Budget for financial sector: 11 expectations of financial services

Vivek Iyer
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Given the number of sub-industries within Financial Services, we have bifurcated our expectations.

The robustness of the fiscal and monetary policies determines any economic system's financial stability. While the monetary policy is determined by the Reserve Bank of India (RBI), the fiscal policy is essentially laid down by the Ministry of Finance. The quality of a fiscal policy, through its initiatives both on the revenue and capital side, lays down the growth path for a country, which is tracked through a metric like Gross Domestic Product (GDP). Therefore, the expectations from the Union Budget are high every year from institutions and individuals alike. This article aims to try to put together a list of Budget expectations from a Financial Services sector perspective. Given the number of sub-industries within Financial Services, we have bifurcated our expectations across different categories. While the asks are endless, we have tried to limit the list to 11 asks:

Rationalization of the tax rates for foreign banks, bringing them in line with the Indian private sector banks. This would help send strong signals on ease of doing business in India, helping more attract more capital from the corporate headquarters of these Banks as well as the Banks customers in the form of investments through their Banking channels.

Consolidation plan for the Co-operative Banks in the country – While efforts are being made by the regulator to oversee the co-operative Banks from a supervisory standpoint, it would be useful to evaluate a consolidation plan for the large and varied co-operative Banks in the country through acquisitions.

Open Banking – Open Banking initiatives in the country under the NBFC-AA license structure of the Reserve Bank of India, will receive a fillip with the finalization of the Data Privacy Bill, which will create a formal consent framework of data ownership.

Central Bank Backed Digital Currency – A potential road map on how CBDC will be rolled out in India and cross-border could provide a path of digitization from a currency standpoint.

Rupee settlement of trade transactions – Given the geo-political uncertainty, it is imperative to have rupee settlement arrangements with multiple countries for trade transactions to effectively utilize foreign exchange reserves. It might be worthwhile to evaluate a South-East Asian Currency Bloc that uses rupee to settle trade transactions.

Synergies between GIFT City and Domestic Tariff Area – The success of the GIFT City initiatives, extensively depends on the symbiotic relationship between the Reserve Bank of India and the IFSC Authority. This will ensure a measured move towards full currency convertibility over a period.

Liquidity Support for NBFCs from RBI – Given the inherent maturity mismatch within NBFCs, it would be worthwhile for the Finance Ministry to consider putting a framework for providing liquidity support to the top layer and upper layer NBFCs in the country. NBFCs depend significantly on market borrowings, with their assets in investments and loans, creating a precarious position for them, when liquidity crisis blows into a full-fledged solvency crisis. The objective is to not to ask the Finance Ministry to interfere with the responsibilities of the regulator but to ask them to choose the same.

Guidance around recognition of Qualified Central Counterparties (“QCCP”) by global institutions – Much has been written about the QCCP recognition conflict between the European and Indian regulators, given the disagreements over right to audit clauses. It might be useful to take this discussion as part of a larger trade policy discussion. India will attract a lot of investments and having robust clearing and settlement channels will be important. Having mutually accepted audit clauses, will only increase our alignment with global practices.

Insurance – It is high time that the Insurance Industry adopts risk-based capital approach towards capital planning for the Insurance industry. This will incentivize Insurance companies to have robust risk management and capital-efficient practices, in turn enhancing the robustness of the overall insurance ecosystem. This could also set the floor for future discussions on composite Insurance, as a diversified product portfolio could bring in greater capital efficiencies.

Market and Digital Infrastructure for Fintech to facilitate financial inclusion – The Government should continue to create market infrastructure for fintech such as Public Credit Registry, Digitized Land Records, and internet infrastructure in the remote villages.

Regulating Crypto Industry – Banning a crypto industry may not be the right answer but regulating an industry and putting in guard rails in place would be an appropriate approach. The challenges that have been faced off late in the crypto industry can be summarized by the adage, “Old wine in a new bottle” – Liquidity risk, leverage, absence of Chinese walls between various activities of the crypto businesses are some of the reasons for the failure. It would be much better to regulate the industry than ban the industry. The Ministry could decide whether to take a self-regulatory organization route or ask one of the regulators to look at this space.

We know that the Finance Ministry is listening and we hope that some of the suggestions make their way into the budget for 2023.

This article was originally published in The Times of India.