India has seen a mix of bold, realistic and sometimes reformist budgets over the years. In the highly public anticipation regarding Union Budget 2021-2022, Union Finance Minister Nirmala Sitharaman, who promised a “budget like never before”, presented the first-ever paperless budget. While presenting it, she has fundamentally come clean on the Budget arithmetic. By declaring higher fiscal deficit numbers of 9.5 percent of the GDP and 6.8 percent of the GDP for fiscal year 2021 and fiscal year 2022, respectively, she has placed the convincing assessments of revenue receipts and recognized “off balance sheet” expenditures.
This anticipated budget did not come bearing joyous news for salaried taxpayers. With no change in tax slabs, and the possibility of fuel prices going up, coupled with moderate inflation- it is likely that taxpayers are going to have lesser savings.
Thus, meaning the budget had remarkable things for the banks and other similar financial institutions. Fiscal 2020-21 has been uneven for the Indian banking industry. While credit growth has remained subdued, Non-Performing Assets (NPAs) and stressed assets have reduced marginally. The second half however, thankfully saw credit growth picking up marginally, due to relaxation of credit to the agricultural sector and an increase in vehicle loans along with credit to industries. In this backdrop, the new budget becomes crucial. Although a lot of this would come to the efficient implementation to meet the targeted goals, it’s important to highlight the ideas this current budget has for such institutions.
Firstly, this budget marked a clear stance from the government on public sector banks. As stated by the finance minister they must be ‘functionally strong and professionally managed to meet the needs of a growing India’ which means to compete they must be far more efficient. Furthermore, since the decision to privatize two public sector banks meant that public sector banks must function with greater efficiency to be able to compete in the market. This ensures government isn’t covering up for the losses public sector banks face by making them compete with private profit oriented financial institutions.
With the proposed increase in FDI limit to 74% and the proposed IPO for the Life Insurance Corporation of India (LIC), the insurance sector in India is likely to get a giant push, which is a huge step as this is one of the industries which have been lagging in India for far too long especially when it is observed that these industries are popular in other developing Asian nations. More focus on health and well being also means the industry would get a huge capital influx.
In addition to this, The Reserve Bank of India (RBI) has, through repo rate reductions, given a nudge for the banks to spend more and save less as the focus will be on driving public spending and increasing consumption where banks have a huge role to play. This might mean loans get cheaper or more attractive and innovative financial products being offered by banks as an incentive to make customers spend more. This is important because with moderate inflation in the coming months and with rise of prices, the tax slabs have remained constant. This means there is a fear decrease in consumption hence makes it important for banks to incentivize spending and consumption in a post pandemic economy.
With the proposed modifications in NBFC (and shadow banks) governance along with changes suggested in the last budget, the government has acknowledged their importance in the financial sector. The NBFCs and shadow banks have always had a special role to play in the lives of the Indian customer, thanks to their easy accessibility and long-standing relationships. But the failure of IIFc meant that there was huge concerns about these shadow banks, thus the proposed governance helps in better control and accountability. These shadow banks form an integral part of financing for small businesses and lower middle-class workforce.
It was also observed that in the last one year, the UPI-based payments have grown nearly three times. This achievement has helped us transform further to a cashless economy which meant this budget focused a lot on a cashless economy. Cashless payments is going to be a boon for banks and other financial institutions as this will help them become an integral part of their customers’ lives, but this is premised upon a payment infrastructure that can compete with the likes of Paytm and Amazon Pay.
The budget then further talked about the idea of bad banks. A bad bank acts as an aggregator of all stressed assets in the system and aims to resolve the issue leaving the banks to focus on the business at hand. A financial institution with non-performing assets (NPAs) can sell its holdings to a bad bank at a market price that will help them clear their balance sheet. This idea was also endorsed by International Monetary Fund’s Gita Gopinath. Although it is important to note that this measure can be only be a success if the non-banking financial services and the banking sector thrive parallelly, thus making it crucial for the implementation to work in tandem with each other.
Lastly, the budget also calls for the formation of DFIs (Development Finance Institutions). Lack of longstanding credit for infrastructure is one of the major reasons for poor industrial and infrastructure investment during the last decade which has yielded low returns over a long period of time. The reason for this is commercial banks are loaded with mounting non-performing assets because of poor infrastructure development hence they find it problematic to lend for long term, say, more than five years. Thus, DFIs which are used in a lot of developed economies successfully. However, it is important to note that according to the budget, DFI will be funded by Foreign Portfolio Investments (FPIs). This is a matter of grave concern because FPI symbolizes short-term inflows with exchange rates, while infrastructure investment is long-term whose incomes will be generally in rupees, thus potentially causing issues in terms of currency mismatches. This is something the government must look to tackle.
In a post pandemic world, these reforms look extremely crucial and the budget shows promise but now the mega task lies before the government the execution of the plan. Otherwise, the Budget, acclaimed as a six-pack economic push, will be unproductive. And the road ahead will be long and hard.
Comments