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C. Shivkumar

BANGALORE, Dec. 15

HERE is a reason for the taxman to smile this year. Corporate tax receipts from the banks and financial institutions sector are expected to show a hefty increase this fiscal.

One of the major reasons why banks are likely to pay large taxes is the phenomenal pace of bad loan recoveries, with the aggressive pursuit of defaulters under the provisions of the Securitisation Ordinance. Banks are estimated to make bad loan recoveries of at least Rs 34,000 crore this fiscal.

During the last few years, most banks and financial institutions have been claiming exemptions, due to large provisioning and write-offs of bad loans. Recoveries of these bad loans consequently imply that some of these provisions would have to be written back into the balance sheet. Bankers say that this component would be recognised as other income in their profit and loss account. Estimates of tax payments by the banking sector as a result of such an extraordinary income is upwards of Rs 5,000 crore.

But bankers prefer to err on the side of caution in making such projections. "These are estimates, and not ceilings. Tax liabilities could be higher, other things remaining equal," says Mr Michael Bastin, Chairman and Managing Director of Syndicate Bank.

There are two components to bad loan recoveries. One is the principal recovery. Some of the banks had completely written of the principal by making full provisions for non-performing assets (NPA). On this entire write-off, almost all the banks and the financial institutions have claimed full tax exemptions.

The second component, interest portion, has not been recognised due to non-payment of debt servicing dues, though the principal has not been written off. This is because accounting is done on a realised basis. With the exception of sovereign guaranteed and State Government guaranteed debts, incomes are not recognised.

In areas where the defaults have taken place, and treated as substandard assets, only 50 per cent provisions have been made. "Wherever such provisions have been made, we have claimed tax exemptions," explained Mr K V Hegde, General Manager - Investments of Canara Bank.

Since some of substandard assets have been now rescheduled and rehabilitated as standard assets, the provisions would have to be written back. "So whatever exemptions we have claimed on these accounts in the past, we are paying it back," said Mr M.S. Kapur, Chairman and Managing Director of Vijaya Bank.

But not all banks had written of all bad loans. Some amount of balance sheet management was also done. Some had gone for large one-time write-offs. This was possible in view of balance sheet size. Besides, these banks had large profits to absorb such one-time write-offs. Such large write-offs were made to limit tax outflows.

Others had done it in stages on the basis of their profits and their tax liabilities. These banks had opted to show low profits instead of losses due to large write-offs. Consequently, banking sources said the highest tax liabilities was likely from banks of the former category, who would now have to write back all the full provisions. The latter banks would be writing back only a small component of provisions. But along with bad loan recoveries, banks and financial institutions this year have also booked hefty profits on trading to offset fall in income due to negative credit growth and the exact tax liability on this count is still being worked out.

The sources said taxes were not the only receipts likely to show increases for the Government this year. The Securitisation Ordinance was likely to see a hefty increase in dividend receipts, with the increase in income, and profitability. This is expected over and above the budgeted Rs 10,761.64 crore.

At the time of making these estimates, neither the Securitisation Ordinance nor the falls in yields to such lows were anticipated. Accordingly one banker quipped, "If NPA recoveries have helped us, the greater beneficiary is the Government, which is our largest equityholder."

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