Union Budget 2018-19: It's time to usher governance reforms in banks, bring sector back on track

The economy is witnessing some signs of slowdown amidst a weakening global economy, trade tensions and political uncertainties in some parts of the world. Along with this, the country is also witnessing some concerns around the financial health of the banking sector on account of bad loan losses, liquidity crunch, etc.

In the past, the government had taken steps to expedite and enable resolution of non-performing assets (NPAs) of banks through the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), amendment of the Banking Regulation Act, 1949 to enable effective implementation of IBC, amending the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, through introduction of stringent provisions, establishment of additional debt recovery tribunals to expedite recovery, etc.

While there have been positive signs in terms of improvement in bank credit as well as declining NPAs, the path to recovery is long and challenging. The Reserve Bank of India (RBI) Governor has also emphasised on the need for governance reforms in banks.

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The upcoming Budget is an opportunity for the Finance Minister to announce policy measures to bring the banking sector back on track, along with building efficiencies in the banking system and reducing NPAs.

File image of Finance Minister Nirmala Sitharaman. PTI

It is important for the government to continue its push on digitalisation and encourage a less-cash economy. It has been seen that in spite of the introduction of penal provisions to discourage cash transactions, there has not been much success. Even today, many transactions happen outside the banking system and largely go untracked and unreported. The government may accordingly consider introducing tax and non-tax proposals to incentivise digital payments.

The recognition of e-KYC can also aid in boosting the productivity of bank resources and save costs involved in manual procedural formalities. Banks and financial institutions are looking for a renewed push for digitalisation from the government.

The biggest expectation of banks from this Budget is a reduction in the corporate tax rate—while the rate has been reduced to 25 percent for small companies, banks have not got this benefit till date despite the policy announcement a few years back.

From a corporate tax perspective, there is a need to address the long-standing demand of banks to align the tax deduction for NPA provisions in line with RBI guidelines. It is interesting to note that tax rules are not aligned with RBI guidelines—for example, the law on the taxability of income from NPAs provides that rules would be aligned with RBI guidelines, but the rules have not kept pace with changing times. These anomalies need to be addressed.

Further, once the Indian Accounting Standards (Ind AS) are made applicable to banks, there are likely to be challenges on tax treatment of items of revenue and expenditure, which need to be addressed proactively. The Income Computation and Disclosure Standards may complicate the matter more, and the banking industry would certainly need clear guidance from the government on tax. Moreover, rationalisation of GST and related compliances would be welcomed by the industry.

It would also be interesting to see whether the government would be keen to introduce any significant direct tax proposals in the Budget given the fact that a task force is expected to submit a draft report on the new direct taxes code by end of July 2019. The direct taxes code is aimed at simplifying tax legislation keeping in mind international best practices and economic environment of the country.

In summary, the government has a tough road ahead to resolve challenges faced by the banking sector, especially public sector banks. Any steps taken to reduce NPAs and bring in liquidity into the system would not only boost the sentiments of the public at large in the economy but also that of investors locally and globally.

The Budget should focus on long-term growth and development and in building stable and stronger institutions. One, however, wonders whether the government would have had adequate time to think through and initiate policy proposals, given that the Budget is being announced only a little more than a month of the government being re-elected.

(Kumar is Partner, and Sutar Senior Manager with Deloitte Haskins and Sells LLP)

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