Budget 2025-26: Banks expect steps for deposit mobilisation, tax breaks

Tax incentives will help sector as loan growth slows down, say experts

The banking sector expects that the Union Budget in February will boost deposit mobilisation as it tackles the pressure of slowing current account and savings account (CASA).

 

The Indian Banking Association (IBA) has asked for tax rebates for savings accounts in order to nudge customers to retain funds. Most banks, for the last few quarters, have reported a fall in the share of CASA deposits in total deposits.

 

“Given the challenges around mobilisation of deposits from the retail segment, some incentives for retail bank deposits could improve the ability of banks to garner such deposits and support supply of credit," said Sachin Sachdeva, vice-president, sector head - financial sector ratings, ICRA.

 

"This is especially important in the backdrop of the proposed changes in liquidity coverage ratio framework as well as moderation in LCR of banks over past quarters. The moderation in LCR is an outcome of slower growth in retail deposits of banks,” he said.

 

A draft Reserve Bank of India (RBI) circular on LCR proposes an additional run-off factor of 5 per cent for retail deposits enabled with internet and mobile banking facilities.

 

Experts hope that the Budget will also have tax incentives for wholesale loans and measures for acquiring bad loans from the banking system.

 

“Considering that the Indian banks have been slowing down on loan growth in wholesale sector, the sector would hope for tax incentives and other measures to boost the lending to this segment which has seen a very steady uptick in private credit flow to fill the gap,” said Kumar Saurabh Singh, partner at Khaitan & Co.

 

Credit growth to the industry improved from a year ago but it is in single digits still. According to RBI data, loan growth to industry was at 8.1 per cent as on the fortnight ended November 29, 2024, compared to 5.5 per cent in the corresponding fortnight the year before.

 

“In addition, with the strength of government guarantee to back NARCL’s bid for acquisition of bad loans, the private sector ARCs would also hope for easing of norms and incentives for listing so as to create a deeper market and competitive landscape for acquisition of bad loans from the banking system,” said Singh, referring to the National Asset Reconstruction Company Ltd.

 

Certain measures like additional foreign direct investment (FDI) in public sector banks, mergers of cooperative banks, and additional tax rationalisation for foreign banks will help the long-term growth of the banking sector.

 

“I am looking for (expanded) FDI limits for public sector banks. Currently, it is kept at about 20 per cent and a higher limit would give better capitalisation and stronger governance,” said Vivek Iyer, partner, Grant Thornton Bharat LLP.

 

“Secondly, there needs to be a proper plan around co-operative bank consolidation. Thirdly, I think there needs to be tax rate rationalization for foreign banks. We need foreign bankers and the size and scale to be relevant to the country” said Iyer.