INVC NEWS
Mumbai : As Finance Minister Nirmala Sitharaman prepares to unveil the Union Budget 2024 in the third week of July, anticipation within the banking sector is palpable. The upcoming budget holds significant implications for economic policies, taxation reforms, and measures aimed at stimulating financial growth across various sectors, including banking.
Challenges Faced by Banks: Deposit-Lending Disparities
In recent years, banks in India have encountered a notable disparity between deposit growth and loan disbursement. This imbalance poses a critical challenge as it directly impacts the liquidity and operational capacities of financial institutions. The decreasing trend in deposit growth signifies a shift in consumer behavior towards alternative investment avenues, such as the stock market, mutual funds, and other financial instruments.
Taxation Reforms and Banking Sector Expectations
Tax Deduction on Interest Income: One of the key expectations from Budget 2024 is the revision of tax policies concerning interest income from bank deposits. Currently, under Section 80TTA of the Income Tax Act, individuals can avail tax-free interest income up to Rs 10,000 annually from savings accounts. For senior citizens (aged 60 years and above), this limit extends to Rs 50,000, covering interest income from fixed deposits under Section 80TTB. Banks are advocating for an increase in these limits to Rs 25,000 and Rs 75,000 respectively, to incentivize higher deposit mobilization.
Exemption in New Tax Regime: The introduction of the new tax regime in the 2020 budget has excluded several tax benefits, including those related to interest income. Banks are urging the government to reconsider and provide exemptions under Section 10(15)(i) of the Income Tax Act for interest income from deposits, bonds, and securities. Such measures would align with the banking sector’s goal of promoting savings and increasing deposit participation.
Impact of Alternative Investment Avenues
The emergence of user-friendly investment platforms and digital payment systems has revolutionized the accessibility of alternative investment options. Platforms offering direct access to stock markets and mutual funds have gained popularity due to ease of use and enhanced transparency. Consequently, this shift has diverted a significant portion of consumer savings away from traditional bank deposits towards higher-yielding financial products.
RBI’s Financial Stability Report
The Reserve Bank of India’s recent financial stability report highlights a concerning trend wherein financial savings are increasingly directed towards non-banking sectors and capital markets. This shift has contributed to a steady decline in the rate of deposits held by banks. Major financial institutions like HDFC Bank have reported sequential declines in their current account-savings account (CASA) deposits, reflecting a broader industry challenge.
Strategic Imperatives for the Banking Sector
Enhancing Tax Incentives: To mitigate the challenges posed by dwindling deposit growth, banks are advocating for enhanced tax incentives that encourage individuals to allocate more savings into bank deposits. The proposed revisions in tax exemptions and deductions aim to restore depositor confidence and bolster liquidity within the banking system.
Policy Advocacy: Leading financial institutions and industry bodies have been actively engaging with policymakers to advocate for reforms that prioritize the sustainability and growth of bank deposits. These efforts underscore the critical role of policy intervention in addressing the evolving needs of the banking sector amidst changing consumer preferences.
Global Perspectives and Industry Analysis
Internationally, concerns raised by esteemed rating agencies like S&P Global Ratings underscore the global ramifications of deposit-lending disparities. The potential slowdown in loan growth due to inadequate deposit mobilization necessitates proactive measures from policymakers to safeguard financial stability and support economic growth objectives.
Future Outlook and Strategic Considerations
As India prepares for the Union Budget 2024, the banking sector remains cautiously optimistic about potential policy interventions that could rejuvenate deposit growth. The alignment of fiscal policies with industry expectations will play a pivotal role in shaping the financial landscape and fostering a conducive environment for sustainable economic development.
Conclusion
In conclusion, the forthcoming Union Budget 2024 holds immense significance for the banking sector, with expectations centered around taxation reforms, deposit mobilization incentives, and policy measures aimed at revitalizing financial stability. The proactive engagement of stakeholders and policymakers will be crucial in steering the banking sector towards resilience and growth amidst prevailing economic challenges.
