What the budget offers to the banking sector

With banks’ earnings already battered by incessant rate cuts and spread attritions, the Federal Budget FY14 has offered little in the form of a helpline to the aggrieved sector.
Now with the banks required to provide FBR with online access to all their transactions besides providing the particulars of deposits worth Rs10 million or more, they might not be able to provide their customers the desired confidentiality. However, according to market sources, the chances of the government actually being able to extract such information out of the banks are thin.
Banking laws don’t allow infringement of customers’ secrecy. Even if the Parliament alters the secrecy laws, which is a rare scenario, the impact on banks’ deposit base and profitability would be little, said industry insiders.
They further underpinned that the majority of the clients holding deposits worth Rs10 million or above are the corporate clients. For such clients, bank transactions are inevitable as cash transactions render their expenses unallowable.
Tracking Rs100,000 and above in credit card payments might put a cap on credit card transactions; however, it given other payment options available, that too won’t irk banks much.
However, market sources underpin that threats to customer secrecy might encumber banks in attracting new depositors, hence keeping the undocumented economy at arm’s length from banks.
The recent budget increased WHT on cash withdrawals worth Rs50,000 and above from 0.2 percent to 0.3 percent. This is expected by some of the market participants to boost inter-bank transfers and restrict cash withdrawals; yet the impact is not expected to be profound as according to sources, most of the transactions that entail huge amounts are business-related transactions which are independent of tax enhancements.
Federal Excise Duty (FED) of 16 percent on all the financial services from financial institutions has been imposed which was previously applicable only on financial services from banks. This measure is expected to create a level playing field within the financial industry, yet it might shed some of the client base of mobile banking services which mainly constitutes the residents of areas with low bank outreach. The imposition of 16 percent FED might trigger them to revert back to cash-based transactions.
Keeping the tax on dividends on investments in money market funds and income funds intact at 25 percent against scheduled 35 percent for FY14 is a positive sign for banks as it continues to provide banks with 10 percent arbitrage opportunity.
But while the budget measures are not directly expected to create major headwinds for banks, the inflationary nature of the budget could cause changes from the monetary policy-front.
With the budgetary measures expected to trigger inflation soon, discount rate is sure to turn its gaze up to contain money supply. Even if it doesn’t start immediately, monetary tightening seems an inevitable phenomenon somewhere in CY14 which indeed will be a good omen for the banking sector.
Not to forget that in the recent budget, the government has been vocal to increase reliance on inexpensive foreign borrowing and public savings to finance fiscal deficit. This will enable banks to channel their liquidity to private sector investment programmes.
Given the claims hold any reality; the banks will be able to garner healthy margins through high yielding private sector lending although it would require banks to undertake smart moves to contain NPLs.
Yet with the government’s planning to cut back its reliance on SBP, whether commercial banks are left with enough liquidity for the private sector is still to be seen.