Union Budget 2016-17: Financial Sector Reforms

Among other things, the Union Finance Minister announced that a comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17.

Created On: Mar 1, 2016 17:51 ISTModified On: Mar 1, 2016 18:09 IST

The Union Finance Minister Arun Jaitley on 29 February 2016 presented the Annual Financial Statement or the Union Budget for 2016-17 in the Lok Sabha. In his budget speech the minister listed nine pillars on which the Government will focus on in order to transform India into a developed nation.

The nine pillars are - Agriculture and farmers' welfare, rural sector, social sector including healthcare, education, skills and job creation, infrastructure and investment, financial sector reforms, ease of doing business, fiscal discipline, tax reforms to reduce compliance burden.

Union Budget for 2016-17

Herein we present the new initiatives proposed to reform financial sector that are aimed at building trust and improving predictability.

Following measures were announced to reform financial sector -

A comprehensive Code on Resolution of Financial Firms will be introduced as a Bill in the Parliament during 2016-17. This Code will provide a specialized resolution mechanism to deal with bankruptcy situations in banks, insurance companies and financial sector entities. This Code, together with the Insolvency and Bankruptcy Code 2015, when enacted, will provide a comprehensive resolution mechanism for our economy.

Statutory basis will be provided for Monetary Policy Framework through amendments to the RBI Act, 1934. And, a Monetary Policy Committee will be set up through the Finance Bill, 2016. A committee-based approach will add lot of value and transparency to monetary policy decisions.

A Financial Data Management Centre will be set up under the aegis of the Financial Stability Development Council (FSDC) to facilitate integrated data aggregation and analysis in the financial sector.

• To improve greater retail participation in Government securities, RBI will facilitate their participation in the primary and secondary markets through stock exchanges and access to Negotiated Dealing System – Order Matching Segment (NDS-OM) trading platform.

• New derivative products will be developed by the Securities and Exchange Board of India (SEBI) in the Commodity Derivatives market.

• To facilitate deepening of corporate bond market, the following measures were announced.

a) LIC of India will set up a dedicated fund to provide credit enhancement to infrastructure projects. The fund will help in raising the credit rating of bonds floated by infrastructure companies and facilitate investment from long term investors.

b) RBI will issue guidelines to encourage large borrowers to access a certain portion of their financing needs through market mechanism instead of the banks.

c) Investment basket of foreign portfolio investors will be expanded to include unlisted debt securities and pass through securities issued by securitisation Special Purpose Vehicles (SPVs).

d) For developing an enabling eco system for the private placement market in corporate bonds, an electronic auction platform will be introduced by SEBI for primary debt offer.

e) A complete information repository for corporate bonds, covering both primary and secondary market segments will be developed jointly by RBI and SEBI.

f) A framework for an electronic platform for repo market in corporate bonds will be developed by RBI.

g) The enactment of the proposed Insolvency and Bankruptcy Code would also provide a major boost to the development of the corporate bond market.

• To tackle the problem of stressed assets in the banking sector, Asset Reconstruction Companies (ARCs) have a very important role.

Amendments in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 proposed to tackle the problem of NPAs in the banking sector. The changes will also enable the sponsor of an ARC to hold up to 100 percentage stake in the ARC and permit non-institutional investors to invest in Securitization Receipts.

A comprehensive Central legislation will be introduced in 2016-17 proposed to deal with the rising instances of illicit deposit taking schemes. The law is of significance as the worst victims of these schemes are the poor and the financially illiterate.

Amendments to the SEBI Act, 1992 will be introduced in 2017 to provide for more members and benches of the Securities Appellate Tribunal.


Public Sector Banks and General Insurance Companies

• To support the Banks in dealing with the problem of NPAs, 25000 crore rupees will be infused towards recapitalisation of Public Sector Banks in 2016-17.

The Bank Board Bureau (BBB) will be operationalized during 2016-17 and a roadmap for consolidation of Public Sector Banks will be spelt out. The BBB was formed under chairmanship of former CAG Vinod Rai on 28 February 2016.

• The process of transformation of IDBI Bank has already started. Government will take it forward and also consider the option of reducing its stake to below 50 percent.

• For speedier resolution of stressed assets, the Debt Recovery Tribunals will be strengthened with focus on improving the existing infrastructure, including computerised processing of court cases, to support reduction in the number of hearings and faster disposal of cases.

• Credit creation target under the Pradhan Mantri Mudra Yojana (PMMY) is pegged at 180000 crore rupees for 2016-17. Under the scheme, which was launched in April 2015 to fund the small entrepreneurs, Banks and NBFC-MFIs sanctioned one lakh crore rupees to over 2.5 crore borrowers in 2015-16.

• To provide better access to financial services, especially in rural areas, a massive nationwide rollout of ATMs and Micro ATMs will be undertaken in Post Offices over the next three years that is till 2019.

The general insurance companies owned by the Government, like New India Assurance, United India Insurance, etc, will be listed in the stock exchanges to ensure higher levels of transparency and accountability.

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