Union Budget 2024: Expectations and Impact on the Banking Sector

INVC NEWS
Bombay: As Finance Minister Nirmala Sitharaman gears up to unveil the Union Budget 2024 in the third week of July, the anticipation in the banking sector is palpable. The upcoming budget has significant implications for economic policy, tax reforms and measures to stimulate financial growth across sectors, including banking.

Challenges facing banks: differences between deposits and lending

In recent years, banks in India have been facing a significant imbalance between deposit growth and loan disbursement. This imbalance poses a critical challenge as it directly impacts the liquidity and operational capacity of financial institutions. The declining trend in deposit growth signifies a shift in consumer behavior towards alternative investment avenues such as stock market, mutual funds, and other financial instruments.

Tax reforms and banking sector expectations

Tax deduction for interest income:One of the key expectations from the Budget 2024 is a revision of the tax policy on interest income on bank deposits. Currently, as per Section 80TTA of the Income Tax Act, individuals can enjoy tax-free interest income of up to Rs 10,000 per annum from savings accounts. For senior citizens (aged 60 years and above), the limit is Rs 50,000, which includes interest income on term deposits under Section 80TTB. Banks are in favour of increasing these limits to Rs 25,000 and Rs 75,000, respectively, to encourage greater deposit mobilisation.

Exemption in the new tax system:The introduction of the new tax regime in Budget 2020 has eliminated several tax breaks, including those related to interest income. Banks urge the government to reconsider and provide exemptions under Section 10(15)(i) of the Income Tax Act for interest income on deposits, bonds and securities. Such measures would be in line with the banking sector’s objective of promoting savings and increasing participation in deposits.

The impact of alternative investment paths

The advent of user-friendly investment platforms and digital payment systems has revolutionized the availability of alternative investment options. Platforms offering direct access to stock markets and mutual funds have gained popularity due to their ease of use and increased transparency. As a result, this shift has redirected a significant portion of consumer savings from traditional bank deposits to higher-yielding financial products.

RBI Financial Stability Report

The latest Reserve Bank of India Financial Stability Report highlights a worrying trend where financial savings are increasingly being channelled into non-banking sectors and capital markets. This shift has contributed to a steady decline in the deposit rate held by banks. Major financial institutions such as HDFC Bank have reported sequential declines in current and savings account (CASA) deposits, reflecting a broader industry challenge.

Strategic imperatives for the banking sector

Increasing tax incentives: To mitigate the challenges of declining deposit growth, banks are advocating for increased tax incentives that will encourage individuals to allocate more of their savings to bank deposits. The proposed changes in tax exemptions and deductions are aimed at restoring depositor confidence and strengthening liquidity in the banking system.

Political Advocacy:Leading financial institutions and industry bodies are actively engaging with policymakers to promote reforms that prioritize sustainable development and growth of bank deposits. These efforts underscore the critical role of policy intervention in meeting the changing needs of the banking sector in the face of changing consumer preferences.

Global Perspectives and Industry Analysis

Internationally, concerns raised by respected rating agencies such as S&P Global Ratings underscore the global implications of the deposit-loan mismatch. The potential slowdown in loan growth due to insufficient deposit mobilisation requires proactive action by policymakers to safeguard financial stability and support economic growth objectives.

Future prospects and strategic considerations

As India gears up for the Union Budget 2024, the banking sector remains cautiously optimistic about potential policy interventions that could rejuvenate deposit growth. Aligning fiscal policy with industry expectations will play a key role in shaping the financial landscape and fostering an enabling environment for sustainable economic growth.

Application

In conclusion, the upcoming Union Budget 2024 holds great significance for the banking sector, with expectations revolving around tax reforms, deposit mobilisation incentives and policy measures to revive financial stability. Proactive engagement of stakeholders and policymakers will be crucial in steering the banking sector towards resilience and growth amidst the prevailing economic challenges.