In the last budget, the government promised a major overhaul of the financial services sector which included a promise to push the crucial bankruptcy code, amend the Reserve Bank of India (RBI) Act to allow the monetary policy agreement and so on. This year, the demonetisation exercise has disrupted the economy in general and the financial sector in particular. Pushing digital payments and accelerating the adoption of financial savings are likely themes in the budget.

The Backdrop

Cash scarcity: This budget is being presented against the backdrop of demonetisation of high-value banknotes. Currency in circulation has fallen sharply.

Physical assets rule: Financial savings as a proportion of economic output have been stagnant for the past four years as people continued to invest in real estate and gold.

Bad loan pile-up: RBI and government interventions have failed as bad loans continue to pile up. Adding restructured loans, soured credit is almost 13% of advances.

The Challenges

Cashless infrastructure: Setting up the infrastructure for cashless payments continues to remain a challenge. The government is looking to triple point-of-sale machines installed over the current quarter.

Lure of physical assets: The strong tendency for physical assets continues despite avenues such as mutual funds, which have seen strong growth owing to systematic investment plans.

Failure of debt recovery tribunals (DRTs): Solutions such as DRTs to address the bad debts problem in the banking sector haven’t worked, leading to the new bankruptcy code. However, it will take time to gain traction.

Tepid loan growth: Credit growth has plummeted to at least a two-decadal low as demonetisation disrupted the economy.

What to expect in the budget?

Recapitalization: Banks need Rs1.2 trillion in fresh capital over the next three fiscal years to meet capital adequacy norms and fund growth.

Push for cashless payments: The government is trying to incentivize cashless payments and is expected to announce a host of incentives to hasten India’s transition to a digital economy.

Incentivizing financial savings: The budget is likely to announce further measures to encourage financial savings. The sharp growth in demat accounts seen last year could accelerate the move towards financial savings.