Banking: focus on new responsibilities and good governance 

General Studies Paper 3

Context: Banks have been traditionally known for accepting deposits and giving loans. However, the definition of a bank has expanded beyond just a physical building. Today, the banking system has evolved into a secure and robust medium that offers innovative deposit schemes, secure money storage, and quick loan transactions.

Banks are no longer just a conglomerate of traditional banks but have also incorporated new forms of banks such as payment banks, small finance banks, and even the general banking system of post offices and non-banking financial companies.

Banking provisions in the budget

• Discussions about the banking provisions in budgets have broadened to include topics like tax concessions, capital provisions, and the role of these new forms of banks in the financial system. The General Budget 2023-24 for the banking sector can be analysed by dividing it into five parts:
• New savings schemes and changes in existing savings schemes
• Sources of Government Borrowing
• Campaign to promote digital transactions
• Loan for a specific sector
• Reforms in banking governance

Banking provisions in the budget: Deposit Schemes

• The Budget 2023-24 includes measures to promote savings among women and secure the future of the elderly through savings.
• Mahila Samman Savings Certificate: It is a new small savings scheme, which will be available until March 2025. This scheme will offer a deposit facility of up to Rs 2 lakh for women or girls for two years at a fixed interest rate of 7.5 percent with a partial withdrawal option. This is aimed at encouraging economic empowerment of half the population and providing them with a secure medium to save their money.
• Sukanya Samriddhi Yojana: It is a special scheme for girls launched in 2015, under the ‘Beti Bachao Beti Padhao’ initiative. Its aim is to encourage families to invest in their education and save for marriage expenses. Parents of girls under 10 years can open up to two (three in case of first girl child twins) Sukanya Samriddhi accounts with a maximum deposit of Rs 1.5 lakh annually. The scheme is “EEE” (Exempt-Exempt Exempt, i.e. tax exemption at the time of investment, tax exemption on the increase in investment, and tax exemption at the time of withdrawing the entire amount of investment including interest).
• Senior Citizen Savings Scheme: Under this, the maximum deposit limit for this scheme has been increased from Rs 15 lakh to Rs 30 lakh. The interest rates of the scheme are reviewed quarterly.
• Monthly Income Account Scheme: The maximum deposit limit for this scheme has been increased from Rs 4.5 lakh to Rs 9 lakh for a single account and from Rs 9 lakh to Rs 15 lakh for a joint account. The interest rates of the scheme are also reviewed quarterly.

Banking provisions in the budget: Sources of government borrowing

• The Union Budget 2023-24 estimates net market borrowing from dated securities at Rs 11.8 lakh crore against a fiscal deficit of Rs 17.87 lakh crore.
• Banks play a crucial role in fulfilling this estimate as they invest a large amount of money in these bonds, aiming to meet statutory requirements and take advantage of market conditions. To actively participate in this system, banks must have sound financial conditions.
• Currently, all 12 public sector banks and major private banks are profitable, and their deposits are continuously increasing, making it easier for them to participate in the government’s borrowing.
• Banking provisions in the budget: Promoting digital transactions
• Banks are competing to provide fast, secure, and accessible digital transaction services.
• Incentive scheme: After the success of last year’s programme, which led to a 76% increase in digital transactions and a 91% increase in their value, the government has decided to keep offering incentives for the financial year 2023–2024.
• Under this scheme, approval has been granted for giving Rs 2600 crore to banks to promote Point-of-Sale (POS) and e-commerce transactions using RuPay Debit cards and low-value BHIM-UPI transactions.
• This provision will be beneficial for banks, which are striving to offer competitive digital payment solutions to their customers.

Banking provisions in the budget: Sector-specific loans

• The banking sector keeps an eye on credit targets for different sectors. In fact, banks get some facilities with these targets such as the provision of a part of the interest rate by the government or the credit guarantee fund. It helps the banks to give their loans to a specific sector.

Agricultural sector:

• The budget focuses on the agriculture sector and provides a provision of Rs 23,000 crores for small farmers to continue benefiting from the Kisan Credit Card.
• The agricultural loan target has been increased to Rs 20 lakh crore, with a focus on animal husbandry, dairy, and fisheries.
• The government offers short-term crop loans up to Rs 3 lakh at a 4% effective interest rate if repaid on time, and for allied activities such as fisheries, animal husbandry, and dairy, loans up to Rs 2 lakh are available at the same interest rate.
• In addition, if the bank gives agricultural loans through its resources, then they get 2 percent assistance.

Micro, Small and Medium Enterprises (MSME): 

• The Credit Guarantee Scheme for MSMEs will be renewed with an additional Rs 9,000 crore, commencing from April 01, 2023. This will enable collateral-free loans of an additional Rs 2 lakh crore and bring down the cost of credit by about one percent.
• Due to the guarantee factor, banks will not have to worry much about the loss in case of loan default and it will be easier for small and medium businessmen to get loans.

Banking provisions in the budget: Reforms in Banking Governance

• The budget has proposed amendments to the Banking Regulation Act, Banking Companies Act, and Reserve Bank of India Act to reform the governance of banks and increase investor protection.
• Although the details are not disclosed, new guidelines are expected to be drawn for the bank’s board of directors, including eligibility, tenure, and reappointment. The aim is to improve the banking system, which has expanded in recent years.

Conclusion

• Based on the changes in the banking system, the approach for analyzing the general budget for the banking sector has also evolved. The budgets for the financial years 2022-23 and 2023-24 do not include any provisions for the recapitalization of public sector banks. The main reason for this is that the financial health of public sector banks has improved a lot, bad loans have come down, and the situation is likely to remain the same in the future.