The government is certainly facing challenges but is sure of charting out the policies to strengthen the banking and financial services sector of India by focusing on banking reforms, addressing bad loans, infusing capital, promoting FinTechs and supporting the NBFCs.
Investment Demand Creation
It is expected that the budget would come up with plans to spur the investment demand. This becomes very crucial in the view of falling GDP growth that was as low as 5.8% in March ’19 with FY19 growth slumping to five year low at 6.8%. Banking sector reforms, PSB consolidation, addressing bad loans and capital infusion to PSB.
The budget is expected to put forward a roadmap on banking reforms. Last year Vijaya Bank & Dena Bank was merged with Bank of Baroda. It is expected that similar approach would continue to create Banks of larger scale with a view to enable state owned banks to play a major role in economy. Post these consolidations, a reduction are expected in number of PSU banks under PCA from the current 5 banks. Addressing bad loans in public sector banks will be another challenge that needs to be addressed on a priority basis, though NPAs seem to be peaking out at industry level. Till IBC came into picture, the promoters were never worried of losing their projects. While that is changing now after IBC getting effective, with expected recoveries being higher than liquidation value, additional capital is expected by the Public Sector banks so as to maintain regulatory capital levels, come out of PCA and start lending. The government is expected to allocate
INR 30,000 crore to PSU banks for this purpose.
The industry expects the budget to reintroduce tax free infrastructure bonds to revive infra sector & economy. This becomes a win-win proposition for investors as well as Public Sector Undertakings such as NHAI, REC, HUDCO, IREDA etc that have been issuers of such bonds historically.
Healthcare / Health Insurance
The insurance industry as well as customers is expecting higher tax exemption for health insurance as well as preventive health check-up considering the escalating medicals costs in India. FICCI has asked to raise tax exemption on preventive health check-ups from 5 K to 20 K. The industry expects public expenditure on healthcare & sanitation to go up.
NBFC Liquidity crisis
Currently, the Non-banking finance companies are going through a rough phase following defaults by Infrastructure Leasing and Financial Services (IL&FS) on short-term debt obligations. As a result of this it’s expected that government will come up with some steps to address liquidity crisis & boost the market confidence. Ministry of Finance may instruct Central Bank to have a special liquidity window for systemically important NBFCs meeting certain criteria.
Taxation – Equity & Equity MF
There is a double taxation in terms of dividend distribution tax, while dividend above Rs 10 lakh is also taxable in the hands of a tax payer. While the steps such as Long Term Capital Gains tax on Equity / Equity oriented MF in addition to STT and tax on dividend are meant to increase the revenue, the above structure results in a higher effective tax rate. The market expects some rationalization here.
Start Ups / FinTechs
Start-ups are expecting a policy to boost the ease of doing business in India. This includes favourable tax treatment / tax holidays, tax on angel investment etc.
While RBI has already waived off charges on bank transfer through NEFT and
RTGS, the government is expected to take further steps to encourage digitization.