FINANCIAL MARKETS SEEK TAX INCENTIVES, BETTER LIQUIDITY
14, Jun 2019
Prelims level : Economics- Growth Mains level : GS3 - Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Why in News:
- Finance Minister Nirmala Sitharaman met representatives from the financial and capital market and they discussed creation of a dedicated liquidity window for the NBFC sector. Bankers have also asked the government to review interest rates on Small Savings Scheme.
- The Indian Banks Association said a system must be evolved to ensure accountability and responsibility on the part of senior management of state-run banks who are involved in credit sanctions and of the loans became NPAs within one year.
- It is requested the government to enact strong recovery laws with a provision to confiscate personal assets of directors of defaulting companies.
- The capital market representative suggested setting-up of Debt Exchange Traded Fund and rationalisation of various taxes like Security Transaction Tax.
- Insurance Regulatory and Development Authority of India chairman Subhash Chandra Khuntia suggested additional tax incentives for term plans to encourage investments, like in the case of the National Pension Scheme.
Non-Banking Financial Companies
- A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property.
- A non-banking institution which is a company and has a principal business of receiving deposits under any scheme or arrangement in one lump sum or in instalments by way of contributions or in any other manner is also a non-banking financial company (Residuary non-banking company).
Difference between banks & NBFCs:
- NBFCs lend and make investments, and hence their activities are akin to that of banks; however, there are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
- Unlike Banks which are regulated by the RBI, the NBFCs are regulated by multiple regulators; Insurance Companies- IRDA, Merchant Banks- SEBI, Micro Finance Institutions- State Government, RBI and NABARD.
- The norm of Public Sector Lending does not apply to NBFCs.
- The Cash Reserve Requirement also does not apply to NBFCs.
Indian Banks’ Association
- Indian Banks’ Association (IBA), formed on 26 September 1946 as a representative body of management of banking in India operating in India – an association of Indian banks and financial institutions based in Mumbai
- With an initial membership representing 22 banks in India in 1946, IBA currently represents 237 banking companies operating in India
- IBA was formed for development, coordination and strengthening of Indian banking, and assist the member banks in various ways including implementation of new systems and adoption of standards among the members
- Indian Banks’ Association is managed by a managing committee, and the current managing committee consists of one chairman, 3 deputy chairmen, 1 honorary secretary and 26 members
Debt Exchange Traded Funds (ETFs)
- Debt Exchange Traded Funds (ETFs) are simple investment products that allow the investors to take an exposure to the fixed income securities.
- These debt ETFs combine the benefits of debt investments with the flexibility of stock investment and the simplicity of mutual funds. These Debt ETFs trade on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at live market prices.
- Debt ETFs are passive investment instruments that are based on indices and invest in securities in same proportion as the underlying index. Because of its index mirroring property, there is a complete transparency on the holdings of an ETF.
- Further due to its unique structure and creation mechanism, the ETFs have much lower expense ratios as compared to mutual funds.