INDIAN BANKING – VALUE-Adding PERFORMANCE and Banking At Its Best THROUGH BEST PRACTICES

Introduction:

Indian Banking sector has undergone a thorough change and remarkable transformation during the last 17-18 years. The banking reforms implemented on the basis of the blue print provided by Narasimhan Committee and other wide ranging supportive measures initiated and implemented by Government of India and RBI have contributed significantly to the enhancement of financial strength intrinsic soundness resilience and operational efficiency of banks. Banks in India have been showing stronger balance sheet footing with better asset quality in post reform period. The post-reform period has also witnessed advent of new players ,product innovations and introduction of new instruments and new approaches to aggressive marketing of such new products . Banks presently operate in an increasingly deregulated and market driven competitive environment of operational flexibility. We are also aware that there has been constant strengthening of financial supervision and prudential regulation over banks in India. With re-inforced strength and stronger financials Indian Banks are now capable of taking advantage of expanding business opportunities both domestic and global .Availment of such expanding opportunities particularly those arising out of expanding financial inclusion as well as those available at the bottom of the pyramid and new global opportunities will facilitate further growth of banks with business diversification.

Indian banks have been able to achieve good results on a wide front in spite of adoption of and adherence to prudential norms relating capital adequacy ,asset classification ,income recognition and provisioning and other regulatory norms and guidelines and implementation of the social objectives of achieving priority sector lending targets and directing credit to weaker and neglected sections of society.

It is indeed gratifying to note that the overall capital adequacy ratio of Indian banks increased to 12.3 per cent towards the end of March 2007 from 10.4 per cent in March 1997. The asset quality as reflected in the reduction in net NPA rate has also improved significantly. The ratio of NPAs to net advances declined to 2 per cent towards the end of March 2007 from 8.1 per cent in March 1997. The profitability of banks as reflected in the rate of return on assets (ROA) increased from 0.7 per cent to about 0.94 per cent in the same period. In a globalised and increasingly integrated world it is essential that our banking system must strictly adhere to global best practices and sound globally recognized performance benchmarks and aim at the achievement of sound financials and other soundness, strength and health indicators used at global level for performance evaluation purposes.

Triple objectives
.Banks must derive value- adding performance to fulfil the expectations of all stake holders,apart from achieving social objectives and fulfilling the expectations of society at large. It is also necessary to achieve Proper and smooth integration of domestic banking and financial system with global financial system. Also it is important to build up and strengthen financial infrastructure and banking system within the country. These can be considered triple objectives in the present day context . These triple objectives are sought to be achieved by means of observing universally recognized best practices.. Banks can surely show better, stronger sounder enduring and value-adding performance and undertake banking at its best in terms of quality of assets and return on assets return on equity .earnings and profitability financial strength and fundamentals ,minimization of costs ,enhancement of wealth for stake holders etc through adoption and implementation of internationally accepted best banking practices ,standards ,codes and other globally accepted performance bench marks and optimum performance indicators. Banks must give primacy to the achievement of above dual objectives.

Guided by above considerations it is absolutely essential for Indian banks to strictly adhere to global best practices and global performance benchmarks and widely recognized performance indicators in different areas.

Global best practices refer to global standards bench marks and target performance levels set by international financial institutions and other organizations including Basel Committee on Banking Supervision (BCBS). These best practices have been arrived at after lot of thinking ,discussion and deliberations and based on the evaluation of the weaknesses and deficiencies which brought about financial crisis in the past. These best practices and standards cover certain relevant aspects and areas in the financial system. Their importance emanates from the fact that they contribute significantly to sound and strong financials and solid fundamentals, help strengthen financial regulation and bring about required measure of transparency, apart from contributing to the healthy development of the institution concerned..

Adoption and implementation of best practices in different areas may surely go a long way in strengthening banks and financial institutions and in reducing their vulnerabilities.. They also provide a basis for informed decision making in different areas particularly in lending and investments. If properly used they can assist in minimizing risks of of different types... They can play an important role in bringing about uniformity and some sort of standardization of practices among all banks and financial institutions in different countries in the world. They facilitate comparative evaluation and assessment by serving as bases or bench marks with reference to which reviews and assessment can be made and performance assessed objectively and in a meaningful manner..

Risk Management Practices:

Risk management is by far the most important area to be covered under global best practices and standards. In the present complex environment and competitive set up the success of any financial institution depends on its risk management capabilities. Success will come only if we assess risks correctly price them properly and manage them effectively. It is always necessary to restrict or limit losses from different transactions. By means of this strategy every bank has to control and regulate its overall exposure to different areas. What banks need to-day is a strong pro-active risk management strategy which helps avoid high risks and ensures that risks are taken consciously and after perceiving all types of possibilities and with full knowledge of all facts and all aspects of the risk involved.. Basel II gives lot of importance to risk management. It is necessary for banks to clearly comprehend and appreciate the nature of risk involved in every area of activity and in all lendings and credit exposures both fund based and non-fund based and also in all investments. It is also necessary to adopt systems for measurement of performance not only in accounting terms such as return on assets (ROA) return on equity (ROE) etc, but also, for measuring the return to stake-holders, shareholder value and shareholder wealth created from time to time. It is therefore, necessary to use measures and yard sticks such as risk adjusted return on capital (RAROC) and other available measures for the purpose of assessment and evaluation..

To facilitate comprehensive evaluation and assessment banks may classify, group or categorise customers into segments or business groups such as corporates, retail trade units ,service sector units ,housing finance companies whole sale,trading units ,manufdacturing units small business professionals and self-employed, SMEs, salary earners people engaged in traditional vocations and jobs such as potters,carpenters,individuals engaged in non-farm activities in rural areas etc and fix bench mark for return or maximum return expected from each of such categories .Banks must review performance in terms of return from time to time with reference to the targets fixed for each group . If the review reveals that a particular segment or category has given a return higher than the target originally fixed for the category it is clear that that group has given something to value addition in the form of extra or excess return over the target fixed.. Capital allocation may be done having regard to what each group has given by way its contribution in relation to the target as revealed by the review. Risk adjusted performance measurement and evaluation helps in the matter of alignment of objectives at the level of each category or segment and also at the aggregate level i.e. the overall level in the bank. Adoption of such comprehensive risk management system will help banks in the process of capital allocation to different businesses and activities based on risk adjusted performance and return from each one of them. As Indian banks move progressively towards globally recognised best practices with integration of risk management in to the business process use of the yard sticks like RAOC and other measures of evaluation will greatly help in pricing decisions as well as in measurement of performance of different business segments and capital allocation to various segments and overall capital management. Consequent on the shift from capital adequacy to capital efficiency now banks have got to focus on efficient capital management capital saving and over all balance sheet management.

Best Practices for Combating Terrorism and Customer Risk Assessment
Banks have to adopt globally recognised best practices for combating terrorism and also for evaluating customer risk by adopting and implementing Anti Money Laundering Policy and programme..
. The AML policy to be adopted and implemented must match global standards. In to-day’s globalised environment organised crime groups which generate huge amounts of money through drug trafficing arms smuggling and other financial crimes may project such dirty and illegal money as legally and legitimately acquired money by means of moving the same through financial system and banking channels. Such dirty and illegal money may be transferred from one country to another for being used for terrorist activities. As a part of the global efforts at fighting money laundering and terrorist financing India has enacted Prevention of Money Laundering Act, 2002 which came into force on 1st July 2005 Recently Prevention of Money Laundering[Amendment]Bill 2008 has been adopted and this may become an Act soon. This amendment aims at checking use of illegal money for financing terror .Money changers and ,money transfer service providers are brought within ambit of this law.. India has set up Financial Intelligence Unit – India (FIU – India) in 2005. This unit collects reports regarding cash and suspicious transactions from banks and other reporting organizations analyses them and disseminates the findings and results to various law enforcement agencies for necessary action. This unit also interacts with FIUs of other countries and gathers information regarding best practices and arranges for exchange of information. Hence, every bank has to adopt a suitable AML programme and policy. Every bank must communicate to the staff at all levels the AML standards and procedures that the bank has adopted. The AML policy should also indicate the AM.L operating structure regulatory reporting and recording requirements and inspection and audit and monitoring mechanism that will be employed to ensure strict adherence to AML requirements. International standard setters such as Basel Committee and Financial Action Task Force (FATF) have done lot of work to prescribe comprehensive guidelines regarding opening of accounts, customer identification and know your customer requirements and risk management apart from customers due diligence process for financial institutions.

The Financial Action Task Force has come out with 40 recommendations which provide a comprehensive blue print for action to be taken and strategy to be adopted for preventing the use of the financial system for money laundering. Global best practices for combating money laundering require banks to develop clearly spelt out customer acceptance policies and customer identification procedure, covering description of categories of customers that are likely to pose higher than average and normal risk to banks. By adopting graduated and comprehensive customer acceptance policies and customer identification procedure banks can conduct more extensive and enhanced due diligence for customers with higher risk. The RBI has given freedom to banks to compile their own risk profiles of customers based on relevant parameters. Banks can use parameters such as geographical areas or locations, range of products and services, type of business, manner of funding the account etc for evolving its own risk profile of customers. However, risk profiling needs to be well documented so that the parameters can be well demonstrated to the regulators whenever called upon to do so.

It is necessary for banks to ensure that risk profiles are compiled and preserved for each customer at the time of commencement of relationship.

Inclusive BankingPractices


Inclusive banking practices are vital from the point of view of expanding customer base ,augmenting business and achieving social obligations.Hence it is necessary to ensure that
the customer acceptance policies adopted in the bank are not be too restrictive thereby resulting in denial of access to banking services to the people, particularly to the weaker and disadvantaged sections of society .Access to financial services is one of the enablers for participation in the efforts at development of the national economy. Restrictive policies may come in the way inclusive banking practices adopted by banks. Hence, adequate care has to be taken to ensure that there are no restrictive clauses in the policy resulting in denial of access to banking products and services to any category of people. Enhanced and quite extensive process of due diligence is required in the case of politicians, high net worth individuals known criminals etc and other categories of high risk customers. Developing and putting in place suitable systems of monitoring is very essential for identification of suspicious transactions throughout the period of relationship with a customer.

Reports regarding cash transactions of over Rs.10 lakhs and suspicious transactions should be generated and sent to concerned authorities. The Prevention of Money Laundering Rules 2005 have provided a definition of what constitutes suspicious activity and the procedure for reporting to the Financial Intelligence Unit (FIU) Government of India. The RBI has issued detailed guidelines to banks incorporating therein best practices in this regard and spelling out how banks have to handle the issue relating to account opening risk management reporting of cash transactions reporting of suspicious transactions to FIU (India) maintenance of records training of staff, etc. RBI has provided certain concessions and relaxations in obtaining documents by banks particularly in rural and semi urban areas. In the case of no-frills accounts KYC requirements are relaxed further to facilitate faster financial inclusion of people in rural areas.

RBI has also stressed the need for customer education regarding the importance of submission of prescribed documents at the time of opening the accounts and commencing the relationship. Banks must do their best in creating public awareness in this regard and educating the customers regarding all aspects of customer identification including submission of required documents.

Corporate Governance Practices:

Another important requirement for banks is adherence to good corporate governance philosophy and practices which must be based on an effective and independent board.. .The recent Satyam episode has shown how failure of corporate governance can cause the decline and downfall of any reputed corporate entity .The corporate governance philosophy of any organization must be based on high standard of universally accepted ethical values and disciplined approach to management .Accountability commitment ,integrity ,transparency justice .,and fairness in all activities must be hall marks of management at board level .Principles of corporate governance have now become some sort of conventional wisdom and banks have to go by this wisdom scrupulously .Corporate governance can be an effective tool for toning up the economic health and intrinsic soundness of any corporate entity .The most important objective of corporate governance is creation and enhancement of value for all stake-holders. Banks have to ensure highest ethical standards in the process of undertaking banking business activity with due diligence. Basel Committee has prescribed some important tenets and principles in this regard. These principles must be carefully adhered to .The corporate governance framework must be adequately flexible to facilitate fast response to changing market dynamics .At the same time it should be firm as regards its values and ethics The corporate governance philosophy must cover not merely regulatory ,statutory and ,legal aspects and requirements but also voluntarily accepted best practices across the world that may help attain high level of business ethics ,and maximization of value and welfare to stake holders..


The Consultative group on corporate governance headed by Dr.A.S.Ganguly has recommended that the boards must be made contemporarily professional by means of adherence to “fit and proper norms” in the matter of nomination of directors. The concerned authorities charged with the task of nominating directors must follow the fit and proper” norms and guidelines of RBI in this regard while nominating directors on the boards of banks Suitability of persons for appointment as directors must be assessed through due diligence The criteria to be followed must include qualification ,expertise track record ,integrity and other relevant fit and proper criteria.. The whole time directors must have sufficiently long period of stay as directors say three to five years to enable them to make some impact of their leadership and professional competence on the ’ performance of the bank concerned. .Directors have a responsibility to gather adequate information regarding the business and performance from time to time .Directors are expected to protect the interests of share holders .In vast majority of cases VIPs, legal luminaries and experts from different fields are inducted in to boards .Such directors based on their expertise,professional knowledge,and specialisation contribute significantly to the deliberations in board meetings so that sound decisions emerge on different matters at each meeting Directors must also try to provide a new perspective and new vision to board room. . VIPs and luminaries who are inducted as directors must try to create an impact instead of being directors for decorative purposes.

THRUST AREAS:

Boards of banks must concentrate on strategic planning policy formulation in respect of all vital areas such as credit ,investments ,international banking ,treasury and funds management organizational development human resources development ,issues relating to business expansion ,expansion of branch net work ,issues relating to technology. risk management systems internal control and issues concerning overall governance. These are areas of major thrust requiring prime concentration at board level.. The board must not waste time in discussing routine things and unimportant matters that can be handled at the level of bank executives..
Quality Practices- Attainment of excellence is the ultimate goal of quality practices to be adopted in any bank...
Banks must also observe best quality practices .Each bank must have a separate cell in planning department charged with the job of planning, building and institutionalizing quality across the bank .This cell can be set up in the planning department This cell can concentrate on quality improvements ,dissemination of information regarding quality creation of quality culture building up of knowledge capabilities so necessary for building up and development of quality and implementation of best quality practices .The cell must keep on studying the quality practices being pursued elsewhere and pick up and adopt the relevant and best ones in their respective institutions.
Best Compliance Practices:

Adoption of best compliance practices is another requirement of supreme importance. Compliance function in banks is an important element in the process of corporate governance and hence, there is a need to strengthen compliance management practices in all banks. According to Basel Committee on Banking supervision it is necessary for banks to have different committees such as, audit committee, management committee, risk management committee, remuneration committee, corporate governance and nomination committee, customer service committee . HR committee share transfer committee, committee for monitoring large value frauds, etc

The Audit Committee over sees reviews and provides directions to the internal audit/inspection function in the Bank in order to ensure and enhance effectiveness of audit and inspection functions as strong management tools The Audit Committee must focus on investment portfolio including debt and shares held with a view to finding out deterioration in value if any.. The committee also reviews all the issues raised in the Long Form Audit Reports. It also interacts with external auditors before finalization of Audited Accounts Management committee has the responsibility taking decisions on high value credit compromise and write off proposals etc Risk management committee identifies evaluates monitors and guides the Bank on various categories of risks to which bank is exposed and devices suitable strategies for managing credit market liquidity operational and legal compliance and reputation and other risks of the bank. Remuneration committee is charged with the job of providing oversight of remuneration of top and senior management and other key personnel performance linked incentives etc and ensuring that compensation is consistent with banks objectives, strategy culture and control environment. Nomination committee has to provide evaluation of effectiveness of board. It undertakes the process of due diligence for determining fit and proper status of existing elected directors and persons to be elected as directors compliance function is a vital function and forms part and parcel of governance in banks.

In the case of listed banks capital market related regulatory compliance must also be ensured. Different committees perform different functions relevant to them. The compliance function should ensure that existing prescribed procedures, guidelines system and controls capture the required information and data in order to facilitate discharge of risk management function at the board level. Compliance must start at the top. Compliance can be effective in a corporate culture where board assumes full responsibility for compliance. Bank Boards must ensure that a proper compliance policy is put in place and board should also oversee its implementation. A robust compliance system should be put in place along with a comprehensive compliance policy. Compliance policy must cover compliance philosophy of the bank role of chief compliance officer and compliance department and composition of its staff and their specific responsibilities. The Board may review the policy from time to time. The Board must also review compliance periodically. Bank boards may constitute compliance committee to oversee the compliance of all regulatory and reporting requirements as well as with banking laws, taxation laws, international laws, labour laws, accounting standards, anti-money laundering Act, fiscal Responsibility Act Right to Information Act and so on. Non-compliance of any of the laws and regulatory requirements will entail financial and reputation risk to the Bank and hence no occasion must be allowed for any sort of non-compliance of any of the laws or statutory or regulatory requirements at any level in the bank...

Transparency Practices

The next important requirement is transparency and disclosure in financial statements. The data and details given in financial statements must be adequate to ensure adequate measure of transparency. This enables the public at large and customers to evaluate financial position and performance of the bank. The disclosures are useful to the public in assessing and understanding where exactly the bank stands in relation to their expectations and in in making decisions regarding choice of banks for keeping their deposits and also for other banking needs. The users of financial statements are interested in the liquidity and solvency and risk in respect of assets and liabilities figuring in and recognised on the Balance sheet of the bank and also off balance sheet items of the bank.. Banks are obligrd to explain the way they manage and control risks associated with the business and operations of the bank. Banks may provide commentary and notes on the financial statements for clarity of understanding. The generally accepted accounting principles and standards must be followed. The Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India has issued as many as 35 standards which must be followed.

The next vital requirements is assessment of position with reference to Industry best practices. Assessment of best practices involves analysis of the organisation’s processes, work flow planning process and strategic planning staffing, major areas such as retail delivery sales CRM strategy and CRM operations human resources finance and funds management investments management and accounting. The objective of this assessment is to reduce current operating expenses, improve productivity to avoid future cost increases, increase returns and revenue, improve quality of service delivery and appropriately position the bank for continued sound growth and expansion commensurate with potential and possibilities.. Best practices provide bench mark for market participants to operate efficiently. But, their implementation must be relevant and suitable to country specific priorities and circumstances.

In the opinion of Dr.Y.V.Reddy the then RBI governor implementation of standards must fit into a country’s overall strategy for financial inclusion,and economic and financial sector development taking into account the stage of development, level of institutional capacity and other domestic factors. The Standing Committee on International Financial Standards and Codes monitors developments in global standards and codes and looks into applicability of these standards to Indian Financial System. The approach of RBI in the matter of adoption and internalisation of global best practices prudential norms and standards and codes in respect of Indian banks is a gradual process that too with suitable changes and modifications keeping in view specific conditions obtaining in India. .
PRACTICE OF DHARMA and Fair Practices.-
All activities ,operations and over all governance must be guided by dharma and tenets of dharma...Transferring fixed rate loans to floating rate category without notice to the borrower .,debiting charges that are not actually incurred to make undue profit ,debiting charges to accounts having balances in the vicinity of Rs one Lakh to take the loan account to the category of loans with outstanding of over Rs 1 Lakh to make it eligible for action under SARFAESI ACT in case of need levying and debiting latent charges without any transparency in the matter etc are against the tenets of dharma. Banks must not resort to such practices. .Banks must follow the fair practices contained in the code of commitment to customers .The objective of the code is to promote good and fair practices by setting minimum standards in dealing with customers and to provide full information to customers regarding products and ,services so as to enable them to take informed decisions .Enhancement of transparency ,to encourage market forces through competition ,to achieve high operating standards to promote fair and cordial relationship between the bank and customers and to foster confidence in the bank concerned and the banking system in general are other objectives of the code.
The code must apply to all products and services offered by banks .Products and services offered by banks must conform to relevant laws and rules as well as regulations .The dealings of banks with customers must rest on ethical principles of integrity ,and transparency .Banks must help customers by providing regular updates and by keeping them informed about changes in interest rates ,charges or terms and conditions .Banks must rectify mistakes in rates applied or in other calculations promptly and reverse charges applied by mistake if any promptly .Also banks must attend to customer complaints speedily and redress them expeditiously .Banks must practice non-discrimination policy .There must be no discrimination on the basis of religion ,caste creed ,race sex physical disability etc Full transparency regarding rates of interest processing charge and other charges etc must be ensured .Changes in rates of interest and fees payable must be communicated to parties concerned by display of suitable notice on notice board ,or some other means of communication .All advertisements and publicity material must be clear and there must be no ambiguity .All personal information regarding customers must be treated as private and confidential even after cessation of relationship except in cases where information has to be given as per law or by way of duty towards public and in public interest .While granting loans banks must explain repayment process by way of amount ,tenure ,periodicity of payment preclosure penalty if any and representatives authorized to collect repayments must adhere to prescribed guidelines .Privacy of customers must be respected .Interaction with customers must be in very civil manner .During recovery visits decency and decorum must be maintained .Customers must be contacted ordinarily at the place of his or her choice and in the absence of specified place at residence and if unavailable at residence at the place of business .Identity and authority of the person to represent the bank must be made known to the customer .Thus all the fair practices contained in the code must be adhered to by banks .By adhering to code of commitment ,fair practices and tenets of dharma banks can enhance their public image and win customer loyalty and customer commitment which will go a long way in helping banks in business expansion and business performance.

Practice of Adhering to Globally Recognised Performance Indicators and Bench Marks.

It is also necessary for banks to try to achieve global bench marks in diverse areas such as capital adequacy ratio return on assets, net interest margin cost income ratio non-performing loans ratio, provisioning of non-performing loans ratio, capital asset ratio, funding volatility ratio, etc. Banks must on an on-going basis review their performance in attaining the highest ratios with reference to the ratios obtaining in other countries and also with reference to the globally accepted best ratios.

Each bank must institute a system of review of their performance in these areas with reference to the highest ratios in these areas achieved by banks in India as well as other developed countries and also with reference to the overall global position. On the basis of reviews from time to time banks must initiate necessary measures to improve the performance in the areas where performance is found inadequate in relation to global ratios performance indicators and bench marks. These reviews must be made at the highest level in management including the board level.

Simultaneous Achievement:

Indian banks must continue to perform well and continue to give excellent financial results while simultaneously achieving social obligations ,fulfilling the expectations of society and contributing substantially by way of return and value to stake holders. At the same time, they have to discharge the social obligations cast upon them and fulfil the expectations of society. All these can be simultaneously achieved only by means of strict adherence to global best practices, global standards and codes and global bench marks and other performance and soundness indicators explained earlier. Best practices may keep on changing and evolving over time across the world and banks must be constantly alive to the changes and developments in this regard from time to time. It will always be prudent for banks to adopt a pro-active approach in the matter of adoption of best practices. Each bank may create a global best practices cell in the corporate office directly under the CMD for the purpose of studying the developments and evolution of best practices elsewhere for the purpose of facilitating adoption of a pro-active approach apart from implementing the guidelines ,and directions issued from time to time by RBI regarding best practices to be observed.

The above cell can be charged with the job of studying the domestic developments as well as developments across the world in the area of best practices. It should also evaluate the performance of the bank in achieving global bench marks in different areas and other performance and soundness indicators with reference to the attainments in the concerned areas in other advanced countries and at global level and place the results and findings of the review before the top management and the Board of directors. Based on such reviews banks can take required steps for fine tuning the implementation of best practices, strategies, processes and other aspects of functioning with a view to achieving better operational and financial results and higher value for stakeholders. Banks have thus got to aim at value-adding performance and banking at its best in terms of quality of service to customers ,maximization of earnings ,and profits and creation and enhancement and maximization of value and return for the stake holders minimization of risks to the lowest level possible implementation of norms standards ,and regulatory requirements to the satisfaction of regulators achievement of social objectives and fulfillment of the expectations of society. All these can be achieved only by means of strict adherence to and observance of best practices in different areas of activity ..

UNION BUDGET 2010-2011

The Union Budget 2010-2011 presented by the Hon’ble Finance Minister Sri Pranab Mukherjee is a well crafted and balanced budget. It has long range vision with its focus on fiscal consolidation, GDP growth, accelerating investments on infrastructure, agricultural development and promoting consumption by putting more money in the hands of people. The budget seeks to serve three main objectives namely, reduction of fiscal deficit, maintenance of growth momentum and restricting the public borrowing to the lowest extent possible.

The most significant aspect of the budget is the effort to reduce fiscal deficit in 2010-2011 to 5.5 per cent of the GDP as against the alarming 6.8 per cent in the current financial year. Fiscal deficit has been restricted to Rs.3,81,408 Crores in 2010-2011 as against Rs.4,14,041/- in the current fiscal (revised estimate). For reducing the gap between expenditure and income, the Finance Minister is relying on growth of the economy and capital market. Increase in the rate of basic excise duty by 2 per cent on anticipated GPD growth of 8.5 per cent is estimated to fetch more tax revenue. Also, the Finance Minister hopes to mobilise about Rs.40,000 Crores from dis-investment of PSUs and another Rs.30,000 Crores by auctioning licence for 3G Mobile.

The budget has also provided road map for fiscal consolidation for next two years; the rate of fiscal deficit will be 4.8 per cent in FY 12 and 4.1 per cent in FY 13.

The borrowing plan for next year is also lower than what was expected. The Finance Minister has done a good job in ensuring that fiscal deficit is under control while at the same time, not sacrificing the need for ensuring GDP growth as well as social needs and inclusiveness to growth. The road map adopted for reduction of fiscal deficit and simplification of tax laws by implementing Direct Tax Code and GST effective from 01.04.2011 will ensure that India is on a healthy growth path. As the road map for fiscal consolidation has been adopted for the next two years it is clear that the government will go by fiscal prudence and strictly adhere to the targets. However, mobilizing funds to the tune of Rs.40,000 Crores by selling PSU shares will depend on several factors such as business confidence level, state of stock market state of global economy etc. Also, buoyancy in tax revenue will be a reality only if GDP growth occurs as anticipated.

The budget has rightly given primacy to agriculture and rural development. A four pronged strategy has been adopted to spur growth of the farm sector. The strategy covers (a) increasing agricultural production (b) reduction in wastage of produce (c) credit support to farmers and d) thrust to the food processing sector. The first element of the strategy is to extend green revolution to the eastern region comprising Bihar, Chattisgarh, Jharkhand, Eastern UP, West Bengal and Orissa. Rs.400 crores have been allocated for this. The decision to organize 60,000 “pulses and oil seeds villages” in rain fed areas in 2010-11 is a welcome step. The budget seeks to provide an integrated intervention for water harvesting watershed management and soil health to increase productivity of dry land farming areas. An amount of Rs.300 Crores has been allotted for this. The second element is reduction in wastages in storage as well as in the operations of existing food supply chains in the country. The third element is increased credit support to agricultural sector. Target for agricultural credit has been stepped up to Rs.3,75,000 Crores (Rs.325000 Crores in 2009-10). The fourth element is increased focus on development of food processing sector by providing state of the art infrastructure. In addition to 10 mega food parks already being set up government has decided to set up 5 more such parks. To facilitate better farm mechanisation the basic customs duty has been reduced to 5 per cent on agricultural machineries like paddy trans-planter, laser land leveler, cotton picker, reaper cum binder sugar cane harvesters etc. The government has also proposed major reductions in indirect taxes for agriculture and food processing sectors. The renewed and increased stress on raising agricultural production and providing incentives for food processing are welcome aspects of the budget.

The Budget has rightly given lot of importance to social sectors. Social sector spending accounts for 37 per cent of the total plan outlay for 2010-11 while another 25 per cent is proposed on rural infrastructure. Mahatma Gandhi National Rural Employment Guarantee Scheme has been allocated Rs.40,100 Crores and Bharath Nirman Programme of building rural infrastructure Rs.48,000 Crores. Also, the allocations for health and housing-rural and urban have been increased. In the case of fertilisers the Government has adopted the nutrient based subsidy scheme and has even proposed switch over to a system of direct payment of subsidy to farmers. This is a welcome development. As regards food security, the government has already finalised draft of food security bill and the same will be circulated for public debate.

Another notable aspect of this budget is the move on reforming financing sector. It is proposed to establish Financial Stability and Development Council to exercise macro prudential supervision over the economy including over large financial conglomerates and to co-ordinate the work and functioning of different regulatory authorities.

One more positive seen in this budget is the signal to the process of reform in the FDI sector. The Finance Minister has proposed to create a new body for handling FDI related matters. This will encourage increased blow of FDI to India.

The budget has given lot of relief to income tax payers. Income tax payers have gained much from the broadening of income tax slabs and also from tax deductions for investment in infrastructure bonds and contribution to Central Government health schemes. As a result of broadening of tax slabs, those who earn Rs.5 Lakhs per year will have Rs.2500 more every month for spending as they are required to pay less tax. Also, those who earn Rs.8 Lakhs a year, will have extra money of Rs.4000 per month for spending. The Finance Minister has thus, put extra money in the hands of people. This will act as a spur for consumption which will turn act as a driver of growth.

Defence budget has been hiked to Rs.147000 Crore. This is most welcome. The centre has announced a Rs.2500 Crore national clean energy fund to develop clean energy technologies that will help India move on to a low carbon economy as per the commitment made at the UN. Introduction of tax sops for solar energy wind energy electric cars etc will go a long way in developing these sectors. Tax benefits coupled with a 60 per cent increase in the allocation of ministry of new and renewable energy may go a long way to help the industry to green technologies to the market unlike the existing system in which the popularity of these technologies is restricted due to their high initial cost.

The cut in surcharges in corporate tax from 10 per cent to 7.5 per cent is balanced with the hike of minimum alternate tax to 18 per cent. Among the specific sectors real estate that has been hit the most by the slow down has been provided some concession. So also the medical equipment and mobile phone manufacturers and the cinema industry. The restoration of general excise duty to its original level of 10 per cent and of the duty on large cars and multi utility vehicles from 20 per cent to 22 per cent will result in the rise in the prices of these vehicles. However this will not have any impact on the common people. As a result of increase in the prices of petrol and diesel cost of transportation of all goods and commodities including food articles will go up which will result in rise in prices. The proposals relating to petroleum products contained in the budget will have inflationary overtones and inflationary potential as the increase in excise duty from 8 to 10 per cent and the hike in customs duty on petroleum products will result in higher prices. The hike in custom duty on crude to 5 per cent ( `0’ per cent earlier) and on petrol and diesel to 7.5 per cent (2.5 per cent earlier) and hike in excise duties on petrol and diesel by Rs.1 a litre each have been passed on to consumers by hiking petrol and diesel prices with effect from the midnight on 26th February 2010. Price rise and increase in the rate of inflation will adversely affect the common people and the poorer sections of society.

The budget proposes setting up of a coal authority. This will be positive for the sector as it may speed up mine allocation and help reduce lead time to commence production. No change is proposed in iron ore export duty and it is positive for iron ore producers as the industry was expecting a hike in duty.

The budget has rightly given lot of importance to the development and stability of the financial sector. Banking and financial sector plays a crucial role in the task of promoting growth of an economy. It is therefore in the fitness of things that the budget has some important initiatives aimed at boosting the banking and financial sector. These initiatives are:-

1. Infusion of extra capital of Rs.16500 crores to PSU banks in order to strengthen their capital base and to enable them to adhere to Basel II norms is a positive for the public sector banking industry. This will enable the banks concerned to expand their business volumes and increase the lendings which will in turn, enable them to increase their earnings and profitability. With increased financial strength they can more aggressively involve themselves in the financial inclusion efforts of the country.
2. Proposed re-capitalisation of RRBs will go a long way in building up their capital base and will enable them to play still more active role in financing rural sector particularly, agriculture and rural non-farm sector.

3. The budget has heralded the third phase of opening up of the private sector to the banking arena. After the birth of Kotak Mahindra Bank through NBFC conversion route RBI has not given licence for establishing new banks. Now it is proposed to give licence to NBFCs and private players for launching a few more new banks. With the birth of a few more banks there will be increased competition in the banking sector and the same will benefit the customers. With increase in the number of banks there will be more participants in the drive for financial inclusion and as a result faster financial inclusion of the presently excluded is possible. The new banks may also come out with innovative products and services for the benefit of customers. The decision to provide banking facilities in all centers with a population of above 2000 by 2012 is most welcome as the same will help expand financial inclusion.

4. It is proposed to provide distinct identity to Indian Rupee with official symbol. With this Rupee will join select club of currencies such as American Dollar, Japanese Yen, Euro and Pound Sterling. This will appropriately project Indian Rupee and enhance its status. This will also mean a categorical assertion of India’s economic strength among comity of currencies. As a result of this value of Indian Rupee may also witness considerable appreciation.

The budget is silent regarding strategies adopted by the government to contain inflation. As some of the taxation proposals have inflationary potential it would have been better for the Finance Minister to indicate the strategies for combating and containing inflation. Also, the budget is silent on the need to cut down subsidy on a large number of items. In spite of the above short-comings, the Finance Minister has done a commendable job in balancing several competing priorities both short term and long term including urban renewal, rural job creation education health care and environment. All this was done in the face of large fiscal deficit the risk of crowing out private sector borrowing scrutiny by foreign investors and also by global rating agencies. The Finance Minister has achieved large measure of success in the process of balancing mentioned above and also in restricting fiscal deficit to 5.5 per cent of the GDP in 2010-2011. The budget has succeeded in spreading a message of optimism, hope and confidence.