Budget 2018: An Opportunity to Reform the Banking Sector

The Banking Sector has seen its share of action which has happened over the last few years. First with the issue of NPAs, then demonetization and now finally with recapitalization of banks the sector has been in the eye of the storm so as to speak. Experts believe that the said issues are going to have a very substantial impact on the Budget 2018. It is expected that the FM will have a special focus on the Banking and the financial sector in the Budget 2018-19. The Government in October 2017 announced and then recently detailed the nature of the recapitalization plan of 2.11 Lakh crore for Public Sector Banks (PSBs). Around 20 PSBs will be recapitalized with Government infusing capital to improve health and functioning of these PSBs. The capital will be used by the Public Sector Banks mostly to tide over bad debts and to revive credit growth. Along with recapitalized a sleuth of Banking reforms and other measures are expected to be put in place. Some of these measures have already been set in motion by the Government. Yearly evaluation of PSBs by independent agencies, yearly report card and rankings and performance linked capitalization are just some of the measures suggested by the Government. Other than these steps other reforms along with a corresponding roadmap can be expected in the Budget 2018-19.

Expectations of the Banking Sector from Budget 2018

During a recent pre-budget consultation between the Finance Minister Arun Jaitley and the industry leaders from the banking and finance sector many requests and suggestions were made to the FM for consideration. As expected the most primary demand of the sector just like that of other sectors is some tax exemptions or reduction on taxes. The industry wants the government to encourage investment by general public in life insurance policies and mutual funds. Thus one of the recommendations that were made is understood to be special tax exemption for investment in to life insurance policies and for the premiums paid. Currently under 80C an exemption of only 1.5 Lakhs can be sought, the industry wants the Government to devise a separate tax exemption for term life insurance. Another major demand of the Banking sector is to increase the TDS limit for bank interest from the current 10000 rupees. Tax sops or subsidy on home loans for first time home buyers to purchase affordable housing is another step that can help banks shore up customers. Banking sector also wants the government to incentivize digitalization, recognition of e-KYC and e-Signature can also go a long way in boosting financial inclusion and enhancing productivity. Thus a renewed push for digitalization and Government’s support for the same to the banks is also desired. Finally due to the popularity of fixed deposits in India thus the Banking sector wants the Government to bring the taxation on FD returns at par with that of debt mutual funds.

Challenges for Public Sector Banks and the Banking Sector of India

The biggest challenges for the PSBs and for the Banking sector of India as a whole are to tackle the surge in bad loans and to expedite recovery of non-performing assets. Another big challenge for the Banking sector and especially PSBs is Asset Quality Deterioration which is leading to worsening of the banking stability indicator (BSI). Also due to rising bad loans and NPAs Public Sector Banks are now extra careful about lending which is resulting in Low Credit Offtake. The fast changing Banking scene along with fast changing trends and rapid digitalization also presents a unique challenge for PSBs. Entry of new players after Reserve Bank of India (RBI) introduced differentiated banking license and Small Finance Banks increases competition for PSBs, especially because the new players won’t have any legacy issues and will be more focused and digitally savvy. New reforms being introduced such as Bankruptcy Code and fresh capital via recap bonds will also require adaptability on part of the PSBs. Public Sector Banks will also have to improve their focus on new banking segments such as micro loans and consumer durable financing.

Some Banking Sector Reforms Expected in the Budget 2018

Although schemes like the Pradhan Mantri Jan Dhan Yojana under which 266.8 million new accounts were opened, establishment of the Bank Boards Bureau (BBB) and FM’s pet Indradhanush plan are steps in the right direction but they had limited impact and the fundamental issues plaguing the Indian Banking sector remains. The Government understands that the Public sector banks have a very vital role to play in India’s growth story. Thus implementation of recommendation of the Narasimham Committee on Banking Sector Reforms can be a beginning point. Experts believe that Banking sector reforms are directly linked with reforms in other sectors as well for instance slow project approvals and a weak economy is one of the reasons for mounting bad debts. In Budget 2018 the Banking sector needs the FM to focus on both fiscal consolidation and on growth simultaneously. In Budget 2018 expect reforms that will help give better operational freedom to PSBs, reforms that will address capital requirement of banks along with human resource management at public sector banks. While highly unlikely one of the major reforms in the Budget 2018 that we may hear about is the Government’s willingness to disinvest some PSBs especially IDBI wherein the government will reduce its holding below 51%. 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 available funds for recapitalization. Although as the said step is not very likely, we may hear something about merger of PSBs instead.      

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