By Brajesh Kumar Tiwari
Banking sector constitutes a major part of the economy hence the banking system is the bloodline of any economy. According to a PricewaterhouseCoopers (PwC) report, India could be the world’s third largest banking hub by 2040 and India’s fintech market is expected to reach Rs 6.2 trillion by 2025.
The banking sector of India is going through a very difficult situation due to the pandemic. It may take 24 to 36 months for banks to recover from the current situation. Global rating agency Moody’s has said that public sector banks will need an additional capital of Rs 2.1 lakh crore to overcome this pandemic. State Bank of India (SBI) is the only bank in India, which comes in the top 50 banks of the world. Proper budget, right tax and regulatory policies can put the banking industry back on the fast growth path. The banking sector is expecting positive amendments and policies in the coming Union Budget 2022.
At present, banks are withdrawing from lending as the biggest problem before the banks is Non-Performing Assets (NPA), which is affecting both private and public sector banks alike. Credit growth is also a big problem for banks. Banks will have to start giving loans, which is their main source of income and companies can get it in the form of working capital. Financial services company “Bank Bazaar” says that there has been a decline in the demand for loans like personal loans, car loans and home loans.
Banks can be in a good position through provisioning of bad loans, provisioning means that banks may reserve enough money for their bad loans in advance. Basel-IV, which is to be formalized in January 2023, will further increase the capital cap. Unless the government pumps in money externally, banks will be in severe loss creating massive capital adequacy problems. The banking sector must help in MSME advances. MSMEs are the backbone of Indian economy and creates employment for 65 million people. This sector has a 16% contribution to the Indian GDP, which as per reports is to become 25% by 2022. Provision should be made for all these in the coming budget.
The upcoming budget could lead to bold policy support to strengthen the digital infrastructure for Banking sector which will ultimately help in digitizing the overall economy. From adding best-in-class technology to upgrading services to upgrading an existing set-up, technology holds a plethora of opportunities. Technological inclusion and technical literacy campaigns should be undertaken to ensure that paperless banking takes place. If rural people can order products on Amazon and use Facebook then why not e-banking services. There is a need for digital literacy programs which can be done through budgetary allocation. The government may consider creating a dedicated fund to strengthen the digital infrastructure of cooperative banks too.
Innovation is the key to maintain long-term relationship with customers. Keeping pace with the changing environment and other industries, the banking sector has to invest in innovation, the government should make a provision on banking innovation in the budget. The more agile and accessible the services and banking practices are, the stronger the relationship with the customers. The banking sector can also be given impetus by reducing the rates of income tax on fixed deposits.
The introduction of a special regulatory and taxation regime to cover various aspects of the cryptocurrency digital currency can be expected from this budget. Increasing the home loan interest rate tax deduction from the existing limit of Rs 2 lakh to Rs 5 lakh will give a boost to home loans.
The financial sector is the pillar of the economy. Such policy measures in the budget will go a long way in boosting and strengthening the banking sector, else the impact of any loss of banking sector will be deep and long lasting on the economy.
(Brajesh Kumar Tiwari is the author of “Changing Scenario of Indian Banking Industry”, Associate Professor Atal Bihari Vajpayee School of Management & Entrepreneurship and Member of Innovation Council at Jawaharlal Nehru University. The views expressed are the author’s own.)