The provisions for the banking sector deal mostly with their lending strategies to the agricultural sector as well as with regards to the treatment of NPAs and capital adequacy requirements. For one, the finance minister made it very clear that he expected the banks to go easy on the farmerswhile recovering loans and indicated that "banks will be encouraged to provide appropriate relief on accumulated interest in deserving cases".

This automatically gave rise to the spectre of rising non-performing assets as well as increased write-offs amongst the public sector banks. The second aspect of the budget proposals deal with the imposition of additional capital adequacy requirements. The norm is 8 per cent at present which will be increased to 9 per cent in the year 2000 and to 10 per cent thereafter. The capital adequacy for the leading banks is very comfortable at present as most are above the 8 per cent benchmark but may be stretched once credit offtake resumes to the industrial sector.

In conjunction with the need for higher capital adequacy is the likelihood of re-classification of non-performing assets. The budget speech indicated that the Narasimham Committee's recommendation on re-classification of NPAs will be implemented soon. At present the norm allows banks to classify those accountsas non-performing which have not paid interest for a period of two quarters. This norm has been sought to be tightened to one quarter of unpaid interest, which will see the level of NPAs of banks rise from the present average of nine per cent of assets. But in reality there will be no real increase in NPAs, or the threat of increased provisioning is more imagined than real. With an interest rate rise in the second half of the year a distinct possibility all banks will have to make higher provisions for diminution in the value of their bond portfolio in the current year.

Both the factors of state directed lending as well as the fear of rising NPAs and the additional provisionings for NPA will put the bigger public sector banks at a disadvantage as far as earnings are concerned and not the others; and hence the weakening sentiment for bank stocks in general and for the big public sector bank stocks in particular.

Engineering stocks

The budget provisions have come at just the right time forcompanies like ABB, Siemens as GEC Alsthom, the latter two of whom have been ailing for the past one and a half years. The budget provisions have provided a few sops for power equipment suppliers. For one, the budget has identified the power sector as a major thrust area for investment; which will mean increased activity further down the line, especially with the thrust on fast track power projects.

The stocks of these companies have not participated in the general market fall that has affected all pivotals. The announcements in the budget comes close on the heels of a better than expected performance from Siemens for the first six months of the current financial year. Against a steep loss expected for the period, the company reported a net loss of Rs 12.9 crore (which was lower than the Rs 60 crore loss in the corresponding period last year), which came after a warning from the managing director of Siemens India that a complete recovery for the company was atleast two years away. It is now beinganticipated that with the emphasis shifting to the power sector and towards the IPPs and with the capital goods sector being exempt from the new restrictions on modvat credit this process of recovery may be hastened.

In addition to this development the moves to securitise the receivables of the state electricity boards could go a long way in reducing the outstandings to companies like GEC Alsthom which is heavily dependant on the SEBs for its revenues.

Aaron Chaze