The country’s banking sector has undergone a sea change over the last decade. From digital transformation to the consolidation of public banks and the introduction of new private banks, banking in India has been dynamic and shock-resistant. Meanwhile, in recent quarters, it has faced challenges in terms of a shortage in deposits. That, however, is set to get a major boost with the Union Budget offering much-awaited relief in personal income tax, says former Chairman of State Bank of India Dinesh Khara.
In conversation with Siddharth Zarabi, Editor of Business Today, at the BT Best Bank Awards, the veteran banker emphasized the significance of the tax rebates and slab changes offered by Finance Minister Nirmala Sitharaman. According to him, out of the Rs 1 lakh crore tax foregone by the Union government, half of it may come to the banking system in the form of deposits and reduce the unsecured loans in the system. “Nearly Rs 50,000 crore is likely to come as bank deposits and will include reduced unsecured loans. The rest of Rs 50,000 crore will boost consumption,” Khara said.
According to him, the fall in bank deposits has more to do with the government adopting to digital mode of fund transfers than the reduction in retail deposits. The share of retail deposits in the banking system has come down to 61% in 2024 from 63% in 2018. But the government deposits have fallen from 14% to 9%. In the same period, the corporate deposits have gone up to 18% from 10%. This is how the scenario has changed, he explained.
Khara, who is now chairing a seven-member committee constituted by the Insurance Regulatory and Development Authority of India (IRDAI) to review proposed amendments to the Insurance Act 1938, said the committee will come up with its recommendations within three months.
“Insurance law was due for amendment. The committee’s role is to review the key parameters with a clear intent: how can we offer insurance for all by 2047. This essentially means that the scale-up of the insurance sector has to happen, which also means that it is important to understand the insurance needs of the people who remain uncovered,” he said, adding that insurance penetration in India continues to be low. Thus, the committee’s focus is on improving the penetration through tweaking the distribution structure and the capital requirement for licensing needs to be looked into.
“The committee has got representation from the insurance sector and the regulators. Thus, I expect that we should be able to do a reasonably decent job,” he said.
Drawing a parallel to the 1990s, when new private banks entered the fray, Khara said new banks have to offer value-added services that are not offered currently. “This drives the incumbent players to think out of the box. This always brings in more competition, which eventually serves the interests of the customer. There is always room for newer players but they have to bring in change to the whole ecosystem.”