Budget 2018: From digitisation to NPAs, a lot expected for banking sector

PwC and Business Standard look at the current scenario in India's banking sector, the issues facing it and what the industry expects from Finance Minister Arun Jaitley in upcoming Union Budget 2018-19

While there has been a lot of push lately on digital transactions from the Narendra Modi-led central government, it is expected that the coming Union Budget 2018-19 will see Finance Minister Arun Jaitley renewing the thrust by announcing some incentives for small businesses to increasingly go digital in so far as banking transactions are concerned.

Also, against the backdrop of the government’s plan to recapitalise public-sector banks, which have been suffering because of their ballooning non-performing assets, Budget 2018 will be keenly watched for any announcement towards that end.

PwC and Business Standard look at the present scenario in the banking sector, the issues facing it, and the Budget expectations the industry has from Finance Minister Arun Jaitley: 

Banking sector at a glance

 

KEY DEVELOPMENTS

Digitisation push

• Various measures and app-based services have been introduced to promote digitization
• Cabinet has approved the proposal that the govt would bear merchant discount rate (MDR) charges on digital transactions up to Rs 2,000 for two years.
• In Budget 2018, the government might introduce additional incentives like tax rebates of, say, 0.2% on digital transactions up to a threshold for small businesses

Capital infusion in PSU banks

• The govt has announced a recapitalisation scheme to infuse capital in the banking system. 
• Additional capital may be infused based on banks’ governance structure, bad debt recovery plan, capital planning & budgeting and HR strategy. 

ISSUES FACING THE SECTOR & WHAT INDUSTRY WANTS

Bankruptcy code: It is still evolving. It needs to be strengthened and the objective and spirit have to be adequately demonstrated

Home loan benefits: Considering higher unit prices in metros, higher tax deduction is needed on principal repayment of housing loan under section 80C

Insurance penetration: Currently, a high GST rate of 18% is applicable on insurance premium. That is a drag, especially given a weak life insurance penetration of under 4%. 

Regulatory timelines: Various regulations like IFRS, margining of non- centrally cleared trades, New Basel III norms are under way, but clearer timelines need to be defined.

Pension plans not tax-friendly: The pension from annuity is currently treated as income and taxed accordingly which is unfavourable when compared with PF, PPF, etc. 

LTCG tax benefits: The MF industry and brokerages expect long-term capital gains tax benefits for equities/equity-oriented funds to continue. 

Dividend distribution tax: There is no dividend distribution tax applicable on equity-oriented mutual funds but debt mutual funds, AMCs pay DDT at the rate of 28.33%. Industry expects removal of this dividend distribution tax to improve investor sentiment.

 

PwC View

Kuntal Sur, Partner and Leader - Financial Risk & Regulatory, PwC India

• Govt’s efforts to translate cash movement into digital money are expected to continue and we also see a tax break for digital transactions
• Insurance is another area of interest, where the 18% GST could be changed
• On long-term capital gain tax, it is expected that the definition of “long term” may be increased to 24 months.

Industry voice

Rajnish Kumar, Chairman, State Bank of India

• Focus on investment in agricultural sector to improve productivity and ensure better terms for farmers. It will be crucial for supporting efforts to double the income of farmers in mecium term
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• Continue with higher outlay for infrastructure to spur investments in various segments of economy. Its positive fallout will be acceleration in economic growth
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• Stay on course with the fiscal discipline path as it will strengthen country profile and attractiveness as investment destination