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Mumbai, Feb. 29 Bank stocks, which tanked during the first half of the trading session when the Finance Minister announced the Rs 60,000-crore loan waiver to farmers, recovered later on the clarification that it is unlikely to affect banks’ bottom line.

The BSE-banking index Bankex tanked more than 490 points intra-day but ended the day with a gain of 39.82 points over the previous day’s close.

The PSU banks fell between 2.54 per cent and 4.35 during the day before recovering significantly.

Punjab National Bank was up 3.93 per cent to Rs 604.15, SBI 3.48 per cent to Rs 2109.70, Bank of India 2.58 per cent to Rs 359.55, Canara Bank 3.56 per cent to Rs 278.10, Allahabad Bank 2.80 per cent to Rs 110.15 and Union Bank was up by 3.43 per cent to Rs 185.65. The relief package announced by the FM includes waiver of Rs 50,000-crore worth of loans to small and marginal farmers and a settlement scheme for other farmers worth Rs 10,000 crore.

Under the relief package, agricultural loans given by scheduled commercial banks, regional rural banks and co-operative credit institutions up to March 31, 2007 and due for December 31 that year will be covered under the waiver scheme to address the problem of indebtedness.

Agriculture loans restructured and rescheduled by banks from 2004-06 and other loans normally rescheduled under RBI guidelines will also be eligible under the waiver scheme and complete waiver of loans for marginal farmers owning land up to one hectare and small farmers owning land up to 1 and 2 hectares.

“Initially the markets took the announcement of loan waiver for farm loans negatively as there was not much clarity about reimbursements of the loan amount to the banks, but after the FM’s clarification that liquidity will be given to the banks over a period of three years, the bank stocks recovered substantially,” said Mr Mangesh Kulkarni, Banking Analyst, Almondz Global Securities Ltd.

“There is still not much clarity as to how the implementation will take place in case of reimbursements, but it will be positive for banks provided they get reimbursed in respect of net non-performing assets (NPAs) portion of the agricultural loans disbursed by them,” said Mr Vaibhav Agarwal, analyst, Angel Broking Ltd.

The FM said that the debt waiver only means that equivalent liquidity to the banking system will be provided and that the plan for this will be announced later.

“It will have a positive impact across banking sectors as the loan waiver in the Budget is on those loans which were outstanding on 31 March, 2007 and due till December 2007, all of which will have been already provided for by banks as NPAs. Now with the government reimbursing these to the banks it will get back the loans written off”, said an analyst with Religare Securities.

Another positive for banks such as SBI and ICICI Bank is that there is relief provided in terms of dividend distribution tax also, wherein a parent company will now be 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 dividend distribution tax and the parent company is not a subsidiary of another company.

“With SBI and ICICI bank having numerous subsidiaries, the relief in terms of dividend distribution tax would mean that they will have to pay lower dividend tax thus enhancing the shareholders value”, said an analyst with Religare Securities.

“The critical issue is how the Government would be financing the loan waiver.

"If the Government is going to shoulder the entire burden it would be good for banks. In any case, further clarity needs to be given,” said Mr Anoop Bhaskar, Head of Equities, UTI Mutual Fund.

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