The Viewpoint: Banking and Financial Sector – The Unconventional Budget

The Union Budget 2017-18 (“Budget“), presented by the FM for the banking and financial service sector has been a departure from the conventional practice. Yet, this was not entirely unexpected considering several other startling policy/regulatory initiatives and reforms, such as the ground breaking reforms in restructuring, long-pending implementation of the Insolvency and Bankruptcy Code, amendments in the SARFAESI and Debt Recovery Tribunal Acts and of course the demonetization that the sector has already witnessed in the year 2016-17..The statement of the FM prior to unveiling of the budget “The current Financial Year is not a conventional year as many major reformative decisions have been taken during the year. There is need for out of box thinking as series of steps are required about what the banks can do.” clearly indicated unconventional approach that the government may have for this sector..The Budget, was is expected to provide some relief to banks which are reeling with NPAs (which have reached 12% of the total advances) and are in a dire need of capital. An allocation of INR 10,000 crores made for recapitalization of PSU banks under the Indradhanush Scheme is underwhelming in light of the expectations of a greater allocation. An increase in provisioning for NPA from 7.5% to 8.5% is expected to reduce their tax liability and increase income..Increase in the budgetary allocation in the infrastructure sector, pegged fiscal target of 3.2% of the GDP, measures for the affordable housing such as allocation of INR 20,000 crores for refinancing of individual housing and infrastructure status to affordable housing projects will have a positive impact not only on the housing finance but overall on the banking sector..Due to demonetization, credit growth has hit an all-time-low of 5% and has resulted in substantial increase in the liquidity of the banks. Measures have been taken in the infrastructure sector for affordable housing sector and low cost of borrowing as a result of increased liquidity, this will boost the demand and augment a multifold rise in the credit-offtake..Extension of concessional withholding at the rate 5% for foreign entities for external commercial borrowing (ECBs) and in government securities, bonds, rupee-denominated offshore masala bonds should inspire confidence of foreign lenders and improve the overall bond market. The proposal to include NBFCs as qualified institutional buyers (QIBs) for participation in IPOs with specifically earmarked allocations will strengthen the IPO market and channelize more investments..The Budget has definitely let down the expectations of the sector in terms of the tax reforms such as exclusion of NBFCs from the purview of provisions of Section 194A of the IT Act, amendment to Section 115JB of the IT Act or clarifying that the amount transferred towards such reserves and provision is not to be added back for the computation of book profits, rationalization of TDS provisions, etc. Further, in view of GAAR being effective from the year 2017-18, a move towards alignment of the Indian taxation system with the taxation system adopted internationally, as a part of the G2O and OECD’s Base Erosion and Profit Shifting (BEPS) Projects was expected as well from the Budget..Though the Budget for the sector is definitely positive, as can be witnessed from an immediate rise in the sector’s stock market, a better allocation of capital for the ailing PSU banks (which is short of almost INR 1.1 lakh crore) to meet the Basel-III norms, more increase in the provisioning norms (increased to 8.5% from 7.5%) for NPAs which has gone to 12%-13% of the total credit and some of the anticipated tax reform and incentives measures for increase in the digital transactions would definitely have been the game changer..Nilesh Chandra is an associate partner and Srivar Awasthi is an associate at HSA Advocates. HSA is a full-service ﬁrm with ofﬁces in New Delhi, Mumbai, Bengaluru and Kolkata.