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Home / Politics / Policy /  Tackling financial inclusion and stressed assets

Expectations: HIGH

Delivery: POSITIVE

Measures

l To merge the Forward Markets Commission (FMC) with the Securities and Exchange Board of India (Sebi).

l To introduce a bankruptcy code in the coming fiscal year.

l To introduce alternative asset schemes such as one for monetizing gold reserves in the country and for infrastructure.

l To set aside 9,555 crore for capitalization of financial institutions including 7,490 crore for state-owned banks.

l To bring non-banking financial companies (NBFCs) on a par with other financial institutions under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

l To set up an autonomous Bank Board Bureau to headhunt public sector bank chiefs, leading up to a holding firm for state-owned banks.

l To do away with distinctions between different types of foreign investments such as foreign direct investment (FDI) and foreign institutional investor (FII) investment.

l To extend concessional withholding tax rate of 5% for FII investments in bonds till 2017. Such investors also don’t have to pay minimum alternate tax on income from securities transactions.

l To establish an electronic market system for trading receivables of micro, small and medium enterprises.

l To set up a national investment and infrastructure fund.

l To improve social security net with new insurance.

Impact

l The merger of FMC and Sebi would finally give the commodity markets a strong, enabled regulator. It also paves the way for convergence in regulations of various financial assets and brings down compliance costs.

l A strong bankruptcy law will help banks tackle the problem of stressed assets.

l The alternative asset schemes revolving around gold and infrastructure will reduce import demand for the yellow metal and help increase financial savings.

l Bank recapitalization amount is lower than expected and may crimp the ability of smaller state-owned banks to grow credit.

l Under SARFAESI, NBFCs will have better prospects in loan recovery. That will lower their credit costs in the long run and thus let them lend at lower rates, which benefits their customers too.

l A bank holding company (when it materializes) will have the ability to borrow from the market for meeting banks’ capital requirements, reducing budgetary constraints on the government. It is also disinvestment by stealth.

l FII and FDI on par would mean more capital flows into certain sectors such as banks, insurance and NBFCs, where firms have already hit the portfolio investment ceiling. Tax breaks for foreign investors will also bring more investments in the bond markets.

l Allowing trading of receivables will help small enterprises manage their working capital better, improve credit flow to the sector and also help relieve stressed asset problems.

l Insurance sector could see increased premium collections.

Stocks in focus

l Axis Bank Ltd rallied 8.15% as it stands to gain the most from the proposal of removing distinction between FII and FDI investment.

l Muthoot Finance Ltd gained 8.34% following the announcement on gold monetization.

l Small state-owned banks such as Indian Bank, Union Bank of India and IDBI Bank Ltd fell around 2% over concerns of capital infusion.

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