NBFCs and the private sector can now enter the banking business if they meet RBI’s criteria. This is a major move for the financial sector
Private players and non-banking finance companies (NBFCs) have reason to cheer the Budget speech as the finance minister announced that the RBI is open to giving them banking licences if they meet the apex bank’s criteria.
“The RBI is considering new bank licences to promoters in the private sector and also NBFCs, if they meet the eligibility criteria of the RBI,” Pranab Mukherjee said while presenting the annual Budget for 2010-11 in the Lok Sabha.
NBFCs like Indiabulls, Reliance Capital, Religare, IL&FS, IDFC and Aditya Birla Financial Services are likely to apply for bank licences after the RBI norms are in place.
“The Aditya Birla Financial Services Group is already a large non-bank player occupying a significant position across all its verticals. We wholeheartedly welcome this initiative and will definitely apply for a licence. The Aditya Birla Group is confident that we will meet any eligibility criteria that might be set," said Ajay Srinivasan, chief executive (financial services), Aditya Birla Group.
“The finance minister has shared the government's desire to open up the banking sector to NBFCs and the private sector. This is a significant step towards further strengthening and broadening the banking sector and bringing it closer to the aam aadmi,” adds Mr Srinivasan
No new banks have been set up in the past eight years. In fact, no new Indian bank has been set up since the first flush of liberalisation in 1993 when half-a-dozen banking licences were given. This announcement clearly demonstrates the government’s plans for liberalisation of the financial sector.
India has 96 scheduled commercial banks (SCBs)—27 public sector banks 31 private banks and 38 foreign banks—having a combined network of over 53,000 branches. According to a report by ICRA, public sector banks hold over 75% of the total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5%, respectively.
Unlike banks, all NBFCs cannot accept demand deposits. Only NBFCs which hold a valid certificate of registration with authorisation to accept public deposits can do so. NBFCs that were earlier allowed to be converted into banks were Kotak Mahindra Finance and 20th Century Finance. While Kotak has diversified into various financial services, 20th Century became Centurion Bank; it was taken over by a bunch of private equity investors and eventually merged with HDFC Bank. Two of the other new licensees in the early 1990s—HDFC Bank and UTI Bank (renamed Axis Bank)—have become very successful private banks.
The announcement also cheered the markets. The Sensex gained 175.35 points while the Nifty gained 62.55 points. Religare (an NBFC) inched up 3% to Rs371 from Rs361, Indiabulls shed 1% to close at Rs98.90, and Aditya Birla Nuvo gained 4% to end at Rs842.
The Budget measures will support a short-term and a long-term rally, but the market’s medium-term prospects are clouded by global worries
After the Budget, market experts have declared that the rally today is a “technical breakout”. This makes no sense to most of us who do not know what is called technical analysis. But the plain fact is that something has hugely changed for the better. At 16,430, the Sensex has closed at its highest level over the past one month. The immediate reason for this is that huge worries about the fiscal deficit, rising borrowings, rise in excise and other taxes are gone. It is as if a huge stone has been removed from the chest of the market. It is for this reason the short term looks good. The rally will possibly take the Sensex up to 17000-17,200, after which the market will again go down.
It could well be that the market goes lower, thanks to global worries. There is talk of a double-dip recession in Europe. Continuing job losses in the US and talk of a bubble in China make the global situation pretty grim all over again. This will put pressure on the Indian markets in the medium term. However, the market cannot remain immune to a couple of features of the Budget. One, the amazingly low tax on salaried employees. Under the coming regime, right up to Rs8 lakh of taxable income, the tax is only 20%. This puts enormous amounts of money in the public.
This will boost both consumption and savings, ultimately keeping the growth going. The second is that the growth momentum of Indian businesses have been kept untouched. The Budget has been a fine balancing act between growth, cutting the fiscal deficit and increasing disposable incomes. All this will be reflected in the long term growth. Unless the external shocks cripple us again, the finance minister has just put the Indian bull on steroids.
Revised income-tax slabs to increase disposable incomes; consumers, who have been feeling the pinch of rising prices, now have something to cheer about.
Amidst all the debate about fiscal consolidation and roll-back of excise duty concessions, the finance minister has created quite a flutter in an unexpected area. The Union Budget for 2010-11 has provided individual taxpayers with some welcome revisions in tax slabs that would effectively put more money into their wallets. Consumers, who have been feeling the pinch of rising prices, now have something to cheer about.
The revised tax slabs will be as under:
Income upto Rs 1.6 lakh Nil Income above Rs 1.6 lakh and upto Rs. 5 lakh 10 per cent Income above Rs. 5 lakh and upto Rs. 8 lakh 20 per cent Income above Rs. 8 lakh 30 per cent
While the primary threshold (amount up to which no tax is payable) remains unchanged at Rs1.6 lakh, the income bracket falling under the 10% tax slab has been revised to Rs1.6 lakh-Rs5 lakh. Previously, this bracket was fixed between Rs1.6 lakh-Rs3 lakh. Similarly, the second slab of 20% tax has been fixed at Rs5 lakh-Rs8 lakh (from Rs3 lakh-Rs5 lakh earlier). The highest tax slab of 30% will now be charged on income in excess of Rs8 lakh, compared to Rs5 lakh earlier.
This dramatic shift in the direct tax policy means a savings bonanza for the inflation-hit consumer. Here is how your savings will shape up under the new tax system:
Suppose you earn an annual income of Rs4lakh, your tax incidence (excluding education cess) will now amount to Rs24,000, instead of Rs34,000 earlier—a saving of Rs10,000.
A person earning Rs6 lakh will shell out Rs54,000 in taxes. In this case, the savings compared to the earlier tax code will amount to a whopping Rs30,000.
Similarly, a person in the highest tax slab, earning say, Rs9 lakh, will be able to save a phenomenal Rs50,000 from the tax differential.
This is not the only carrot extended by the government, either. The existing tax-saving limit of Rs1 lakh has also been raised by an additional amount of Rs. 20,000 for investment in long-term infrastructure bonds.
Industry experts have welcomed the move. Ranjeet Mudholkar, principal advisor, Financial Planning Standards Board India, said, “The further slackening of income-tax slabs will benefit 60% of tax-payers. Apart from these, a tax payer can also avail deduction of Rs20,000 for investment in infrastructure bonds as notified by the Government, in addition to the limit of Rs1 lakh under Section 80C. Hence, from the perspective of financial planning, a tax-payer can channelize more funds towards their chosen financial goals despite earning the same income. Also, to optimise the use of excess disposable income, a tax-payer should employ strategic asset allocation towards better asset-creation in future.”
Nikhil Bhatia, executive director at PricewaterhouseCoopers believes this is an indication of how the slab rates will move from here onwards. “I think it is a step in the right direction. Under the direct tax code (DTC), the tax slab rates are expected to go up substantially. In that sense, it is not much of a surprise because an indication of this was coming through from the DTC itself, where the marginal tax rate has been proposed at Rs25 lakh. It is a populist move; one which will leave more money in the hands of the individual”, he said.
Dr Suresh Surana, founder, RSM Astute Consulting Group, agreed, “The finance minister has attempted to take the tax-payer on the road to the new Direct Tax Code (DTC) (proposed to become effective from 1 April 2011), by bringing the income-tax slab rates in sync with those proposed in the DTC.”
Contributions to the Central Government Health Scheme have also been allowed as deductions within the overall ceiling for tax rebate, besides contributions to health insurance schemes which are currently allowed as deductions under the Income Tax Act.
The proposals on direct taxes are estimated to result in a revenue loss of Rs26,000 crore for the government.
Income upto Rs 1.6 lakh
Income above Rs 1.6 lakh and upto Rs. 5 lakh
10 per cent
Income above Rs. 5 lakh and upto Rs. 8 lakh
20 per cent
Income above Rs. 8 lakh
30 per cent