The Union Budget 2017-18 ("Budget"),
presented by the FM for the banking and financial service sector
has been a departure from the conventional practice. Yet, this was
not entirely unexpected considering several other startling
policy/regulatory initiatives and reforms, such as the ground
breaking reforms in restructuring, long-pending implementation of
the Insolvency and Bankruptcy Code, amendments in the SARFAESI and
Debt Recovery Tribunal Acts and of course the demonetization that
the sector has already witnessed in the year 2016-17.
The statement of the FM prior to unveiling of the budget
"The current Financial Year is not a conventional year as
many major reformative decisions have been taken during the year.
There is need for out of box thinking as series of steps are
required about what the banks can do." clearly indicated
unconventional approach that the government may have for this
The Budget, was is expected to provide some relief to banks
which are reeling with NPAs (which have reached 12% of the
total advances) and are in a dire need of capital. An
allocation of INR 10,000 crores made for recapitalization of PSU
banks under the Indradhanush Scheme is underwhelming in light of
the expectations of a greater allocation. An increase in
provisioning for NPA from 7.5% to 8.5% is expected to reduce their
tax liability and increase income.
Increase in the budgetary allocation in the infrastructure
sector, pegged fiscal target of 3.2% of the GDP, measures for the
affordable housing such as allocation of INR 20,000 crores for
refinancing of individual housing and infrastructure status to
affordable housing projects will have a positive impact not only on
the housing finance but overall on the banking sector.
Due to demonetization, credit growth has hit an all-time-low of
5% and has resulted in substantial increase in the liquidity of the
banks. Measures have been taken in the infrastructure sector for
affordable housing sector and low cost of borrowing as a result of
increased liquidity, this will boost the demand and augment a
multifold rise in the credit-offtake.
Extension of concessional withholding at the rate 5% for foreign
entities for external commercial borrowing (ECBs) and in government
securities, bonds, rupee-denominated offshore masala bonds should
inspire confidence of foreign lenders and improve the overall bond
market. The proposal to include NBFCs as qualified institutional
buyers (QIBs) for participation in IPOs with specifically earmarked
allocations will strengthen the IPO market and channelize more
The Budget has definitely let down the expectations of the
sector in terms of the tax reforms such as exclusion of NBFCs from
the purview of provisions of Section 194A of the IT Act, amendment
to Section 115JB of the IT Act or clarifying that the amount
transferred towards such reserves and provision is not to be added
back for the computation of book profits, rationalization of TDS
provisions, etc. Further, in view of GAAR being effective from the
year 2017-18, a move towards alignment of the Indian taxation
system with the taxation system adopted internationally, as a part
of the G2O and OECD's Base Erosion and Profit Shifting (BEPS)
Projects was expected as well from the Budget.
Though the Budget for the sector is definitely positive, as can
be witnessed from an immediate rise in the sector's stock
market, a better allocation of capital for the ailing PSU banks
(which is short of almost INR 1.1 lakh crore) to meet the Basel-III
norms, more increase in the provisioning norms (increased to 8.5%
from 7.5%) for NPAs which has gone to 12%-13% of the total credit
and some of the anticipated tax reform and incentives measures for
increase in the digital transactions would definitely have been the
Nilesh Chandra is an associate partner and Srivar Awasthi is
an associate at HSA Advocates. HSA is a full-service ﬁrm
with ofﬁces in New Delhi, Mumbai, Bengaluru and
Originally published in Bar & Bench
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On March 24, 2017, while responding to a question in Parliament, the Minister of State for Defence informed us that the FDI equity inflow for April 2013-December 2016 in the defence sector was 1 million USD.
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