The banking and Financial Services Industry is an integral part of the spine of the finances of our country. With a contribution of Rs.107.83 lakh crore just by the public sector banks in FY20 itself the segment is moving at an accelerated growth rate of 3.57% compounded annually. There has been a major influx in newer technologies into banking services with the internet boom and the higher acceptance of digital payments across the channels ever since the demonetization move in 2016. Private players like WhatsApp bringing in UPI payments facility and the setup of NPCI (National Payments Corporation of India) have also promoted the growth of BFSI and its overall infrastructure over time. These facts alone are good enough to justify the importance of the sector in our economy. A small dent in the variables or a minor positive plush may turn things around. The annual budget of each year has a similar impact. The trial continued with the budget of FY-21 with the proposal of new policies and plans, the highlights of which we try to closely analyze and assess with a forward-looking approach for the overall economy.
A retrospective view of the past few years has brought the banking sector and PSUs into the mainstream to a higher degree than before. As per the budget of 2021, Finance Minister Nirmala Sitharaman unveiled the plans of divesting in all sectors barring four strategic areas. The government announced a budget of Rs. 1.75 lakh crore from the stake sale in public sector companies and financial institutions including 2 PSU (Public Sector Unit) banks and one insurance company in the next fiscal year. The move comes under the new PSE (Public Sector Enterprise) Policy unveiled in the current budget in the next fiscal year. The policy would entail the strategic sale of IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd. being the inclusions up for sales by the end of the year beginning on April 1. The disinvestment target is lower than the last year’s target of 2.1 lakh crore.
Pros and Cons: A Brief View
The annual budget like any other aspect has its pros and cons. While there are moves that can be called for a positive catalyst for the economy, there are some areas that have still scope for the rework to be done.
- Constitution of ARC/AMC- Through the annual budget the government plans to work on the constitution of an Asset Reconstruction Company/ Asset Management Company. NPAs have been a burden on the economy, especially in the past few years. With a plan to subdue this burden to a different entity while the focus is kept on their reconstruction, the assets would be transferred and dealt with separately by a specially set up ARC/AMC done by an existing company in the business of ARC.
- Deposit Linked Insurance Scheme- With an aim to restore the confidence of retail depositors in the banking industry an implementation framework would be in place whereby the depositors would be able to withdraw amounts up to 5 lakhs against their deposits. The success of this initiative would be directed by the seamlessness with which the deposit and withdrawal process continues.
- Increase in FDI limits- With an increase in FDI limits, up to 74% in the insurance industry, the move is a welcome change as the control can rest between foreign JV partners with a dominance of specific safeguards such as the majority directors being Indian residents and 50% of the board comprising of Independent Directors.
- Capital outlay for PSB revitalization- The budget entails an outlay of Rs.2000 crore to improve the financial health of the PSBs which would help in the further easy provision of capital during difficult times on the capital adequacy front. The privatization of banks would enable the other PSBs to gain an impetus for better performance and reflect a level of open-mindedness.
- LIC (Life Insurance Company) IPO- The major move of the current budget is the disinvestment of the LIC and the decision of an IPO. The move would enable a significant cash inflow as well. The disinvestment being budgeted at Rs. 1,75,000 crores as per the budget. A discussion is also on the cards for the consolidation of the SEBI Act, 1992, the Depositories Act 1996, The Securities Contract (Regulations) Act, 1956, and Government Securities Act, 2007 into a rationalized single market code to streamline the multiple laws. The process would also lead to ease in implementation of the statute being easy from an administrative viewpoint.
- Tax-related benefits-
- Exemption of royalty income received from non-resident on account of the lease of aircraft paid by a unit in IFSC would be exempted from income tax in India
- Investments in Unit Linked Insurance Plans (ULIP) would be taxable on maturity applicable on all policies taken on or after February 1, 2021. The move will create parity in terms of how mutual funds and ULIPs are taxed in the hands of the end consumer as an investment product.
- GST reduction on medical insurance premium- An area missed out in the budget would be not reducing the GST on the medical insurance premium, which was a major expectation of the industry. Given the fact that the budget gives maximum importance to Healthcare and wellbeing, a reduction of tax from 18% to 12% could have further benefited the insurance industry making the premiums more affordable
- Rationalization in the tax rate for Indian branches of foreign branches- The foreign banks looked forward to a rationalization in the tax rates from the current levels. The taxes currently levied at 40%, if reduced to lower a level as applicable on the domestic banks in India could have been a major tax reform in the banking sector.
Editor’s Note- A verdict
A narrowed assessment of all the positives and negatives affecting the BFSI sector, and an aggregate analysis helps us understand some key points coming into the picture.
- Catch up with the change- Privatization and disinvestments being some of the key components of the budgets indicate the need for the PSBs to accept the changes and also gain pace to function stronger than before. The decision will bring in more competition in the environment.
- Insurance will be the key game changer- On being compared to other developed nations and the emerging economies like Thailand and the Philippines, India has lagged in the insurance industry. The penetration level and density of insurance are far lower when compared to other Asian countries. This will gain good momentum with a proposed increase in FDI limits at 74% and proposed IPO of for LIC. An additional focus on health and well-being may also drive more capital inflow into the sector.
- Increased spending levels- The RBI has worked through the repo rates by reducing them and hence making a subtle nudge for the banks to increase the spending of the consumers. With a greater and more definitive role, the Banks will act in the direction of giving cheaper and more attractive loans than before hence acting as an incentive to spend more.
- Close watch on the NPAs- With an agenda to strengthen the core of banks and their functionality, the budget aims to scrutinize closely the balance sheets through its move to implement a special body to watch the NPAs and work towards their reconstruction. This in turn would provide value to customers and shareholders of the banks
The budget can be an easy charter for the BFSI sector to the growth and development which can be a positive variable in the overall function of the growth of the economy.
Author: Mohd.Yusuf (Editor, TJEF)