Post-Budget Survey: A Tough Road Ahead For Indian Banking And Finance Sector

Indian Finance and Banking sectors are at the heart of the Indian economy. There is a lot of challenges that perturbs their growth process, but the Indian government is attempting to force them aside. The image of the Indian banking system is very bright. 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. Therefore, we can state that the Indian banking system is very well-built and quite heavy.

 

Budget and its Impingement on the Banking Sector

A week beforehand 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 tough loans. That had affected the expectations of people for the infusion of more capital in banks in the budget announcement. Nevertheless, against the expectations, Finance Minister Arun Jaitley provided only an amount of Rs. 10,000 crore for the banking arrangement and against this sum of money, the banks are instantly looked to provide credits amounting Rs. 5 lakh crore to the different sectors of India.

Mr. Arun Jaitley said that the regime 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.

Considering the new Insolvency and Bankruptcy Code, (IBC) Finance Minister said that it has changed the lender-debtor relationship. He added that “The recapitalized banks will now possess a keener ability to sustain development. All these structural reforms in the medium and long run will help Indian economy to achieve stronger growth for a long time.”

In accession to that, the budget has also offered to allow strong Regional Rural Banks (RRBs) to put up capital from the market that will help them improve their credibility to the rural economic system. 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 the Initial Public Offering (IPO) in the next one year.

Further, the deduction of 7.5 percent of total income allowed to Indian banks with regard to the provision of bad and doubtful debts has been increased to 8.5 percent of total income.

Nevertheless, the deduction limit of five percent of total income for foreign banks operating in India goes on to remain the same.

 

Future for the Finance Sector

The financial marketplace had already chewed over the government’s move of imposing a 10 percent tax on Long-Term Equity gain on the earnings exceeding Rs. 1 lakh, which contributed to the sudden depression in the Indian Stock market on the budget day. This would come into effect from 1st April 2018. Below this new regimen, any appreciation in value of stocks or units up to 31st January 2018 is exempted but any addition in the same from 31st January 2018 up to the date of the sale (after 1st April) would be assessed at 10 percent. Likewise, for the short-term capital gain, in that respect is a 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 a tax provision for Mutual Funds as well. As per the long-term capital gain, Mutual Funds will also be taxed at 10 percent. Aside from that, the dividends on Mutual Funds will also be taxed at 10 percent. As a consequence, all dividends in Equity and Equity Oriented Funds will now be tasked at the rate of 10 percent.

 

Budget’s Take on Crypto-Currency

Finance Minister as well announced that crypto-currencies are not legal tender and warned of all measures to be removed to rule out the usage of crypto-assets in financing illegitimate activities or as part of the payment arrangement. He added that the government will develop a distributed ledger system or the block-chain technology to permit formation of any chain of records or transactions without the need of mediators. That will assist India to become a Digital Economy.

 

The Road Ahead

Awaiting the current scenario of the Indian financial system, the charge per unit of GDP is set to be about 7.2 to 7.5 percent for the current fiscal. The mark of fiscal deficit is also quite high, at 3.5 percent, for the year ending in March. The targeted fiscal deficit for the coming fiscal year is 3.3 percent, but looking at the government outlay in the budget and the source of revenue that it receives, it seems quite hard. Adding to that, the oil prices are zooming up, Indian inflation rate is up and at the recent meeting, the RBI has maintained the status-quo.

The upcoming year would be really significant for the economic system of India, especially for the banking sector, as they bear to run into the Basal-III norms and that calls for an infusion of Rs. 4-5 trillion by 2019 in the banking organization. The budgetary allocation for the banking scheme is not as expected and thus, it would be very interesting to find out how the government sees its mark for the coming fiscal ahead of the 2019 general elections