By Devanshee Dave
Indian Finance and Banking sectors are at the core of the Indian economy. There are a set of challenges that perturbs their growth process but the Indian government is trying to pull them apart. The picture of the Indian banking system is really vivid. As per the data by ibef.org, India has 27 public sector banks, 16 private sector banks, 46 foreign banks, 56 regional rural banks, 1,574 urban cooperative banks and 93,913 rural cooperative banks. Thus, we can say that the Indian banking system is really well-established and quite large.
Budget and its impact on the banking sector
A week ahead of the budget, the government infused Rs 2.11 trillion capital into Public Sector Banks (PSBs) in order to help them revive from the losses occurred by higher Non-Performing Assets (NPA) and bad loans. That had impacted the expectations of people for the infusion of more capital in banks in the budget announcement. However, against the expectations, Finance Minister Arun Jaitley provided only an amount of Rs. 10,000 crore for the banking system and against this amount, the banks are now expected to provide credits amounting Rs. 5 lakh crore to the different sectors of India.
Mr Arun Jaitley said that the government will soon announce measures for addressing Non-Performing Assets and stressed accounts for Micro, Small and Medium Enterprises (MSMEs), which will eventually help banking sectors and MSMEs in managing effective cash flow.
Regarding the new Insolvency and Bankruptcy Code, (IBC) Finance Minister stated that it has changed the lender-debtor relationship. He added that “The recapitalised banks will now have a greater ability to support growth. All these structural reforms in the medium and long run will help Indian economy achieve stronger growth for a long time.”
In addition to that, the budget has also proposed to allow strong Regional Rural Banks (RRBs) to raise capital from the market that will help them improve their creditability to the rural economy. It’s noted that RRBs are local level banks operating in different Indian states. As per this announcement, the largest lender of the Indian banking system, the State Bank of India (SBI), has started planning to list two of its 14 RRBs under Initial Public Offering (IPO) in the next one year.
Further, the deduction of 7.5 percent of total income allowed to Indian banks with respect to the provision of bad and doubtful debts has been increased to 8.5 percent of total income. However, the deduction limit of five percent of total income for foreign banks operating in India continues to remain the same.
Future for the finance sector
The financial market had already speculated the government’s move of imposing a 10 percent tax on Long-Term Equity gain on the earnings exceeding Rs. 1 lakh, which led to the sudden slump of the Indian Stock market on the budget day. This would come into effect from 1st April 2018. Under this new regime, any appreciation in value of stocks or units up to 31st January 2018 is exempted but any increase in the same from 31st January 2018 up to the date of the sale (after 1st April) would be taxed at 10 percent. Also, for the short-term capital gain, there is taxation provision at 15 percent.
In his speech, the Finance Minister said that it is heartening to see recognition for alternative investments like venture capital funds, angel investors, and alternative investment funds.
There is tax provision for Mutual Funds as well. As per the long-term capital gain, Mutual Funds will also be taxed at 10 percent. Apart from that, the dividends on Mutual Funds will also be taxed at 10 percent. As a result, all dividends in Equity and Equity Oriented Funds will now be taxed at the rate of 10 percent.
Budget’s take on cryptocurrency
Finance Minister also announced that crypto-currencies are not legal tender and warned of all measures to be taken to eliminate the use of crypto-assets in financing illegitimate activities or as part of the payment system. He added that government will develop distributed ledger system or the blockchain technology to allow organization of any chain of records or transactions without the need of intermediaries. That will help India become a Digital Economy.
The road ahead
Looking at the current scenario of the Indian financial system, the rate of GDP is set to be around 7.2 to 7.5 percent for the current fiscal. The target of fiscal deficit is also quite high, at 3.5 percent, for the year ending in March. The targeted fiscal deficit for the coming financial year is 3.3 percent but looking at the government spending in the budget and the source of revenue that it has, it seems quite difficult. Adding to that, the oil prices are soaring up, Indian inflation rate is up and in the recent meeting, the RBI has maintained the status-quo.
The coming year would be really important for the economy of India, especially for the banking sector, as they have to meet the Basal-III norms and that requires an infusion of Rs. 4-5 trillion by 2019 in the banking system. The budgetary allocation for the banking system is not as expected and thus, it would be really interesting to see how the government meets its target for the coming fiscal ahead of the 2019 general elections.
Featured image source: Flickr
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