On September 20th, 2019, the Finance Minister Nirmala Sitharaman announced Corporate Tax Cuts in order to stimulate the economy. While in our previous article, we have already discussed at length the impact of Tax Cuts on the Corporate Sector.
Let us now understand how this big step impacts the banks and the NBFC’s which are the lifelines of any economy.
Why was the Tax Cut important for these two sectors?
The Indian Banking Sector has been under serious challenges such as weak credit growth and burgeoning non-performing assets. While the Non -Banking Finance Companies (NBFC’s) have been trapped under liquidity crunch owing to the fear of default. The banks have been further unwilling to lend to the infrastructure and the heavy sector, which has subdued investments into the economy.
Therefore, in this scenario, it was important for the government to stimulate investments, revive demand and consumption, which would be possible only when the banks and the NBFC’s are in good health.
How will the two sectors be strengthened?
The basic idea behind any tax cut is to improve the earnings of any enterprise. Obviously, as the earnings recover, the companies would try and pass on these benefits to the consumers in the form of rate cuts. For instance, the automobile sector, which has been struggling for almost a year now, will definitely see a rise in demand. This will further strengthen the demand for auto loans, which will ultimately revive credit growth for both banks and the NBFC’s ahead of the festive season.
The rate cut will allow companies to expand their manufacturing capacity, which would further improve the role of banks and NBFC’s in providing manufacturing loans.
The IL&FS fiasco has put the NBFC sector under serious trouble. They have been under severe liquidity crises, and this move would enable them to improve liquidity and get rid of certain portion of their debt. The improved cash flows will also have a positive impact on the asset quality of the banks.
This move is expected to ignite investments. The rise in investments is certainly going to improve the profitability of the two sectors.
Who will be the major beneficiaries?
Tax Cuts will lead to a significant improvement in the after-tax profits of the bank. The State Bank of India would be the biggest gainer with a reduction in tax rate by 16% i.e. from 41.20% to 25.20%. Other major gainers include DCB Bank (35.80% to 25.20%), Bandhan Bank (35.20% to 25.20%), HDFC Bank (34.50% to 25.20%) and many more.
The tax cut would be a major step to resolve the ongoing liquidity crisis in the NBFC sector by improving the after-tax profits. Muthoot Finance would be the biggest gainer with a reduction in tax rate by 10.70% i.e. from 35.90% to 25.20%. Other major gainers include Bajaj Finance (35.30% to 25.20%), Shriram City Union (35% to 25.20%), Cholamandalam (34.90% to 25.20%) and many more.
The government’s endeavor to improve the capital base of banks and NBFC’s was commendable. The strengthening of the financial sector is the key to bolster the financial strength of an economy and would lift out the economy from distress and slowdown. Hence, the corporate tax slashing is indeed a welcome move.
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