The budgetary boost

The Union Budget for the financial year 2022-23, presented on February 1, will bring many direct and indirect benefits to the banking sector. The extension of the Emergency Credit Line Guarantee Scheme (ECLGS) till March 2023 will extend benefits both to the banks and Micro, Small and Medium Enterprises (MSMEs), as this would not increase the non-performing assets (NPAs) of banks. The ECLGS will be extended to cover the next fiscal with expanded guarantee cover of Rs 5 lakh crore. An additional guarantee amount of Rs 50,000 crore has been announced for the hospitality sector. Notably, this scheme was started in 2020 in the backdrop of COVID-19 pandemic, and has benefited MSMEs in a big way.

The Budget has announced the introduction of digital rupee in the year 2022. Digital rupee will operate somewhat on the lines of cryptocurrencies like Bitcoin or Ether. Transaction in these currencies takes place without any intermediary or bank. In view of the growing trend of virtual currency globally, the government wants India as well to have a digital currency of its own. Currently, the RBI prints notes as per the requirements, which reach the market through banks, taking a lot of time, whereas the digital rupee will be sent directly to the user through mobile, laptop or desktop. And again, the user will be able to transfer the same to any other person on a real-time basis. The sent digital currency will neither be deposited in any wallet nor in any bank account.

Finance Minister Nirmala Sitharaman had proposed the formation of 'Bad Banks' in the 2021-22 Budget to rid the banks of NPAs. Now in the 2022-23 Budget, she has announced that the 'Bad Banks' will start functioning by March 31, 2022. Initially, 15 NPA accounts totalling Rs 50,335 crore will be transferred to the 'Bad Bank'. Banks are the backbone of the Indian economy. Therefore, it is important for the banks to remain healthy. However, for a long time, banks, especially the public sector banks, have been facing the problem of NPAs. The pandemic has added to the problems of banks even more. Many people have lost their jobs and businesses have collapsed. This has enhanced the chances of banks increasing their NPAs in the coming months.

The cash which will come back to the bank by selling the NPAs can be given again in the form of loan to the needy, as the banks have already made provisions for NPA. Therefore, whatever the NPA banks sell to the 'Bad Bank', that amount will be directly added to the profits of the banks. 'Bad Banks' have been successful in selling bad loans in many countries across the world. After the 2008 financial crisis, the US launched a distressed asset relief programme, which improved the health of the US economy. According to an estimate, 'Bad Banks' can be effective in resolving bad loans of more than Rs five lakh crore.

It has other benefits as well, for example, after selling the NPAs to 'Bad Banks', banks will be able to focus on strengthening their business activities, because banks suffer financial loss in their attempt to recover bad loans. Keeping the balance sheet clean will increase the confidence of domestic and foreign investors and depositors in the banks, which will increase the rating of the bank and will also make the path of investment easier.

In the Budget 2022, the work of connecting 1.5 lakh post offices across the country with the core banking system will be completed, which will make it possible to operate savings and current accounts through internet banking, mobile banking, ATMs etc. People will also be able to transfer their money to any part of the country. India has the largest network of post offices. The move will also promote financial inclusion. At present, post offices are also providing the facilities of deposit and payment to the customers through India Post Payments Bank. To promote digital payments, the finance minister has further announced setting up of 75 digital banks in 75 districts by scheduled commercial banks, so that digitisation can be given a further boost in the country.

The government has announced to increase the amount of capital investment from Rs 5.54 lakh crore to Rs 7.55 lakh crore. MSMEs will benefit the most from this. To increase their business, they will also take loans from banks, which will accelerate the credit flow of banks. This will also accelerate the demand and supply, and give impetus to employment generation. The Budget also talked about reducing the corporate surcharge from 12 per cent to seven per cent. This will give additional capital to the corporates, which they can use to increase their businesses. To strengthen the business, they can also take loans from banks because, at present, capital is available with the banks at a cheap rate.

The finance minister has announced to give Rs 6,000 crore to MSMEs in the next five years, which will help MSMEs to deal with capital problems. The Budget also speaks about linking of Udayam, E-Shram, NCS and Aseem Portal. This will make it easier for entrepreneurs to take loans from banks. More than 60,000 new start-ups have been started in the country since the year 2016. To further strengthen this scenario, the tax benefit period for start-ups has been extended by 1 year to March 31, 2023, in the Budget.

There is a proposal to build 80 lakh houses for the poor, for which a provision of Rs 48,000 crore has been made. An announcement was made in the Budget to promote organic farming on land falling within a 5-km radius of the banks of the Ganges. To make these announcements materialise, it would be necessary to take loans from banks. The credit growth rate of banks stood at 9.2 per cent on a year-on-year basis in December 2021, while it increased by 6.6 per cent on a year-on-year basis in December in the preceding year.

The Budget is likely to increase the credit growth rate of banks and reduce the level of NPAs, also leading to a significant increase in the profits of banks in the coming months.

Views expressed are personal