Bankers bat for tax break on bad loans, deposits

Pitch for tax-free infrastructure bonds

Sensing a possible rate pause by the Reserve Bank of India (RBI) on January 24 policy review, top bankers, on Thursday, urged the government to offer tax breaks on bank deposits and bad loans, and ease rules on foreign currency loans to boost liquidity and spur economic growth.

Liquidity tightness and high borrowing costs was choking companies’ profit margins and deferring the much-needed investment in Asia’s third largest economy. In a pre-budget meeting with Finance Minister Pranab Mukherjee, bankers urged the government to take steps to ease liquidity by making deposits more attractive and luring foreign currency loans.   “We are seeking level playing field with all debt instruments. Bank deposit interest beyond 3 years should be given status of capital and exempt from capital gains tax,” State Bank of India Chairman Pratip Chaudhuri said after the meeting. “In our country, only 1/3 of savings come to the bank. In India, the bank deposit to GDP ratio in India is very low at 45 per cent. If the bank credit to GDP ratio goes up it will lead to higher output, employment and taxes,” he said.

  Non-banking finance companies also sought tax breaks on loans and NPAs. NBFC's deduct tax at source on instalment of borrowers under a Section 194A of Income Tax Act, whereas banks, LIC or UTI are exempted. “NBFCs should also get exemption under Section 194A,” said Raman Aggarwal, Director of Finance Industry Development Council and an official of SREI Infrastructure Finance. The head of country’s top lender also sought tax breaks on provisioning for non-performing assets. “Whatever loan loss provisions we make, so long as they are in conformity with what RBI prescribes as the prudent provisioning, that amount should be fully allowed for deduction. But there are overall cap of 7.5 per cent of the total loans and interest and so many others. That should be done away with and made simple.” Chaudhuri said.

He also added that the rules for foreign currency convertible borrowing should be eased to attract more capital into the country.

Lenders were unanimous on a no change in rates at RBI's policy review on Jan 24. “RBI wants inflation to be stumped out totally. I am not hopeful (on rate cuts),” SBI’s Chaudhuri said. Indian Overseas Bank Chairman M Narendra said that there may not be even a cut in cash reserve ratio.

Commercial banks also made a pitch to issue tax free infrastructure bonds, saying this would help mobilise greater resources for infrastructure development in the country.
Chairpersons and managing directors of banks and financial institutions urged the finance minister to provide “special incentives for investors” to invest in infrastructure bonds.

“The requirement for special incentives for investors to invest in infrastructure bonds was highlighted.” They also suggested that a single window clearance system should be put in place for infrastructure sector.