In a big relief to banks struggling with bad loans, the government today proposed tax concession on provisions for NPAs while announcing capital infusion of Rs 10,000 crore for state-owned lenders.
It also proposed that tax on interest will be levied on actual receipts and not on accrual basis in respect of Non Performing Asset (NPA) or bad loan accounts.
BSE banking index surged 2.76 per cent, a full percentage point more than the BSE Sensex itself.
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Presenting Union Budget 2017-18 in Parliament, Finance Minister Arun Jaitley said: "In order to give a boost to banking sector, I propose to increase allowable provision for Non-Performing Asset from 7.5 per cent to 8.5 per cent. This will reduce the tax liability of banks."
He also proposed to tax interest receivable on actual receipt instead of accrual basis in respect of NPA accounts of all nonscheduled cooperative banks as well, at par with scheduled banks.
"This will remove hardship of having to pay tax even when interest income is not realised.
Currently banks can claim deduction in respect of provision for bad and doubtful debts.
Jaitley also announced that Rs 10,000 crore will be infused in public sector banks in the next fiscal and more will be provided if required.
"As per the Indradhanush plan, the public sector banks will be provided with Rs 10,000 crore in the next fiscal. Additional allocation would be made if required," he said.
Under Indradhanush roadmap announced in 2015, the government will infuse Rs 70,000 crore in state banks over four years while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirement in line with global risk norms, known as Basel-III.
In line with the blueprint, public sector banks has been given Rs 25,000 crore in each fiscal, 2015-16 and 2016-17. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19.
The government has already announced fund infusion of Rs. 22,915 crore, out of the Rs 25,000 crore earmarked for 13 PSBs for the current fiscal. Of this, 75 per cent has already been released to them.
The first tranche was announced with the objective of enhancing their lending operations and enabling them to raise more money from the market.
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With regard to the SBI merger plan and reducing stake in IDBI Bank, Jaitley said, both ideas are very much on the table.
"On the SBI merger we have moved substantially ahead," he said.
SBI has planned the merger of its five associate banks as well as Bharatiya Mahila Bank (BMB) with itself.
SBI has three listed associate banks - State Bank of Bikaner & Jaipur (SBBJ), State Bank of Mysore (SBM), State Bank of Travancore (SBT) and two unlisted associate bank -- State Bank of Patiala and State Bank of Hyderabad. As per the swap ratio, SBBJ shareholders would get 28 shares of SBI (Rs 1 each) for every 10 shares (Rs 10 each).
Similarly, SBM and SBT shareholders would get 22 shares of SBI for every 10 shares. In case of Bharatiya Mahila Bank, 4,42,31,510 shares of SBI would be swapped for every 100 crore of Rs 10 each.
With regard to the Pradhan Mantri Mudra Yojana, Jaitley said it has contributed significantly to funding the unfunded and the under-funded.
"Last year, the target of Rs 1.22 lakh crore was exceeded. For 2017-18, I propose to double the lending target of 2015-16 and set it at Rs 2.44 lakh crore. Priority will be given to Dalits, Tribals, Backward Classes, Minorities and Women," he said.
The Stand Up India scheme was launched by the government in April 2016 to support Dalit, Tribal and Women entrepreneurs to set up greenfield enterprises and become job creators, he said.
"Over 16,000 new enterprises have come up through this scheme in activities, as diverse as food processing, garments, diagnostic centres, etc," he added.
The Finance Minister also announced a bill relating to resolution of financial firms will be introduced in the current Budget Session of Parliament.
"This will contribute to stability and resilience of our financial system. It will also protect the consumers of various financial institutions. Together with the Insolvency and Bankruptcy Code, a resolution mechanism for financial firms will ensure comprehensiveness of the resolution system in our country," he said.
