Budget Series 2017-18-#1 Impact on Banking Sector

Akanksha Mund & Vishaka Sivanainar

The Budget 2017-18 – Banking Sector

The Union & Railway Budget released on 1st February was highly anticipated for it attempted to overcome the existing global and economic challenges. Possible increase in policy rates by the Federal Reserve, an uncertainty of commodity prices and pressure for protectionism are a few existing challenges. According to the December monetary policy statement, the Rs. 17 lakh crore demonetization of the economy slowed the growth rate down to 7.1% from the earlier estimate of 7.6%. In the past 2.5 years, the administration has become more transparent. Industry expectations included recapitalization, focus on NPAs, consolidation of government-owned banks, the creation of affordable housing, a digital push towards a cashless economy, insurance boost, reduction of the gold import duty and corporate tax rate.

Key highlights include:

NPAs – The allowable provision for NPAs has increased to 8.5%. There is a tax concession for provision on bad loans. The interest taxable on the actual receipt with respect to NPA accounts of all non-scheduled co-operative banks are to be treated at par with scheduled banks.

Cashless economy – No transaction above 3 Lakh is permitted in cash (excluding certain exceptions). After the success of the BHIM app, Aadhar Pay, a UPI for Aadhar Enabled Payment System, will be launched shortly. Banks will introduce 10 Lakh POS terminals by March 2017 and 20 Lakh Aadhar based POS by September 2017

Impressive figures – Income tax has reduced from 10% to 5% for the income slab of 2.5-5 Lakh. Rs. 10000 Crore has been allotted towards bank recapitalization compared to previous year’s Rs. 25000 crore. Government spending in the banking sector will touch Rs. 3.96 trillion in the next fiscal year. The net market borrowing figure of Rs. 3.48 Trillion (considers bought-back securities) was set.

Stock market – Banking stocks rallied more than the broader market with the BSE Bankex gaining 2.7%. Low fiscal deficits and lack of populist measures turned out to be positive for the banking stocks. Asset reconstruction companies would be allowed to list the security receipts issued against bad loans on stock exchanges registered with SEBI.

The penultimate budget in Prime Minister Narendra Modi’s tenure was remarkably neutral, however, it managed to elicit positive reactions from the banking sector.  

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