New Delhi, January 11, 2018

Banking sector braces for consolidation action, tax-breaks and strengthening of IBC framework

The Santa season may be behind us. But the banking system is pinning hopes on Finance Minister Arun Jaitley to deliver more goodies in the upcoming Budget to support economic growth and help take the economy out of the current morass.

The expectations are high with this being the last full-fledged Budget for Jaitley before the 2019 General Elections. Hopes are also high that surgical strikes will not happen to cure the ailing banking system.
Legislative changes

Besides spelling out the contours of the reforms that banks need to deliver to avail the proposed Rs.1.35-lakh crore Recap Bonds, Jaitley is also widely expected to throw some light on the legislative amendments that will be carried out in the coming days to strengthen the Insolvency and Bankruptcy Code (IBC).

A 14-member expert committee set up by the Corporate Affairs Ministry is reviewing the IBC implementation and it’s recommendations are going to form the basis of the upcoming legislative changes, sources in banking industry said.
IBC framework

The banking system is setting store by the IBC framework in resolving the NPA mess and unlocking capital that has been stuck. As many as 10 out of the 19 banks (excluding State Bank of India group) are already facing the Prompt Corrective Action (PCA) of the Reserve Bank of India.

In his Budget speech, Jaitley is expected to set the tone for more consolidation action among public sector banks this fiscal. So tighten your belts to hear some market-friendly announcements on consolidation in the banking system.

However, the moot point is whether he will be liberal in doling out enhanced tax breaks on the provisions made towards NPAs.

There is no doubt that the twin blows of demonetisation and GST implementation had dealt a crippling blow to economic activity in 2017, pushing the banking system into a deeper NPA mess and affecting the MSME sector the most.

The 2016 enacted Insolvency and Bankruptcy Code (IBC) — which was seen as the antidote for the NPA problem — is slowly turning out to a bitter pill for the banking system, if the first set of resolutions are anything to go by.

Faced with prospects of huge haircuts, bankers were right in demanding that they be provided with tax breaks for taking haircuts under the insolvency resolution process.

So what is a haircut? Simply put, it denotes the financial loss a lender is willing to take or has to take under a resolution scheme or if the borrower were to become insolvent.
Story so far

The taxman has been quite conservative when it came to allowing tax deduction on the provisions by banks made towards bad debts.

As on date, as much as 8.5 per cent of the total income of banks are allowed as deduction for income tax purposes.

This is clearly a pain point for banks that are facing NPAs and therefore are quite circumspect about making provisions for the same.

As of end September 2017, the aggregate NPA in the banking system was estimated at Rs.7 lakh crore.

In the wake of demonetisation, the Reserve Bank of India had urged Jaitley to allow banks to avail full tax deductions on the provisions made towards bad debts.

On their part, the non-banking finance companies are hoping that Jaitley will deliver parity on the tax treatment provided to them and those available for banks and housing finance companies as regards sums provided towards provisioning of bad debts.

[The Hindu Business Line]