Budget 2023: Here's what the BFSI sector can expect from FM Nirmala Sitharaman

Despite global uncertainties, the Indian economy has been resilient and is well on its way to a growth rate of 7 per cent. With the vision of attaining a $5 trillion economy, the government has adopted a focused approach towards ease of doing business and enhancing industrial growth, generating employment, and increasing investments. Banks and financial institutions are expected to play a key part in this by ensuring access to credit to the MSME sector and bringing the underbanked and unbanked under the gamut of credit access. The upcoming Budget is likely to boost rural/agri spending by $10 billion, a growth of 15 per cent over FY23, and maintain double-digit 20 per cent growth in public capex over the current fiscal. As we approach the Union Budget for FY 2023-24, let us look at the key areas that are likely to be the focus area for the government.

Recapitalisation of PSBs had become for a norm for a few years to FY22 owing to the “twin balance sheet crisis” and rise in banks’ NPA levels. Given their improved financials, banks are now in a position to raise capital from the markets themselves. However, the Budget FY24 may provide a tidy sum to bolster the capital base of public-sector general insurance firms.

Attracting investors to Indian Government Securities

This budget can provide an extension of beneficial rate of 5 per cent to interest income received by non-residents from investment in government securities (G-secs), which is currently available to foreign portfolio investors (FPI). The recommendation is made by the Indian Banks Association (IBA) to the government ahead of the Union Budget 2023. Currently, FPIs are charged concessional rate of 5 per cent on investments in G-secs under section 115AD of the Income Tax Act. The gains made by NRIs from investment in G-secs is charged in the range of 10-20 per cent. The concessional tax treatment would attract a new set of non-resident investors to invest in Indian G-secs.

Stressed assets

It is expected that the Budget will provide clarity on bad debts on credit cards business as it is leading to difference of opinion between lenders and the income tax authorities. The assessing officers of the income tax department classify credit card business as non-banking activity and are not allowing the deduction on non-performing assets (NPAs) in the segment. The IBA has also sought full deduction on provisions made on bad, doubtful and standard assets. Currently, banks are not allowed to claim full provision made on bad and doubtful debts. The tax department has capped deduction on provisions on bad and doubtful assets at 8.5% of total income of the bank.

Foreign bank tax rates

Creating a level playing field for foreign banks in India, through a rationalised tax rate, could help bring multiple benefits to the country. This budget is expected to lower tax slab for foreign banks. While domestic banks have a lower rate of 22 per cent, branches of foreign banks are taxed at the base rate of 40 per cent, creating significant disparity between Indian and foreign

Expected removal of rule that calls for TDS on cash withdrawal

Section 194N has cast a liability on banks to deduct TDS in case of withdrawal of cash from accounts above a specified limit. Banks are facing practical difficulty in implementing the same and collecting TDS amount from the customer’s account.

Creating a market for Pass Through Certificates

With the Bad Bank structure being put in place, it is important to develop a market for high yield fixed income securities, to provide a continued liquidity window to stressed asset. Stressed assets are a cost of doing business and providing a liquidity window through a robust secondary market for high yield fixed income securities. The government could explore leveraging the GIFT IFSC for the purpose of developing this high yield fixed income securities market, given that the participation of mature international financial investors with a deep understanding of high yield fixed income products may be needed to deepen the market.

Decentralised finance initiatives

The government may consider extending incentives for the promotion of decentralized finance in the country. With the retail CBDC pilot planned during the year the government can look at offering tax relief for banks and FIs engaged in promoting and building the infrastructure for the future of money.

Views are personal. The author is Partner & Leader – Financial Services, PwC India.