Banking Sector

The abolition of interest tax will benefit the banking sector as it will not be necessary for banks to pay this and in turn pass it on to their borrowers. Earlier the banks used to pay interest tax and pass on this cost to borrowers. This was especially true in the case of working capital that were lent on variable rates. Banks would marginally benefit from the fixed rate long term loans on which this interest tax is already included. On old fixed rate loans banks would benefit as it would not be paying any interest tax but it will receive this tax amount from the long term borrowers as the fixed rate includes this cost.

The governments' shareholding in PSU banks will be brought down by these banks accessing the markets for their future fund needs to meet their capital adequacy requirements. It is an important move for banks as they were earlier constrained from raising funds from the capital markets and this will allow them to meet their future growth plans. This would also provide more autonomy for banks in the long term however as their PSU status will continue they would continue to be burdened by problems related to PSUs and hence will not be able to compete on a level playing field with private sector banks.

The move to provide greater flexibility and autonomy to banks in formulating their corporate strategy will pay off in the long run as they will be in a position to take wiser and quicker market decisions. It would also let them get out of the bureaucratic hitches which delay loan processes.

The budget statement also mentions greater autonomy to the Reserve Bank of India. The proposal would call for changes in the Reserve Bank of India Act, 1934. This could translate in the government having less say on interest rate matters and the government only consulting the central bank on certain matters and leaving the rest to it to decide.

The setting up of debt recovery tribunals and appellate debt recovery tribunals will help reduce the NPAs to a small extent, however to reduce NPAs in a big way the present legal system needs to be overhauled.

The budget also mentions that weak banks would be left to formulate their own strategy for their revival. However if banks falter to deliver, the board of directors of the banks will be superseded by the Financial Restructuring Authority (FRA).

The recapitalisation of the weak banks will continue, this will lead to taxpayers funds going into financing these loss making banks. A better alternative would be to shut off these loss making banks.