What is to be Expected for the Banking Sector During this Budget?

For a long time, the only thing that the Indian banks looked forward to in the Union Budget was the extent of recapitalization that the government would allocate each fiscal year. Last year, the government had already told banks that the government had recapitalized banks to the extent required and the onus was on the banks to raise capital from the market.

In a way that is correct. The government has already infused more than Rs.2.2 trillion to recapitalize the stressed banks. The number of PSU banks have also been reduced through two-way mergers and even three-way mergers in some cases. In short, India has a public sector banking story that is much better capitalized and most of the bad loans are provided. It is now time for the next level of banking reforms.

What are the Expectations for Banks in Budget 2022?

Broadly, here is what the banks are expecting the Union Budget 2022 to delivery for them.

I. It is more than half a year since the government offered guarantees worth Rs.30,600 crore under the National Asset Reconstruction Company Ltd (NARCL) for acquiring stressed loan assets. The onus is now on the banks to get the necessary regulatory clearances from the RBI to transfer such stressed assets to the NARCL.

The banks have identified loans worth Rs.90,000 crore that are severely stressed and out of that nearly Rs.50,000 crore worth of loans are being transferred in FY22. The budget needs to provide an action plan with a time table for the next one year and stringent monitoring.

II. The biggest competition that banks are facing today is not from the NBFCs but from the Fintech solution providers which are leveraging technology in a big way to simplify access to customers. That is likely to change banking in a big way.

Banks now need to focus on a very critical niche where they can add substantial value through innovative financing solutions and that is where the Budget 2022 needs take the lead. For the National Infrastructure Pipeline where over 193 projects above Rs.1,000 crore have been identified, the need of the hour is public-private partnerships, innovative products, synthetic solutions. Budget 2022 needs to empower that.

III. PSU banks have been consistently losing market share to the private banks and even with the recapitalization, the PSU banks would struggle. The need of the hour is greater leeway to banks in terms of talent procurement, talent retention, rewards model, independent board of directors, greater market-driven approach to business etc.

The need of the hour is to bring these banks to a higher level through better upskilling of the PSU banking manpower. Budget 2022 must take the initiative. ESOPs and industry parity pay are a must.

IV. One way, the Budget 2022 can help is to scrap the current FDI cap in state-run banks, which is pegged at 20%. If this is removed and the government is willing to cede control, the networks and the customer franchises of these banks can actually be leveraged to the hilt.

This will also enable global players to infuse capital into these PSU banks on a much bigger scale.

V. One demand, and it does sound logical, is the lowering of corporate tax rate for foreign bank branches. It is currently at 40% for these foreign branches in India, making their India operations almost unviable. Ironically, domestic players are paying just 22% now.

This has led to tepid performance by most foreign banks in the last few years. Creating a fair playing field for international banks in India is not only the right way ahead but will ensure best practices in terms of process, technology, credit evaluation etc.

VI. In the last few years, too many urban cooperative banks have come under stress resulting in depositors running around for their money. It is time the Budget 2022 gets these urban cooperative banks into the banking mainstream to reduce the risk of depositors and ensure their orderly growth. 

VII. Last but not the least, it is time to seriously consider offering higher income-tax deduction for bad and doubtful debt provisions. Currently, banks can deduct such provisions from their taxable income. However, the need of the hour is incentivizing such provisions by providing accelerated exemption benefits so that banks can get out of the NPA mess quicker and with lesser longer strain.

Of course there are also other demands like seamless and quick conversion of foreign branches into subsidiaries. However, these may be more complicated. The big need of the hour is to action the NARCL and the NMP into a more value accretive measure.