Budget Watch: Sitharaman likely to address banking, insurance reforms

Government's equity dilution in state-owned lenders will be one issue financial market observers will monitor

As Finance Minister Nirmala Sitharaman prepares to present her seventh consecutive Budget later this month, she will have to take a call on issues related to banking and insurance.

Sitharaman, in Budget 2021-22, had announced the privatisation of some public sector banks (PSBs) as part of a disinvestment drive that aimed to fetch Rs 1.75 trillion. However, the disinvestment process of IDBI Bank continues. Financial market observers will watch if in Budget FY25 she will announce further equity dilution in PSBs to meet the 25 per cent public shareholding norms prescribed by equity market regulator Securities and Exchange Board of India.

 

Sitharaman had said that besides IDBI Bank, the government will privatise two other PSBs and one general insurance firm in 2021-22. Experts don’t expect any immediate announcement in this regard. India has 12 state-owned banks that collectively manage approximately 60 per cent of the banking system's total assets.

Budget FY25 may prioritise a long-pending proposal to reform the country’s insurance law. In November 2022, the Finance Ministry sought public comments on proposed amendments to the Insurance Act of 1938 and the Insurance Regulatory and Development Authority Act of 1999. The amendments intend to introduce composite licensing to insurers apart from other changes related to insurance intermediaries, captive insurers and insurance businesses among other areas.

The banking sector is hopeful that the government will make an announcement on the long-pending five-day banking rule in the Budget. Bankers have made several proposals for the Budget, including tax relief on deposits and home loans, as well as the establishment of a dedicated refinancing entity for non-banking financial companies (NBFCs).

Dinesh Khara, the outgoing chairman of State Bank of India (SBI), has advocated tax relief on the interest income earned by account holders. “If some relief could be provided regarding tax on interest earnings, it would incentivize depositors. Eventually, the banking sector uses deposits mobilised for capital formation in India,” he told PTI in an interview in June.

Under current regulations, banks are required to deduct tax on interest income earned from deposits across all their branches if it exceeds Rs 40,000 per year. For savings accounts, interest earnings up to Rs 10,000 annually are exempt from tax.