By Prashansa Srivastava
Finance Minister Arun Jaitley is expected to unveil the budget on 1st February 2018 for the upcoming fiscal year and significant developments are expected for the banking and finance sectors considering the massive changes that have taken place over the recent years.
Recent developments in the banking sector
The banking sector has received considerable attention due to the issue of non-performing assets (NPAs) and recapitalisation of Public Sector Banks (PSBs).
According to the data provided by the Reserve Bank of India, non-performing assets or bad loans of PSBs stood at a staggering Rs 7.34 lakh crore by the end of the second quarter this current fiscal year, the bulk of which came from corporate defaulters. Relaxed lending norms and lack of thorough analysis of financial status and credit rating by banks has encouraged corporate defaulters.
A week ahead of the budget, the finance ministry announced that the government would infuse Rs 2.11 trillion capital into PSBs. The capital which is the heart of expanding credit, earning interest and driving economic activities. As the Government is the majority shareholder, it has to provide equity capital if the banks are struggling. This injection of capital is also known as the recapitalisation of banks. It is aimed at tackling the twin balance sheet problem in India and tide over bad debts and to revive credit growth. The government has set up some banking reforms and measures already to complement recapitalisation such as yearly evaluation of PSBs by autonomous agencies, yearly report card and rankings and performance linked capitalisation. Other than these steps other reforms along with a corresponding roadmap can be expected in the Budget 2018-19.
Challenges for public sector banks in India
The challenge of the rising NPAs looms dangerously ahead for the banking sector. Tackling the surge in bad loans and expediting the recovery of non-performing assets is the most significant roadblock. Rising bad loans have dwindled earnings of banks, holding up future growth and investment. A rise in NPAs means a rise in corporate debt, which hinders investment and subsequently growth over a spectrum of industries.
The fast-changing banking landscape and rapid push towards digitalisation by the government also presents a unique challenge. Adaptability on part of PSBs is needed to compete with new more digitally savvy players and dealing with new reforms. Public Sector Banks will also have to improve their focus on new banking segments such as microloans and consumer durable financing.
Pre-budget expectations
Since the step of recapitalisation has been taken, the government must now signal further reforms to improve the functioning of these banks. The need for transparent and clear banking reforms is clearly evident.
To encourage term plans, the insurance industry has been demanding the creation of a separate tax exemption for life insurance policies and premiums paid. The industry wants the government to encourage investment by the general public in life insurance policies and mutual funds. Currently, under Section 80C of the Income Tax Act, an exemption of only Rs 1.5 lakhs can be sought.
The banking sector also aims to increase the Tax Deducted at Source (TDS) limit for bank interest from the current Rs 10,000. This limit was last set in the year 1997. This will ensure more interest in hand for bank customers. This can also help banks to shore up customers.
In the wake of an aggressive push towards digitalisation, the banking sector also wants the government to incentivise e-KYC and e-Signature. This will help to enhance productivity and promote digital banking. The sector also wants the promotion of Unified Payments Interface (UPI) to be stronger considering its scalability and ease.
Finally due to the popularity of fixed deposits in India which though safe is highly tax inefficient, the Banking sector wants the Government to bring the taxation on FD returns at par with that of debt mutual funds wherein an investor is taxed only upon redemption and if redemption is after three years, the tax is calculated on the Long Term Capital Gains at 20.6% with indexation benefits, which significantly reduces tax outgo.
Increasing efficiency by removing roadblocks
In the Budget 2018, the banking sector needs to focus on both fiscal consolidation and growth. In the Budget 2018, we can expect reforms that will help give better operational freedom to PSBs and enable the mergers of PSBs. This will infuse efficiency in PSBs and they will be able to compete with private sector banks more efficiently. It will also reduce the pressure on the government to make more funds available for recapitalisation.
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