The Union Budget for 2024-25 contains two proposals that has direct relevance to the banking sector.
First, the Budget proposes to bring out a “financial sector vision and strategy document” to prepare the sector in terms of size, capacity and skills. This will set the agenda for the next five years and guide the work of the government, regulators, financial institutions and market participants.
Such a comprehensive document has been long overdue. The banking sector, of course, will be the centre-piece of the document. Going down the memory lane, the two Narasimham Committee Reports in 1991 and 1998, several recommendations of which were implemented, had laid the foundation stone for modern banking in India and aligned it to the international benchmarks.
Subsequently, the Report of the Financial Sector Legislative Reforms Commission (Chairman: BN Srikrishna) was released in 2013, which, despite containing several useful recommendations, remained unimplemented.
Therefore, the banking sector will eagerly await the recommendations of the proposed document. And, the timing of bringing out such a document is appropriate as the commercial banks are in a good position, financially, to absorb the likely changes emanating therefrom.
The second proposal relates to expanding the banking outreach in the North Eastern (NE) region by opening over 100 branches of the India Post Payment Bank. The NE region had 5,054 banking offices (June 2023) which constituted just 3.1 per cent of the country total. Even within the NE region, over three-fourths of bank offices were concentrated only in two States — Assam and Tripura (Table 1).
Thus, it’s apt that the Budget has endeavoured to increase the presence of the NE region in the banking map of the country. This will help increase financial inclusion there. However, the difficult terrain of the seven States in the NE region, and the sporadic law and order disturbances pose threats to usher in States-wide equity in the banking network.
Moreover, it’s not understood why a ‘payments’ bank was chosen for this, why not a universal bank, be it private or public? Or, have the universal banks currently operating there become tired?
However, the Budget hasn’t addressed the deposit mobilisation problem of the banking sector in the face of surging credit demand. Credit demand is likely to grow further looking at the encouraging proposals for the Micro, Small and Medium Enterprises including Mudra loans.
Further, the Budget facilitates increased demand for educational loans. The sizeable capital expenditure envisaged will also invigorate downstream industrial activities. All these, coupled with the continuing strong rural demand, will push up the overall credit demand.
The increase in securities transaction tax and long-term capital gains tax on securities as well as taxation of debt mutual funds is unlikely to reverse the financial disintermediation process which has taken strong roots in the financial sector unless banks make their deposit products attractive either in scale or scope. In this context, the RBI’s June 7 measure to raise the limit of bulk deposits from ‘₹2 crore and above’ to ₹3 crore and above’ looks futuristic.
Anyway, the capital market will take some time to adjust to the changes, but it will bounce back, given the sound economic fundamentals and the reigning animal spirits. Steps for reforming and strengthening debt recovery tribunals is a positive for recovery of irregular loans in the banking sector.
Internship schemes
The banking sector should strive to capitalise on the comprehensive internship programme announced in the Budget. Already, banks accommodate summer interns, but the scale, which was missing, now stands addressed.
Moreover, that the companies would meet the training cost and 10 per cent of the internship cost from their Corporate Social Responsibility funds is an innovative move by the government.
The new regime of personal income tax has been tweaked marginally. Most of the increases in the tax slabs under the regime has already been eroded by inflation, and if inflation does go awry further, the real gains may plunge into negative territory. Therefore, the Budget has to be complemented with strict vigil on how the inflation trajectory shapes — a task for the central bank.
According to the Budget, as a result of the changes in the new regime of personal income tax, a salaried employee stands to save up to ₹17,500 in income tax, i.e., less than ₹1,500 a month. For the middle class, this may not be a decent sum to start even a monthly Recurring Deposit with a bank or a Systematic Investment Plan in a mutual fund.
The impetus given to the tourism industry in the Budget will not only augment income but also generate employment. This will, in turn, give fillip to personal loans and card business of banks and their card subsidiaries.
However, there’s a risk if the over-enthusiastic tourists take recourse to ‘Buy Now, Pay Later’ schemes and are unable to repay on time.
The gross and net market borrowings through dated securities during 2024-25 are estimated at ₹14.01 lakh crore and ₹11.63 lakh crore, respectively. Even though both will be less than that in 2023-24, the central bank is required to manage the borrowing programme and the yields deftly, combined with liquidity management efforts.
In line with the Economic Survey (2023-24), the Budget underscores the significance of data and statistics under the Digital India mission. Banks need to partake in this mission and improve their data availability, accuracy, transparency, dissemination and above all, privacy. For example, data disclosures by banks in their balance sheet, profit & loss account statements and ‘notes to the accounts’ need deep improvements in several dimensions.
To sum up, the Budget doesn’t impose any burden on the banking sector. It will depend upon the individual banks to leverage their business and human resources in consonance with various enablers announced in the Budget.
The writer is a former senior economist, SBI. Views expressed are personal