Banks and financial institutions have proposed a reduction in dividend tax rate from 20% to 10%. They are also demanding abolition of tax deducted at source on bank deposits. This is to enhance the credit growth. They are also recommending incentives to equity investment schemes. As per the recent RBI guidelines banks are now allowed to invest 5% of their outstanding advances (earlier 5% of incremental deposits) into shares, debentures and mutual funds.

Banks including State Bank of India and the Indian Banks Association (IBA) have asked the FM to abolish TDS on bank deposits. Banks have also suggested extension of fiscal incentives to the housing sector.

Like the Financial Institutions, banks too should be allowed to raise funds for infrastructure projects.

Banks and FIs have recommended expediting the development of retail debt market and allowing them to invest in index funds through UTI.

To minimize the level of non-performing assets, banks have recommended upfront penal action against defaulting companies. To avoid multiplicity of regulatory authorities, the institutions have suggested formation of a single regulatory authority based on a similar existing structure in UK.

ASSOCHAM (The Associated Chambers of Commerce and Industry of India) has demanded a need to ease pressure on interest rates because it would stimulate consumption of goods in the country and reduce production costs.

Banks have suggested raising the capital limit for loans to small-scale sector to Rs 30 bn and launching of a domestic futures market in gold.

The Prime Minister’s economic advisory council has recommended a 2% cut in small savings (such as post office recurring deposits and NSC Series VII) interest rates. A cut in the small savings rate would have the effect of signaling a softening of interest rates for the system as a whole.

VRS – Step in right direction
PSU banks like SBI and BOI has successfully implemented VRS scheme. With almost 10% of the existing staff applying for the VRS, this is likely to result not only higher cash flow in future but also long term benefits like improvement in efficiency level.

Profits likely to take hit
If banks decide to charge the entire VRS expenses in a single year, profitability is likely to take hit. This would result in lower returns on equity.

Amortisation of VRS costs
The RBI has allowed banks to amortise the cost on account of VRS over a five-year period. Also, as an additional bonanza banks are allowed to treat the bonds issued as a part of VRS as tier-II capital.

Universal Banking
With Universal Banking concept, traditional baking business like working capital finance is no longer banks forte. As a result banks are facing stiff competition from financial institutions.

PSU Banks to be allowed to buy equity
As a part of the banking sector reforms, the government will allow PSU banks to buy its stake in other banks. Currently, only the shares not held by the government is freely transferable. Now since the government proposes to reduce its holding in these banks to 33%, it would need prospective buyers for its stake. The move will also allow mergers and acquisitions of state owned banks.

Retaining the control
Although, the government has announced to reduce its stake in nationalised banks, it is not willing to give away management control. This is likely to affect adversely operating environment in these banks.

Beginning of consolidation
The last few months saw a beginning of the consolidation process in the banking industry.

Integration holds key
Although, a merger helps banks in increasing the size and fuel future profits growth, integration of two different cultures and technology is challenge for any bank.

Entry of new banks
The RBI has come out with the revised guidelines for entry of new banks in the private sector. Large industrial houses are not allowed to set up new banks. Also, the number of licences to be issued in the next three years may be restricted to two or three of the best acceptable proposals (including permission to NBFC for conversion into banks).