Provisional Financial Plan 2024: Expectations for India’s Banking Industry

The upcoming Union Budget in February has generated high expectations, but the Finance Minister has already stated that there will be no major announcements. As it is an election year, the Budget is expected to be a vote on account, focusing on essential government expenditures. The full budget will be presented after the elections and the formation of a new government.

The banking sector seems to be in a better state, with scheduled commercial banks reporting a capital to risk-weighted assets ratio of 16.8% and a common equity tier 1 ratio of 13.7% in September 2023. The gross non-performing assets ratio and net non-performing assets ratio have also decreased to multi-year lows of 3.2% and 0.8%, respectively. This has led to a rise in profitability, with return on assets and return on equity reaching a decade high of 1.2% and 12.9%, respectively. Given this positive outlook, it is unlikely that the government will announce any major bank privatization in this budget.

Last year’s Budget Speech had mentioned a comprehensive review of existing regulations by financial sector regulators, taking into account suggestions from the public and regulated entities. The RBI has released multiple draft regulations for public comments and engaged with stakeholders, but there have been instances where regulations were issued without formal consultation. This has caused uncertainty for stakeholders, such as the RBI’s instruction in December 2023 to curb evergreening through Alternative Investment Funds (AIFs). This instruction was not put through the public comment phase and caught stakeholders off guard, especially with the immediate reversal requirement. To address this issue, the Budget should consider announcing an administrative procedures statute, similar to the US Administrative Procedures Act, which would be binding on all financial regulators and provide stability and predictability to the regulatory regime.

The Insolvency and Bankruptcy Code (IBC) remains the primary mode of recovery for stressed assets, accounting for 43% of the total amount recovered. However, there is a need for further reforms to make the process more efficient and effective. The Budget should consider introducing measures to expedite the resolution process and reduce the burden on the National Company Law Tribunal (NCLT).

In conclusion, while the upcoming Budget may not have any major announcements, it is expected to focus on essential government expenditures. The banking sector is in a healthy state, and the government is unlikely to announce any major privatization. However, there is a need for stable and predictable regulations, and the Budget should consider introducing an administrative procedures statute. Additionally, reforms in the IBC process can further improve the recovery of stressed assets.  

Share This Article
Leave a comment