may increase the operating cost for the PSU banks.
• Including IAY houses under the differential rate of interest scheme at an interest rate of 4% will increase the proportion of sub-PLR lending for the PSU banks.
• Banks that receive dividend from their subsidiaries will benefit from the set off of dividend distribution tax.
• Inclusion of the Post Office Time Deposit Account to the basket of saving instruments under Section 80C of the Income Tax Act will reduce the attractiveness of bank term deposits.

Impact on companies

• Large PSU banks like SBI [Get Quote], PNB and Bank of Baroda [Get Quote] will face the pressure on their net interest margins until the subsidy for waiver of agricultural loans is released. The may also face higher delinquency rates due to the increased agri-credit targets.
• Banks like SBI and ICICI Bank [Get Quote] that receive dividend from their subsidiaries will benefit from the set off of dividend distribution tax.

Powered by Equitymaster.com, an independent equity research initiative. Equitymaster is currently celebrating its 10th Anniversary. To know more about the special offers on its equity research subscription services, please click here