Budget 2021 : Financial Administration

  • The Budget has announced setting up of a Single Security Market Code by consolidating the provisions of :
    • SEBI Act, 1992,
    • Depositories Act, 1996,
    • Securities Contracts (Regulation) Act, 1956 and
    • Government Securities Act, 2007.
  • The budget has also proposed to create a permanent institutional framework to govern the corporate bond market.
  • To provide protection to investors, the Finance Minister has proposed to introduce an investor charter as a right of all financial investors across all financial products.
  • Only Rs. 20,000 crore has been earmarked for the recapitalisation of banks in the current budget.
  • Bad Bank: An asset reconstruction firm, or ‘bad bank’, would be constituted and be tasked with taking over the bad loans of public sector banks to cope with rising NPAs.
Single Security Market Code Analysis:
  • Single Security Market Code will improve ease of doing business in the country’s financial markets, cut down compliances, reduce cost and do away with friction between various stakeholders.
Permanent Institutional Framework Analysis:
  • The proposed permanent institutional framework will help instil confidence among participants in the corporate bond market and help in the development of the bond market.
Bad Bank Analysis:
  • It is being set up as an ARC (Asset Reconstruction Company)/AMC (Asset Management Company) for non-performing asset (NPA) management.
  • What is the purpose of setting an ARC/AMC?
    • The COVID-19 disruption has already created a lot of stress in the banking system. The banks already have a gross NPA of around 7.5 percent, which is expected to rise to 13.5 percent by September 2021.
    • ARC/AMC aims to buy bad assets of commercial banks.
    • It will sell these assets at a discounted price in the market.
    • This institution is commonly known as a bad bank.
    • Experts at bad banks attempt a resolution through a professional approach.
  • Benefits:
    • It will enable banks to focus on fresh loans and investments.
    • This will help clean up the balance sheets of commercial banks and thereby make available more funds for lending.
  • Challenges:
    • Formation of ARC/AMC can enable banks to continue reckless lending practices.
    • Mobilizing capital : Finding buyers for bad loans in a pandemic hit economy will be hard.
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