On February 1, 2018, Finance Minister Arun Jaitley will present Union Budget 2018-19. The Budget for 2018-19 is significant for the Narendra Modi government as it would be the first Budget post the implementation of the Goods and Services Tax (GST) regime. Since it would also be the last Budget before the 2019 Lok Sabha elections, the BJP-led NDA government is expected to announce some populist schemes to woo voters.


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In view of the above, the Union Budget 2018-19 may be a right mix of populism and reforms. Here is what the banking sector can expect from the Finance Minister's forthcoming Budget.


The banking sector has seen a flurry of activity in the past few months, firstly with the issue of NPAs, demonetisation, GST and finally with the recapitalisation of banks. All these issues are likely to have a substantial impact on the Union Budget 2018. It is expected that the FM will have a special focus on the banking sector in the Budget 2018-19. 


Here is the list of expectation for banking sector:


1. Allow full tax deduction for provisioning of non-performing assets at lenders


2. Raise the threshold for tax deduction on the interest paid on bank deposits from current 10,000 rupees


3. Reduce the tenure of tax-exempted retail term deposits to minimum of 3 years from current 5


4. Allow tax relief for proceedings under insolvency code


Among the major issues which the FM is expected to address is the recapitalisation of the banks. It is to be noted that the Centre had first announced it in October 2017 and then recently detailed the nature of the recapitalization plan of 2.11 lakh crore for Public Sector Banks (PSBs). Around 20 PSBs will be recapitalized with Government infusing capital to improve overall health and functioning of these PSBs. This holds significance since the surge in bad loans, recovery of non-performing assets (NPAs), Asset Quality Deterioration etc are the biggest challenges in the banking sector, which affect the banking stability indicator (BSI). Due to rising bad loans and NPAs, the PSBs are now extra vigilant about lending which is resulting in Low Credit Offtake. The capital provided by the Centre can thus be utilised by the PSBs to tide over bad debts and to revive credit growth.


The government may also allow 100 percent FDI in private banks (currently, up to 49 percent is allowed without government’s permission and up to 74 percent with approval) and 49 percent in PSU banks (presently 20 percent). This will infuse efficiency in PSBs and they will be able to compete with private sector banks more efficiently. It will also reduce the pressure on the Government to make available funds for recapitalisation.