Budget expectations: Banking on reforms, tax waivers

The banking sector has been grappling with a host of challenges in recent years. The year 2017 was no different. Sluggish loan growth, rising bad loans and weak earnings continue to plague the sector.

However, there has been one silver lining — the Insolvency and Bankruptcy Code (IBC) — that has set the ball rolling for efficient and quicker resolution of stressed assets.

All eyes are now set on the first set of 12 big defaulters that the banks sought to resolve under the RBI’s directive in June. Constituting a fourth of the system’s bad loans, the deadline for reaching a resolution plan is fast approaching (by March).

While bidders are emerging for some of the steel accounts, some others may find it difficult to draw buyers. Hence the biggest challenge for banks, is the huge haircut they may be forced to take on most of the stressed accounts.

Including the first list of big defaulters, there are a little over 500 cases admitted by the National Company Law Tribunal (NCLT) under the IBC, currently.

In as far as streamlining the resolution process under IBC goes, there have been a slew of amendments over the past year.

But fast tracking of resolution has brought to fore a larger issue. Capital-starved public sector banks are caught in a sort of catch 22 situation. If they do get a buyer, the haircut could be enormous. If they don’t, then the company goes into liquidation, which leaves them with virtually nothing on the table.

 

On the cards
  • Progress on governance reforms
  • Clarity on MAT waiver on notional profit from debt waiver under IBC
  • Tax concession on digital transactions

 

 

The Centre’s recapitalisation plan is a key proposal awaited in the Budget every year, to address the issue of capital. But the cat has already been let out of the bag, with the Centre announcing the big bang recap plan of Rs 2.1 lakh crore over next two years.

The manner in which these funds will be apportioned to individual banks has also been recently announced. What will be awaited in the Budget is the roadmap laid out for governance reforms. Also, industry players are awaiting more clarity on the waiver of MAT on the notional profit arising out of debt waiver under IBC.

These aside, higher tax concessions on bad loan provisioning continue to be on bankers’ wishlist this year as well. If implemented, most of these expectations will have a positive impact all banks, corporate lenders in particular such as SBI, BOB, Axis Bank, PNB and ICICI Bank. For some of the retail focussed banks and new format payments banks, tax concession on digital transactions will be a positive. Above all, a pro-growth Budget, stimulating investments will no doubt benefit the entire banking sector.

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