High rates may shrink Centre’s dividend kitty

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Even as RBI governor YV Reddy met finance minister P Chidambaram on Friday to discuss the central bank’s upcoming monetary policy review where analysts expect it to raise lending rates, the government is waking up to the reality that rising interest rates are hurting its own finances.

The Centre expects a sharp reduction in dividends received in fiscal 2008-09 from public sector banks, whose margins are under severe pressure from a series of monetary tightening measures. Further, the special dividends from oil companies, on which the government depends from time-to-time to meet its fiscal needs, may not be forthcoming as oil PSUs are bleeding from persistent under-recoveries.

The government had received dividends worth Rs 13,728.40 crore in 2007-08 from nationalised banks, financial institutions and the Reserve Bank of India (RBI). As per the 2008-09 Budget, dividends from the same are expected to be Rs 18,445.40 crore+a projected rise of over 34%. But this is unlikely to come through.

The Budget figure also includes a hefty dividend from RBI from the profits it makes by investing the country’s foreign exchange reserves, among other income heads. Excluding the profits it earned from sale of SBI shares, the RBI had transferred a surplus of Rs 11,411 crore to the government for the year ended June 30, 2007, up from Rs 8,404 crore in the previous year, a 35.8 % rise.

The surplus to be transferred to the exchequer for the year ended June 30, 2008 is also on the RBI agenda in its review meeting on July 29. The bank’s financial year runs from July to June.

Incidentally, minister of state for finance PK Bansal said in the Capital on Friday that high interest rates could have affected the profit growth of state-run banks in the first quarter of 2008.

The country’s largest bank, State Bank of India, which will announce its first quarter results today, is expected to post the slowest growth in net profits, at 4.2%, in the past one-and-a-half years, according to a Bloomberg estimate. SBI expects to clock a NIM of 3% in 2008-09, down from 3.09% in 2007-08, its chairman said on July 1, 2008. SBI’s associate bank, State Bank of Mysore’s, net profits fell by 80% in April-June 2008.