In the Union Budget 2021-22, India’s Finance Minister Nirmala Sitharaman committed to a budget estimate for expenditure in 2021-2022 at INR 34.83 lakh cr to ensure the economy is given the required push as the Covid-19 pandemic derailed the economic progress of the country and resulted in weak revenues for the government.
The fiscal deficit, which is the difference between the government’s total revenue and the money it spends on important public needs such as welfare programmes and building infrastructure, for FY20-21 stood at 9.5% of the country’s gross domestic product (GDP).
This means, if the government earns INR 100 as revenue from avenues such as taxes, it ends up spending INR 109.5 to meet the commitment towards different industries and sectors. The government said it plans to gradually reduce the deficit to 6.8% in 2022, and to 4.5% by 2026.
Let’s look at how the Budget 2021-22 will enable India’s banking and financial technology systems.
Leap in Digital Banking: What it Means for You
The Finance Minister has proposed a INR 1,500-crore scheme to develop, promote and accelerate digital payments in the country.
Due to the social distancing norms enforced in 2020, digital payments are now increasingly preferred over cash. Digital transactions are considered safer, traceable and hassle-free.
However, moving to digital is not easy, especially for the elderly and our rural population. Usability, security and lack of awareness are huge problems India needs to overcome.
To benefit customers as well as the financial services industry, areas where this fund can be used include:
- Financial education
- Cashbacks to encourage digital payments
- Reduction in transaction costs for service providers — banks and fintechs.
Fintechs-related Announcements: How They Affect You
Fintech or financial technology has reshaped our economy over the last five years. However, the pandemic has slowed down its progress.
The first announcement was the proposed fintech hub in Gujarat International Finance Tec-City (GIFT). The fintech hub at GIFT would serve as a “regulatory sandbox,” which implies fintech companies will engage in a controlled experimental environment. Such an environment is lacking as of today.
- The hub will allow fintech players, banks and other participants, like the credit bureaus, to collaborate and innovate next-generation solutions.
- The hub will help bring the vision behind ‘Make in India’ to life.
- The hub will give our country’s products and services global visibility.
- The hub will encourage healthy competition among financial institutions to provide better services and make the banking ecosystem more efficient.
Secondly, the budget proposal to extend the tax holiday for start-ups to one more year is expected to improve investments in fintech.
For customers, this means there could be more game-changing fintech innovations, like Paytm and PhonePe, in the future. These could eventually lead to better service and convenience.
Saving and Borrowing Announcements: What Impacts You
First let’s look at the savers. The last few years have been tough for the common Indian. Saving money and generating inflation-adjusted returns have not been easy. To add to the uncertainty, we saw multiple banks failing to perform, and the remaining are offering very low deposit rates.
Borrowers have been facing their own challenges, too. This is mostly due to banks not passing on the central bank’s rate-cuts fully to customers, on account of their own financial insecurities.
The budget has made some significant adjustments toward this. This would ultimately lead to better investment avenues for savers. It would also improve the borrowing options for retail customers and small businesses in these five ways:
1. Recapitalisation of Public Sector Banks (PSBs) for INR 20,000 cr
PSBs in India have been reeling under the pressure of rising corporate non-performing assets (NPAs) and the impact of a provision granted to retail borrowers to extend their loans’ payment period during the Covid-19 pandemic has further hurt banks’ balance sheets.
What a bank recapitalization does is that it infuses fresh capital into banks to strengthen their balance sheets. Such a move is aimed at encouraging banks to lend more by provisioning for pandemic-related hits to their balance sheets.
The consumer is expected to directly benefit from any promotion in lending by state-owned banks.
2. Setting up of a Development Financial Institution (DFI) capitalised with INR 20,000 cr
A professionally-managed development finance institution (DFI) will lend INR 5 lakh cr over 3 years for large-scale infrastructure projects. This should free up commercial banks that are currently funding long-term, mega projects, allowing them to focus on what they do best.
The DFI is expected to revert commercial banks to a healthier state, enabling them to lend to the public and retail customers at competitive rates.
3. Ambitious divestment target of INR 1.75 lakh cr
This will allow many of our public sector units (PSUs) to be privatised. The government-owned Life Insurance Corporation of India (LIC) will be listed in the stock markets, paving way for retail investors to invest in the national insurer.
4. Deposit Insurance
In the previous budget, the Finance Minister made an important enhancement in the deposit cover of Scheduled Commercial Banks — from INR 1 lakh to INR 5 lakh. This is the amount of deposits per customer that remains safe even if the bank goes bust.
In this year’s budget, the Finance Minister has proposed further amendment to this mechanism, through which even this INR 5 lakhs can be accessed easily by the depositors without too many restrictions. This will help depositors in a panic situation.
5. Creation of the “Bad Bank”
If a bank has a lot of bad loans or NPAs, it affects its health due to higher provisions eating into profitability and inability to give fresh loans.
A “bad bank” simply absorbs these bad loans, so that the original bank can start with a clean slate and is encouraged to lend.
To clean up bank books, the budget announced an Asset Reconstruction Company (ARC), and an Asset Management Company (AMC). The ARC would purchase bad loans from the banks at a discount and the AMC would manage the loan and try to recover the maximum possible.
For this to happen, the AMC will need to engage in bringing in fresh capital or investors, selling off factory assets, and so on. This exercise, if successful, can change the face of the Indian banking system by enhancing consumer trust, especially in the PSBs, which have been battered by NPAs of over 10%.
The Downside
The budget does have one dampener for savers. From April 1, 2021, interest on fresh employee contributions to the Provident Fund (PF) beyond INR 2,50,000 a year will be taxable.
This is applicable only on the PF contributions from the employer and not from the employee. The PF proposal may hit a minority of highly salaried investors.
Gains made from unit linked insurance plans (ULIPs) will also be taxed. This may not impact ULIP investments much, given that they haven’t given consistent returns even in the past.
Bottom Line
With India at the cusp of growth in banking led by the federal government’s Jan Dhan Yojana, Budget 2021-22’s focus on improving the country’s banking and saving system is encouraging for a population that is beginning to experiment with financial services more than ever before.
As the Indian banking system further strengthens with the help of fintechs, the consumer will emerge as the consequent gainer.
