Banking Article, Banking Finance 2022, Banking Finance April 2022

Union Budget 2022 :Improving Access to Finance

The Finance Minister of India, Ms. Nirmala Sitharaman presented the Union Budget 2022-23 (“Budget”) on 1st February 2022. Amid concerns of rising inflation and the uncertainties surrounding COVID-19, the Budget aims to revive the economy,interalia through innovative financing, financial inclusion and adoption of technology in finance.

While various measures were announced in the Budget, the key focus of this article is the banking and finance space.

Financial Inclusion

In 2022, 100% of 150,000 post offices are proposed to be brought under the core banking system. This is expected to enable financial inclusion and access to accounts through net banking, mobile banking, automated teller machines (‘ATMs’) and facilitate online transfer of funds between post office accounts and bank accounts. This change is expected to be helpful, especially for farmers and senior citizens in rural areas, enabling inter-operability and financial inclusion.Thiswillenable access to the financial system of the country to the remotest and most excluded parts of the country.Setting up 75 digital banking units (‘DBUs’) in 75 districts of the country by scheduled commercial banks has also been proposed. This is intended to encourage further adoption of digital payments. Specific focus has also been promised to promote use of payment platforms that are economical and user friendly.

The Aspirational Districts Programme which was introduced to improve the quality of life of citizens in the most backward districts of the country will be continued in financial year 2022-23 as Aspirational Blocks Programme, inter alia to remove blocks in financial inclusion.

Infrastructure Financing

The Budget lays down specific emphasis on innovative ways of financing towards achieving the goals of the PM Gati Shakti master plan by proposing to provide technical support from the capacity building commission, funds up to INR 200 billion to facilitate infrastructure development and enhancing financial viability of infrastructure projects. The Budget proposes to expand the national highways network by 25,000 kms in the financial year 2022-23. Innovative means of financing has become the focus of international financial organisations and global investors as it helps fuel the economic growth by routing private sector savings along with public sector funds towards achieving development. The specific focus of the Budget on infrastructure development is expected to accord greater liquidity and flexibility in the fundraising capacity of the infrastructure sector.

Digital Rupee

The Budget proposes that the Reserve Bank of India (“RBI”) shall issue its digital currency in this financial year using blockchain and other technologies. This introduction is expected to boost the digital economy and intends to create an efficient and cheaper currency management system using blockchain and other technologies. The introduction of digital currency by the RBI extends an opportunity to the citizens to partake in the digitalization of currencies across the world within the security of a regulated environment. There are certain disinclinations attached to the volatility of other digital currencies which has been keeping the majority population away from exposure to the efficiencies of exchanging value in digital form. This is a first and welcome step in validating currency in digital form and can build the trust and confidence of people in adapting such currency systems.

Scheme for taxation of virtual digital assets

To regulate income generated from digital assets, the Budget has proposed to provide for a specific tax regime where any income from transfer of any virtual digital asset shall be taxed at the rate of 30%. However, loss from transfer of virtual digital asset is not permitted to be set-off against any other income. Further, to capture the transaction details, it proposes to provide for tax deducted at source (‘TDS’) on payments made in relation to transfer of virtual digital asset at the rate of 1% of such consideration which is above a monetary threshold. Gift of virtual digital asset is also proposed to be taxed in the hands of the recipient of such gift.

While the taxation of digital assets in itself may be viewed as high and hence restrictive of investments in digital assets, this ought to be seen as a positive move towards providing recognition to owning digital assets by citizens. This in turn could lead to further engagement by way of investments in digital assets since taxation of the same can be viewed as legitimisation of it as well. It brings the cryptocurrency industry in India away from the grey spectrum of financial regulation.

Cost of funding

Surety bonds are proposed to be accepted as a substitute for bank guarantees in government procurements to decrease indirect costs for suppliers and contractors under the Budget, making it beneficial for the import of gold. The Insurance Regulatory and Development Authority of India has established a framework for insurance firms to offer surety bonds. This amendment can be expected to improve liquidity in the market, reduce the cost of funding and increase access to government project opportunities.

Key Takeaways

There are several proposals in the Budget which are futuristic and have the ability to facilitate financial inclusion across the country. The Budget seeks to enable financial inclusion, both through physical and virtual networks. Inclusion of post offices in the core banking network with focus on infrastructure development and encouragement of digital banking may be expected to include a significant part of the population as beneficiaries and participants in the economic growth of the country. Separately, the proposal to introduce the digital rupee, regulation of income earned through digital assets and encouragement of innovative means of financing can be expected to ensure that India remains in the forefront of adopting technology in finance.

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