As 2021 was ending, we were expecting the end of the pandemic and were gearing towards the return to a world of the pre-pandemic era. However, the Omicron variant of the SARS-COV2 virus has upended the return to normalcy plans for some time. One thing that the pandemic has taught everyone is to plan for the unplanned and to live with uncertainty. While it is an easy lesson to appreciate, it is an extremely difficult lesson one to put in practice and this is something that our government is now facing. While I am no epidemiologist to comment on the severity of the Omicron variant, my sense as a meagre financial services professional is that while the variant may last only for a quarter, the after-effects last for close to another two to three quarters. The government is faced with quite a difficult choice of managing priorities, as is with every budget, but here are some 10 expectations from a banking and financial services standpoint, that could be considered by the government in the upcoming Budget.
- Foreign Bank Tax Rates – Creating a level playing field for foreign banks in India, through a rationalised tax rate, could help bring multiple benefits to the country. While the Grant Thornton Bharat Report on foreign banks in India detail out the benefits in a more comprehensive manner, some key highlights as enclosed below
- Promoting ease of doing business in India
- Attracting more foreign capital, including greener capital
- Attracting foreign technical know-how especially in the alternate energy space
- Creating a market for Pass Through Certificates – With the bad bank initiative being passed in the last budget and the Bad Bank structure being put in place, it is important to develop a market for high yield fixed income securities, to provide continued liquidity window to stressed assets. Stressed assets are a cost of doing business and providing a liquidity window through a robust secondary market for high yield fixed income securities. The government could explore leveraging the GIFT IFSC for the purpose of developing this high yield fixed income securities market, given that the participation of mature international financial investors with a deep understanding of high yield fixed income products may be needed to deepen the market.
- Re-looking at the definition of priority sectors – Usually the priority sector definitions are aligned to some of the pressing priorities of the nation, so that the bank credit can be allocated in an efficient manner to those sectors. It might be worthwhile to look at broadening the definition of priority sectors to include alternate energy, education, and health care. A focus on these sectors can enhance the long-term sustainable growth rate of the country and the budget could consider starting off with a broadening of the definition of priority sectors.
- Relaxation of FDI limits for some sectors – We saw the pandemic generate generous fiscal stimulus responses by different countries averaging to about 10% of their GDP. While it was necessary and important to do the same, it is also crucial to time the unwinding of the initiatives. The government will not be able to leverage borrowings indefinitely and hence would need to continue to explore increased FDI participation in different sectors, for increased capital inflows into the country. The government may consider re-looking at some of the FDI caps currently and explore the possibility of relaxations.
- Decentralised finance initiatives – The government may consider extending incentives for the promotion of decentralised finance in the country. Decentralised finance refers to a crypto-based finance ecosystem, which has been seeing growth globally. While the challenges of AML risks exist within the ecosystem, it would be useful for the government through the FIU, to create certain checks and balances for the same. A positive step in this direction by the government, will send the right signals to the market and continue to power our innovation ecosystem through a continuous supply of investor capital.
- Credit Stack – Financial inclusion is about providing financial services such as savings, investment, and credit. Credit is a journey that takes some time especially with respect to the customers at the bottom of the pyramid, given the limited credit history or absent credit history associated with the customers. Investment in a public credit stack with the right public and private (including fintech) partnership model, could go a long way in retaining the customers that have been included in the financial ecosystem through the successful PMJDY program.
- Green Labelling – Europe has adopted green labelling as for the purpose of rating activities as green basis their carbon footprint. Given that climate change is a global risk that everyone is exposed to, it might be worthwhile for India to adopt the same initiative and start rating green activities, so that ESG investing can be accelerated in the country, through these green labelling initiatives.
- Consolidation of Urban Co-Operative Banks in the country – It would be imperative to correct the existing challenge of Urban Co-operative Banks in the country, through a consolidation of the same with some of the existing players within the Banking system. The government may consider allowing regulated entities such as foreign banks, private banks, public sector banks, NBFCs including fintech to be considered for the purpose of consolidation. The recent consolidation measures for PMC Co-Operative Bank, could become more of a template for future consolidations.
- Liquidity window for the Top Layer Non-Banking Financial Companies – Top Layer NBFCs, as per the RBI categorisation around tiering of NBFCs, have inherent contagion risks associated with them. Given the inherent business model of NBFCs, liquidity risk is one of the top risks that are exposed to, and the government may consider introducing a special liquidity window for only such NBFCs that can be used during period of high stress.
- Data Privacy – Given the extent of digital initiatives that the country has embarked on, it is imperative that the Data Privacy Bill is passed into the law. It might be useful for the budget to prioritise this aspect of passing the bill into law. These laws will help put the much-needed statutory framework around privacy in the country.
