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Key Highlights of Budget 2016-17 on Banking Industry

The Union Budget 2016-17 had disappointed the public sector banks by not increasing the allocation of capital funds and keeping it at a level of Rs 25,000 crore for FY2017, which is considered in adequate considering higher NPAs and weak credit takeoff in the economy. However, the budget had announced to operationalize Bank Board Bureau in 2016-17, which will spell out a roadmap for consolidation of Public Sector Banks (PSB). While addressing the asset quality issues in the PSBs, the budget had announced to strengthen Asset Reconstruction Companies (ARCs) and Debt Recovery Tribunals (DRTs). The budget also announced to continue the ongoing reform programme and ensure the passage of Insolvency and Bankruptcy law pending before the Parliament, which was subsequently passed in May 2016 in the parliament to provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities.

Key Highlights of Finance Minister speech related to Banking:

  • Government had maintained the allocation of capital funds unchanged for Public Sector Banks (PSBs) in line with the Indradhanush plan at Rs 25,000 crore for FY2017. If additional capital is required by these Banks, government would find the resources for more capital funds allocation and will stand behind PSBs.
  • PSBs are confronted with the problem of stressed assets, which is a legacy from the past. Several steps had already been taken in this regard. Govt is not interfering in lending and personnel matters of the Banks. Structural issues have been addressed in various sectors like Power, Coal, Highways, Sugar and Steel. The Banks are putting in special efforts to effect recoveries, with a focus on reviving stalled projects.
  • To tackle the problem of stressed assets in the banking sector, Asset Reconstruction Companies (ARCs) have a very important role, so its proposed to make necessary amendments in the SARFAESI Act 2002 to enable the sponsor of an ARC to hold up to 100% stake in the ARC and permit non-institutional investors to invest in Securitization Receipts.
  • 100% FDI in Asset Reconstruction Companies (ARCs) will be permitted through automatic route. Foreign Portfolio Investors (FPIs) will be allowed up to 100% of each tranche in securities receipts issued by ARCs subject to sectoral caps.
  • In order to get more investment in Asset Reconstruction Companies (ARCs) which play a very important role in resolution of bad debts, it is proposed to provide complete pass through of income-tax to securitization trusts including trusts of ARCs. The income will be taxed in the hands of the investors instead of the trust. However, the trust will be liable to deduct tax at source.
  • A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17. This Code will provide a specialised resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities. This Code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy.
  • For speedier resolution of stressed assets, the Debt Recovery Tribunals (DRTs) will be strengthened with focus on improving the existing infrastructure, including computerized processing of court cases, to support reduction in the number of hearings and faster disposal of cases.
  • The Bank Board Bureau will be operationalized during 2016-17 and a roadmap for consolidation of Public Sector Banks will be spelt out. Post recapitalization, The Govt is willing to look at consolidation among subsidiaries, consolidation of subsidiaries with the principal bank, consolidation of a weak bank to a strong bank subject to overall 52% discipline that has been laid out.
  • The process of transformation of IDBI Bank has already started. Government will take it forward and also consider the option of reducing its stake to below 50%.
  • The Pradhan Mantri Mudra Yojana (PMMY) was launched for the benefit of bottom of the pyramid entrepreneurs. Banks and NBFC-MFIs have reported that the amount sanctioned under PMMY had reached about Rs 1 lakh crore to over 2.5 crore borrowers by early February 2016, while the target next year is raised to Rs 1,80,000 crore.
  • To provide better access to financial services, especially in rural areas, government will undertake a massive nationwide rollout of ATMs and Micro ATMs in Post Offices over the next three years.
  • Its proposed to provide additional options to banking companies and financial institutions, including non-banking financial companies, for reversal of input tax credits with respect to non-taxable services provided by them by way of extending deposits, loans and advances.
  • It is proposed to amend section 281B of the Income-tax Act to provide for revocation of attachment of property in cases where assessee furnishes a Bank Guarantee from a scheduled bank of an amount not less than the fair market value of such property or of an amount sufficient to protect the interest of revenue.
  • To reduce the burden of loan repayment on farmers, a provision of Rs 15,000 crore has been made in the Budget Estimate 2016-17 towards interest subvention.
  • The first home buyers is given deduction for additional interest of Rs 50,000 per annum for loans up to Rs 35 lakh sanctioned during the next financial year, provided the value of the house does not exceed Rs 50 lakh.
  • Union Cabinet has approved the Stand Up India Scheme to promote entrepreneurship among SC/ST and women. Rs 500 crore has been provided for this purpose, which will facilitate at least two such projects per bank branch, one for each category of entrepreneur. This will benefit at least 2.5 lakh entrepreneurs.
  • A Financial Data Management Centre under the aegis of the Financial Stability Development Council (FSDC) will be set up to facilitate integrated data aggregation and analysis in the financial sector.
  • To improve greater retail participation in Government securities, RBI will facilitate their participation in the primary and secondary markets through stock exchanges and access to NDS-OM trading platform.
  • To facilitate deepening of corporate bond market, a number of measures will be undertaken.
  • In the recent past, there have been rising instances of people in various parts of the country being defrauded by illicit deposit taking schemes. The worst victims of these schemes are the poor and the financially illiterate. The operation of such schemes are often spread over many States. Its proposed to bring in comprehensive Central legislation in 2016-17 to deal with the menace of such schemes.
  • Its also proposed to amend the SEBI Act 1992 in the coming year to provide for more members and benches of the Securities Appellate Tribunal.

Questions anticipated on:

  • Bank Board Bureau
  • Indradhanush
  • New Bankruptcy Law 
  • Amendment to SARFAESI Act 2002
  • How efficiency of DRT could be improved
  • How much disbursement happened under Pradhan Mantri Mudra Yojana
  • Stand Up India Scheme

References:

  • Union Budget Speech 2016-17
  • Livemint articles on budget
  • Business Line articles on Budget
  • Capitaline commentary on budget