India's banking sector has been on a roller-coaster ride. From the consolidation of public sector banks to the bailout of one of the large private sector banks; from striking rise in investments in cryptocurrency to the rapid growth of digital lending platforms; from the enactment of Insolvency & Bankruptcy Code, 2016 to the establishment of National Asset Reconstruction Company Ltd; from the collapse of one of the largest Non-Banking Financial Companies to overhaul of the regulatory regime governing Non-Banking Financial Companies (NBFCs), India has seen a wide range of developments.
Against this backdrop, the banking sector in India evolves with continuous efforts from the government and the Reserve Bank of India (RBI).
These reforms intend to strike a fine balance between regulation of the institutions and freedom for institutions to grow and establish practices, while at the same time ensuring that adequate safeguards exist to protect the stability of the economy at large, keep the interest of customers as paramount and at the same time allow for swift and diverse reforms to make formal banking channels accessible to every stakeholder in an efficient and prudent manner.
This Budget is expected to include a few large-scale announcements in this regard.
First and foremost, announcements for extension of some of the reliefs granted in the last two years in relation to coronavirus and its impact on the industry, especially to the MSME sector, is on top of the list.
It is also anticipated that the Budget may also include a few additional reliefs against the impact of the third wave. Broadly related is the expansion in the scope of priority sector lending which will enable banks and financial institutions to meet the stringent requirements of RBI.
In terms of lending which is the backbone of the sector, India has witnessed high growth in digital lending, including by way of online platforms and mobile applications.
As per the report of the working group which was established by the RBI to review the practices for digital lending, including lending through online platforms, the study shows technological innovations in digital lending space have led to marked improvements in making the service accessible, efficient and viable.
However, the progress has also presented concerns of mis-selling, unethical business practices, breach of data privacy, and illegitimate business operations.
Furthermore, keeping in mind the growth potential and the ability to expand the access and serve the underbanked areas by way of a viable business model, there is increasing demand for licence to operate fully digital banks.
Thus, it is expected that the Budget would include announcements for policies catered towards the launching of fully digital banks, and regulations governing digital lending in India.
In order to further strengthen access to financing for Indian borrowers, an announcement in relation to the Voluntary Retention Route (VRR) limits is also anticipated.
VRR enables investment in debt instruments by foreign portfolio investors (FPI), by offering exemptions on macro-prudential and other regulatory prescriptions applicable to FPI in India.
Stakeholders have been seeking extension in VRR limits, as the existing limits have been exhausted and other related changes in this regime are also eagerly awaited.
A complete overhaul of the regulatory regime governing Asset Reconstruction Companies (ARC) in India which could include substantial amendments to the SARFAESI Act and strengthening of the norms relating to the functioning of the National Asset Reconstruction Company Ltd. (NARC) (which has been established by the public sector banks with the backing of the government to focus on consolidation and resolution of distressed assets) to achieve smooth and swift resolution of distressed assets, is also expected.
Lastly, the Budget is expected to touch upon the stand of the government in relation to regulation of cryptocurrency and provide an ecosystem for the same.
(Veena Sivaramakrishnan, Partner, Zubin Mehta, Partner and Yugal Jain, Senior Associate, Shardul Amarchand Mangaldas & Co.)
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