Pay panel boost for bank loans

IMPACT OF THE SIXTH PAY COMMISSION REPORT

It is not just government employees who are cheering the sixth Pay Commission report. Even banks are eyeing big bucks with the panel suggesting an end to the system of advances to Central government employees.

Instead, it has suggested that the Centre could provide a 2 per cent interest subsidy on bank advances to Central government employees. If the proposal is approved by the Union Cabinet, bankers said, there could be a large market to be tapped for home loans alone.

Apart from the potential of getting 4.5 million Central government employees, banks are also eyeing the segment due to the lower risk.

"It's a good business for banks, especially in the backdrop of a slowdown in retail credit, which we have seen in the current financial year. The prospects of defaults are next to nil," said Union Bank of India Chairman and Managing Director M V Nair.

Bankers said they could strike a deal with the employer to get instalments deducted directly from the monthly salary. In the case, the employee concerned is unable to pay close to the time of retirement, the dues can be deducted from the superannuation benefits, a senior Union Bank of India official said.

"With such an arrangement, the credit will be on the books of banks, plus it will get interest subvention. Both auger well for growing advances," added BoI Executive Director K Kamath.

Though it is too early to gauge the impact on retail credit, some banks are factoring in the potential business along with higher spending because of the Pay Commission recommendations, as also due to the tax proposals, while preparing business plans for 2008-09.

"Given the Indian psyche, if a person has the ability to pay (surplus), he or she aspires to have a home. So the arrangement (interest subsidy) will mean a good business opportunity. Though most of the demand may be for housing advances, the credit will also be sought for purchasing consumer durables," a Bank of Baroda general manager said.

At present, the Pay Commission recommendation is relevant to 4.5 million Central government employees. But going by the history of pay hikes given to the state government and public sector employees, the tally of beneciaties could cross 10 million.