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Banking
Indian Budget 2007-08- Full Text of Budget Speech
IX. FINANCIAL SECTOR
85. In addition to the important legislative measures now before Parliament, Government proposes to take a number of initiatives in banking and insurance.
86. Government proposes to acquire RBI's equity holding in State Bank of India. I have provided a sum of Rs.40,000 crore for this purpose, but the transaction will be deficit neutral to the Government.
87. The Differential Rate of Interest (DRI) scheme provides finance at a rate of 4 per cent to the weaker sections of the community engaged in gainful occupations. I propose to raise the limit of the loan from Rs.6,500 to Rs.15,000 and the limit of the housing loan from Rs.5,000 to Rs.20,000 per beneficiary.
Regional Rural Banks
88. Regional Rural Banks (RRBs) have emerged as the third arm for delivering rural credit, and the sponsor banks have assured me that RRBs are willing to take on greater responsibilities. The Committee on Financial Inclusion, chaired by Dr. C. Rangarajan, has also made certain recommendations concerning RRBs. I, therefore, propose to:
• ask RRBs to undertake an aggressive branch expansion programme and, in 2007-08, open at least one branch in the 80 uncovered districts of the country;
• extend the Securitisation and Reconstruction of Financial Assets and Enforcement of Securitisation of Interest (SARFAESI) Act to loans advanced by RRBs;
• permit RRBs to accept NRE/FCNR deposits; and
• recapitalize, in a phased programme, the RRBs which have a negative net worth.
Housing Loans
89. The National Housing Bank (NHB) will shortly introduce a novel product for senior citizens: a 'reverse mortgage' under which a senior citizen who is the owner of a house can avail of a monthly stream of income against the mortgage of his/her house, while remaining the owner and occupying the house throughout his/her lifetime, without repayment or servicing of the loan.
90. Our people want housing loans. Banks and housing finance companies that lend against mortgages would have greater comfort if the mortgage can be guaranteed through a three way contract among borrower, lender and guarantor. Regulations will be put in place to allow the creation of mortgage guarantee companies.
Insurance
91. On December 6, 2006, Rashtrapatiji launched an exclusive health insurance scheme for senior citizens offered by National Insurance Company. I have asked the other three public sector insurance companies to offer a similar product to senior citizens, and they have agreed to do so in 2007-08.
92. The Micro Financial Sector (Development and Regulation) Bill as well as a comprehensive Bill to amend the insurance laws will be introduced in the Budget Session.
Financial Inclusion
93. Financial inclusion is the process of ensuring access to timely and adequate credit and financial services by vulnerable groups at an affordable cost. The Committee on Financial Inclusion has given an interim report. While we await the final report, Government has decided to implement, immediately, two recommendations. The first is to establish a Financial Inclusion Fund with NABARD for meeting the cost of developmental and promotional interventions. The second is to establish a Financial Inclusion Technology Fund to meet the costs of technology adoption. Each fund will have an overall corpus of Rs.500 crore, with initial funding to be contributed by the Central Government, RBI and NABARD.
Capital Markets
94. The capital market is an important instrument for intermediating financial resources. Recognising the strength of the Indian capital market, the International Organisation of Securities Commissions (IOSCO) has decided to hold its annual conference in Mumbai in April 2007. In line with measures announced every year to strengthen the market, I propose to:
• make PAN the sole identification number for all participants in the securities market with an alpha-numeric prefix or suffix to distinguish a particular kind of account;
• take forward the idea of Self Regulating Organisations (SRO) for different market participants under regulations that will be made by SEBI and, if necessary, supported by an enabling law;
• promote the flow of investment to the infrastructure sector by permitting mutual funds to launch and operate dedicated infrastructure funds;
• converge the different regulations that allow individuals and Indian mutual funds to invest in overseas securities by permitting individuals to invest through Indian mutual funds;
• allow short selling settled by delivery, and securities lending and borrowing to facilitate delivery, by institutions;
• put in place an enabling mechanism to permit Indian companies to unlock a part of their holdings in group companies for meeting their financing requirements by issue of Exchangeable Bonds.
Innovative Financing for Infrastructure
95. The minimum obligation of States to borrow from the National Small Savings Fund (NSSF) has been brought down to 80 per cent of net collections. Repayments of past NSSF loans by the Central and State Governments have also commenced from 2005-06, making available resources for long-term lending. I therefore propose that these funds may also be borrowed from NSSF by India Infrastructure Finance Company Limited (IIFCL).
96. An initiative that has borne fruit is the launch of the US$5 billion infrastructure financing initiative by Citigroup, Blackstone, IDFC and IIFCL.
97. A committee chaired by Shri Deepak Parekh has made a number of recommendations for financing infrastructure. One of the recommendations is to use a small part of the foreign exchange reserves without the risk of monetary expansion. The Committee has suggested the establishment of two wholly-owned overseas subsidiaries of IIFCL with the following objectives:
(i) to borrow funds from the RBI and lend to Indian companies implementing infrastructure projects in India, or to co-finance their ECBs for such projects, solely for capital expenditure outside India; and
(ii) to borrow funds from the RBI, invest such funds in highly rated collateral securities, and provide 'credit wrap' insurance to infrastructure projects in India for raising resources in international markets.
The loans by RBI to these two subsidiary companies will be guaranteed by the Government of India and the RBI will be assured of a return higher than the average rate of return on its incremental investment. Government proposes to examine the legal and regulatory aspects of the recommendation, in consultation with RBI, in order to find an innovative method of enhancing the financial resources for infrastructure.
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