Budget 2022 Series – Banking and Financial Services
For many industries, the last two years have been nothing short of a roller coaster ride. The banking and financial services business is regarded as the pillar of any economy. The pandemic has had the greatest impact on bank asset quality and profitability. However, more infrastructure spending, faster project implementation, improved access to banking systems, and other factors are projected to spur growth in this sector. The banking and financial services sector has some expectations in order to sustain the same.
The banking industry's priority in the post-COVID-19 phase is on innovation, in providing banking services using technology, and in digital transformation. Thus, the Budget might include policy steps to spur innovation in the banking sector, such as reimbursement of specific costs or tax breaks in the form of weighted deductions/100 percent depreciation, among other things in order to boost the cashless payments ecosystem. The fintech industry plays a particularly important role in digitalization, thus few relaxations in tax norms and liquidity assistance for NBFC fintechs to facilitate innovative credit solutions.
On the income taxation front, a reduction in the corporate tax rate applicable to foreign banks is expected. Currently, foreign banks are subject to 40% tax, which is significantly higher than 22% tax rate applicable on domestic banks. The sector also expects an income tax deduction for the provision of bad and doubtful debts in order to incentivise banks to undertaken better provisioning. Further, existing equalisation levy (sometimes known as "digital tax") regulations subject transactions including any online element to an equalisation levy for foreign firms. This raises obstacles and uncertainty for global companies seeking to support and learn from Indian firms.
Measures to improve the performance of public sector banks can also be expected. Raising the FDI limit for PSBs is one of them. Currently, FDI limit in PSU Banks is capped at 20%, while this limit is already 74% for private banks. Quoting Dr. Arun Singh, Global Chief Economist, Dun & Bradstreet “Policy measures to address the governance, management, and operational issues faced by public-sector banks is expected. A roadmap to reduce the government’s stake in public sector banks and consolidation is also expected.”
Relaxing stressed asset valuation criteria, streamlining NPA provisions, shortening the period of tax-saving fixed deposits, and eliminating GST on additional interest charged in the event of defaults are among some of the banking sector's other requests to the government ahead of the Budget. NIFTY has dopped n nearly 5% in the past week. Analysts expect the markets to remain volatile ahead of the budget. Bank Nifty seems stronger than Nifty at the moment and can play an important role in providing support to the broad indices. How the Union Budget 2022 turns out for the sector is something to watch for!