Comment

The big bang for the banking sector is clearly the finance minister’s announcement that Reserve Bank of India (RBI) is considering giving some additional banking licenses to the private sector.

Non-banking financial services companies could also be considered if they meet RBI’s eligibility criteria.

With almost no pre-budget expectation on this count, this announcement is bound to be seen in positive light.

But some of the key tax concerns were not addressed in the speech. For example, the banks have been demanding deductions for bad and doubtful debts in accordance with guidelines issued by the RBI.

However, this demand has not been met. Prescribing an improvised method for computation of disallowances in relation to exempt income would also have been a welcome step.

In the last budget, an interest subsidy of 1% on housing loans up to Rs 10 lakhs for houses costing less than Rs 20 lakhs was introduced. This scheme has been extended to March 31, 2011.
As a one-off interim relief to the housing and real estate sector, it is proposed to allow pending projects to be completed within a five-year tax holiday instead of the present four years.

Additionally, the norms for built-up areas of shops and other commercial establishments in housing projects will be relaxed so as to enable basic facilities for residents.

RBI had set up a level committee on the lead bank scheme to ensure that the benefits of banking services reach the widest possible range of people.

Based on its recommendations and in consultation with RBI, appropriate banking facilities either using business correspondent model or any other model with appropriate technology back up are proposed to be provided to areas with a population in excess of 2000 by March 2012.

The financial inclusion fund and financial inclusion technology fund, set up in 2007-08 to extent banking services to unbanked arrears, have been augmented by Rs.100 crore each.

An Apex level Financial Stability and Development Council is proposed to be set up with a view to strengthening and institutionalising the mechanisms for maintaining financial stability.

It will be a kind of super regulator which will macro-monitor the economy and the functioning of large financial conglomerates, as well as addressing the long felt need of the financial service sector to have a central body that will co-ordinate the multiple regulators regulating it.

Separately, a financial sector legislative reforms commission is proposed to be set up to re-write and clean up the financial sector laws to bring them in line with the requirements of the sector.
Presumably, the commission will provide its report to the Council.
For public sector banks, additional capital has been provided to ensure that they meet a minimum of 8% Tier-I capital by March 31, 2011.

Further capital is also provided to strengthen the Regional rural banks and provide them with an adequate capital base to support their increased lending to the rural economy.

Lastly, some advice for happy individuals; the tax rates rationalisation may put more money in your pocket. However, remember, it is not your salary that makes you richer; it is your spending habits. So spend wisely. Moreover, if you have offshore bank accounts, beware. The Government has commenced bi-lateral discussions to enhance the exchange of bank-related and other information to effectively track tax evasion and identify undisclosed assets of resident Indians living abroad.

— Suresh Swamy, Executive Director, PwC