Several chambers for trade, commerce and industries have shared with the ministry of finance their recommendations and demands with respect to the budget 2015. These include what they expect of the banking sector. It is to be seen how many of these wishes of India Inc would Finance Minister Arun Jaitley concede in his budget. Some of the key recommendations of these trade bodies
Bank investment company: Public sector banks will need Rs2.4 lakh crore to Rs 3lakh crore of equity capital under Basel III norms by 2018. Akin to a sovereign fund, a bank investment company can be set up to hold equity shares in these banks, which can be permitted to raise resources from the capital markets for future capitalization. This model, which has been successfully implemented in Singapore and the UK, will enable empowerment of the public sector banks by transferring accountability and responsibility from the government to the bank investment company.
Reduce government ownership: Estimates suggest that the government will be able to garner up to Rs90,000 crore by just cutting its stake in the 24 public sectors to 52%, which in turn will significantly reduce the fiscal demand. This key step needs to be fully complemented by targeting to reduce government ownership to 26%. This step alone will revalue the public sector bank stock prices considerably. It is highly important that the low valuation that public sector banks are presently faced with is overcome by taking a few steps:
a) RBI should pay 8% (repo rate) on the 4% CRR statutory deposits which are presently interest free.
b) A 2% reduction in the repo rate in 2015 will lead to better valuations and a complete re-rating of the banking sector and unleash better valuations.
c) Allowing more overseas branches with tight lending norms can raise more low cost long-term funds before global interest rates go up.
d) Priority sector lending requirements should be reduced from 40% to 25%. Further, PSL bonds akin to recently introduced infra/affordable housing bonds can be expanded to generate lower cost-long term funds for banks.
e) Many leading public secror banks have in the past invested in prime real estate, and also made financial investments in rating agencies, exchanges, allied businesses like home finance, insurance etc. They could utilize the current uptick in the capital markets to divest these and raise incremental capital. They need to manage premises more efficiently to reduce costs.
f) Consolidation among PSU banks will improve the perception among investors, thereby more favourable pricing for PSU banks.
Bridge the governance gap: Splitting up of the post of CMD into a non-executive chairman and a MD & CEO, will go a long way in transforming governance practices in the sector. A minimum tenure of 3-5 years for the top management, as also performance linked compensation will ensure continuity, accountability and results. Executive-level credit decisions, risk management/executive credit committees should be left to the top management.
Build sound risk management culture: NPA monitoring needs to go hand in hand with exit monitoring, through red flagging’ and use of early warning signals. Public sector banks should also constitute specialized cross functional teams which include business, risk managers and legal experts for recovery management.
Excess cash balances: Excess cash balances of the central government can be auctioned to scheduled commercial banks to enhance banking sector’s liquidity forecasting process and capability, reducing money market volatility and allowing the government to earn interest on surplus cash.
Invest in analytics: Currently, while private sector banks spend about 2% of their revenues on technology, public sector banks spend less than half of this. Use of information technology for centralized operations, efficient use of server space including cloud computing and virtualization, etc. can potentially reduce operational cost by 12-15%. Using CRM & data warehousing / analytics practices, public sector banks can reduce customer acquisition and servicing costs and maximize cross-sell with 3-6 financial products being sold to each customer.
FDs: reduce lock in period: Reducing lock in period of bank fixed deposits eligible for tax rebate to 3 years from 5 years, can encourage financial savings. In addition, the government should also enhance threshold for mandatory TDS on interest income to Rs50,000 a year (from Rs 10,000 a year currently).
LEAN organization: Implementing lean work-flow systems to centralize processing in back office centers will not only reduce operating and real rentals and utility costs, but will also free up space from branches and improve the customer sales and service experience.
Human capital management: Improving compensation packages including performance linked rewards are vital. The government may also look at introducing ESOP schemes in public sector banks to align value creation interests of shareholders and employees.
ASSOCHAM also recommends systematic disinvestment and an IPO for listing IRCTC.
Chandrajit Banerjee, director general, CII has the following suggestions:
Deduction for interest on home loans: Deduction available from taxable income towards interest on loan taken for acquisition/ construction of self-occupied house property has been increased up to a maximum limit to Rs200,000. This is a nominal increase from the limit of Rs150,000 introduced vide Finance Act, 2001. By applying the cost inflation index for the relevant years, the deduction should be increased to at least Rs350,000.
Taking/ repayment of loans, Deposits: The mode of repayment in the form of genuine book entries should be included as valid modes of fund transfers under section 269SS and 269T of the Act. The limit of Rs20,000 may be suitably increased to Rs50,000.
Benefit to NBFCs: Extension of benefit of special provision prescribing treatment of bad or doubtful debts as taxable income in the hands of banks, PFIs, etc. must be given to NBFCs.
CENVAT credit: NBFCs which deposit an amount of service tax in relation to fee based income which is associated with loan transactions, need to be permitted to avail 100% CENVAT credit on input services received.
Credit card dues: There must be appropriate clarification on non-taxability of interest levied on delayed credit card payments. Interest charged on credit card payments should be excluded from the levy of service tax.
Fees on card transactions: Charging service tax on interchange amounts to double taxation. There has to be clarification that the interchange fee received by a bank in a card transaction (being credit card, debit card, ATM, etc.) should not be liable to service tax provided that service tax has been paid at the first point of swipe on the total fee earned from the card transaction.
Bad debts under service tax: Suitable provision should be made to provide relief to service tax providers in case of bad debts.
Prabodh Thakker, president, Indian Merchants Chamber makes the following suggestions:
GST means impactful change: Facilitating the introduction of the GST Bill is probably the most impactful policy change brought about by the new government that impacts the financial sector. Most investors and manufacturers see the GST as a game-changer that would make India a more business-friendly nation, while simultaneously simplifying the tax administration system. GST could add as much as 2 percentage points to the nation’s GDP. The government’s emphasis on enhancing the ease of doing business, its movement on the Insurance Bill, initiative on labour reforms etc are changes impacting the financial sector.
Reforms needed: The budget should incentivize and encourage governance capacity at all levels, helping to introduce modern budgeting practices (like IFRS in the accounting sector) as well as monitoring and evaluation mechanisms in the financial sector. That will help check the increasing NPAs of banks as well as help them raise capital. For all national infrastructure projects, introducing rigorous design standards, conducting cost-benefit analysis and detailed post-project evaluations must be made mandatory. Time and cost overruns should be heavily penalized. A time bound program should be put in place for minimizing subsidies, or, at least, implementing the existing ones more effectively.
Global factors: The international price of crude oil will have a direct bearing on the global investment climate and that will impact the country’s banking and financial services sector, via its effect on subsidies. In this context pruning the fiscal gap down to the target will take sustained expenditure reduction and that will have repercussions on the banking and finance industry.
Interest rate cut: An interest rate cut by RBI has largely symbolic value, but it cannot be denied that it affects investor sentiment greatly. This sentimental value ultimately drives investment. Thus, an interest rate cut by the RBI has a real potential to jumpstart economic revival, and so is the need of the hour.
Dr Jyotsna Suri, president, FICCI, makes the following suggestion:
Reduce high cost of capital: It is necessary to bring down the high cost of capital. The reduction in interest rates will boost demand and investments. The government must move away from the aggressive revenue approach and provide a genuine non-adversarial and conducive tax environment for industry and the economy to flourish
