2021 Budget: Changes in the Banking Sector
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The Finance Minister in her Budget 2021 speech announced several taxation reforms along with an increased spending on healthcare and vaccine development.
Here are some major highlights of the budget in the banking segment:
Keeping money in a bank is one of the safest saving options. However, the recent episodes have shown that banking deposits are not completely safe. In today’s budget, the Finance Minister announced that in an event of bank failure or if withdrawals are stopped because of financial pressures, the bank customers will be able to access their deposits up to Rs.5 lakh. Bank deposits of a maximum of Rs.5 lakhs are insured under ‘The Deposit Insurance and Credit Guarantee Corporation Act, 1961’ (DICGC Act). This will help account holders to meet their immediate financial requirements.
To keep such risks at bay, it is best not to keep your entire savings in one bank. It is better to open bank accounts in reputed banks or have a minimal exposure to small banks like co-operative banks.
In today’s budget, the finance minister announced that a bad bank will be set up to take care of the bank’s stressed assets through an Asset Reconstruction Company (ARC) model.
If you don’t know about bad bank, let us give you a small primer.
As you might know that banks are in the lending business. The loans given out by banks are called assets as the banks receive a higher interest rate than they pay out to their depositors. However, not all borrowers repay their debt. When companies with massive debt level cannot pay back, the loans become a non-performing asset (NPA) and it hurts the bank’s balance sheets.
These bad loans became prominent after the bank’s regulator Reserve Bank of India (RBI) told banks to undertake an asset quality review in October 2015.
A bad bank will be an aggregator of all stressed assets in the banking system. The bad bank could help banks to clean up banks’ balance sheets. Banks can sell their stressed assets to the bad bank. After the transfer, the new entity can look for resolution and asset turnaround while the bank can focus on their core businesses.
At the end of September 2020, the total gross NPAs of the banking system was 7.5% of the industry’s loan book. This figure is likely to increase to 13.5% by March-September 2021, according to the Reserve Bank of India’s (RBI) projection.
