The Union Budget for the year 2025 is to be presented on February 1, in which provisions will be made for the upcoming financial year, with the help of which development can be accelerated as well as appropriate measures can be taken for the betterment of the deprived sections and farmers. Sectors like manufacturing, construction, education, health, road, rail etc. have played an important role in ensuring the development of the country, but the role of banks has been more important than all these sectors and they are deciding the direction of development of all these sectors.
To make the budget effective, suggestions have been sought from all important stakeholders, including banks. Since independence, banks have been playing an important role in making the country economically strong. Therefore, it is important that the government should make provisions in the budget to strengthen the banks. Only when the banks are strong, they will be able to make the country economically strong & ensure inclusive growth of the country.
Today, the biggest problem facing banks is the lack of cheap capital. Broadly speaking, the job of a bank is to take deposits from customers and distribute the same deposits in the form of loans among the needy and businessmen. Banks pay low interest on deposits and charge high interest on loans. The bank earns profit from the difference in interest rates. At present, the government is collecting tax on the interest earned on savings, recurring and fixed deposits. Banks have also invested the bank’s deposits in mutual funds and insurance to increase their earnings. Here, due to the strong economy for the last few years, the Sensex of the stock market is continuously going up and people are getting better returns on investments in the stock market and mutual funds. In such a situation, domestic investors are avoiding investing in banks.
Due to the shortage of deposits, banks have to raise capital from the market at higher interest rates to give loans and there is a vulnerability of liquidity crisis in the market. Due to the decrease in borrowing, economic activities have declined, and the Gross Domestic Product (GDP) has decreased significantly. Therefore, to encourage personal savings, there is a need to make the interest earned on savings, recurring and fixed deposits tax-free.
Currently, the interest earned on these is being considered as income and tax is being levied on them. Also, tax exemption should be given on all bank deposits under Section 80C of the Income Tax Act. To encourage deposits, government-backed savings schemes with guaranteed returns should be started in rural areas, because rural people still avoid investing in the stock market and mutual funds. In this sequence, to encourage savings, arrangements should be made to give tax-free interest on deposits made by women, senior citizens and farmers.
There is also a need for government-backed awareness campaigns to educate citizens about the importance of saving and using formal banking channels. This can also increase bank deposits. The government should sell attractive long-term government savings bonds through banks to increase bank deposits and help meet borrowing needs of big companies & corporates.
The government needs to make strong laws to prevent incidents of online fraud, because due to the increasing frequency of cybercrime, the common men are avoiding keeping deposits in banks. Due to the frequent collapse of cooperative banks & private banks, there is a fear in the minds of customers. To assure them that their money will be safe, the deposit insurance limit needs to be increased from ₹ 5 lakh to ₹ 10 lakh. In case of bank failure, the process of deposit insurance claims should be made simpler. This can also promote deposits.
The government should create a strong framework for the expansion of schemes like Pradhan Mantri Jan Dhan Yojana (PMJDY). The concept of financial inclusion can be realized by opening more and more savings accounts by the common men. By connecting with the bank, the deprived sections will be able to get the benefits of government schemes, and they can be made financially literate, which will increase their chances of becoming self-reliant. This will also give strength to the digitalization campaign of the country, they will also be able to get facilities like crop insurance, agricultural loan etc.
There has been a significant reduction in the non-performing assets (NPAs) of banks in the past years. However, recovery mechanisms like SARFAESI, Bank Adalat etc. need to be strengthened further. In contrast, the National Company Law Tribunal (NCLT) was established under the Companies Act, 2013 to recover NPAs from large defaulting companies, but its performance has also not been as expected. The excessive delay in reaching a decision and the settlement amount being 15 to 25 percent of the principal loan amount raises questions on its success.
Following the decision of the Hon’ble Supreme Court, TDS (Tax Deducted at Source) on benefits given to bank employees is going to be introduced from January 2025. Some banks have currently borne this burden themselves, while some have not. I think the government needs to intervene in the matter.
This loss can be compensated by increasing the number of incomes taxpayers or the bank employees can be given options like performance-based bonus or compensation which is tax exempt or increasing the cash component of the salary in place of this loss. It is believed that this provision may negatively affect the performance of bank employees, because they work in a stressful environment. The reduction in benefits may reduce their morale and the profit of banks may decrease, which may also have a partial negative impact on the country’s economy.
It can be said that the performance of the banking sector has improved in the recent years and a significant reduction in NPA has also been recorded. However, at present, the bank is facing a crisis of deposits. After banking facilities have become digital, the incidents of online fraud have increased a lot, due to which the trust of investors in banks has decreased. The expected reduction in NPA has also not happened due to the weakness of the recovery mechanism of banks. On the other hand, the deduction of TDS on the benefits given to bank employees has led to a reduction in their morale, which has increased the possibility of a negative impact on the performance of the bank. Therefore, provisions to solve these problems need to be made in the budget.
Satish Singh, Ahmedabad Based Senior Columnist, views are personal
