The Hindu Business Line : NPA provisioning: PSBs want IT waiver to be extended

PUBLIC sector banks have sought an extension of income tax exemptions for provisions on Non Performing Assets in a bid to limit their tax liabilities.

Presently banks are entitled to a 10 per cent exemption on provisions for NPAs under Section 36 (viia) of the Income Tax Act. This exemption, made in 2002, is due to expire in April 2005 and end with the assessment year 2004-05.

Bankers said that they had approached the Finance Ministry for extension of this exemption. Bankers are taxed at the rate of 32 per cent.

In addition, banks have also now become liable for service tax at the Centres and they are also expected to make stamp duty payments at the State level.

Bankers said that they had sought the extension in view of the changed conditions in the debt markets.

The banks this year would be expected to make large depreciation provisions for their securities in the marked-to-market category securities (held-for-trading and available-for-sale securities).

The depreciation provisions arise from the sharp fall in the price of government securities. The ten-year yield to maturity is currently 200 basis points higher than on March 31 .

Besides, bankers fear that the large loan recoveries they expected to make during the year would also be become liable for income tax.

Banks expect to recover an average of Rs 400 crore each of NPAs that were written off. These recoveries would be shown in the profit and loss account for the current year as extraordinary income.

Bankers said that they intended to use this extraordinary income for making additional floating provisions for their new NPAs or Non-Performing Investments (NPI) and for strengthening of their capital.

Bankers said that they needed the exemptions for making provisions on some of the NPIs, which include state government guaranteed securities.

So far, few banks have provided for provisions on such investments and have preferred recording the incomes on such investments on an accrual basis. On all other assets, the incomes are accounted for on a realised basis. Provisioning for such NPIs is due to begin from 2006 onwards under the Reserve Bank of India's (RBI) guidelines.

In addition, bankers said that they were also faced with a build-up of NPAs in the sub-Rs 10 lakh categories. Accordingly their provisioning liabilities were due to rise, impacting their capital-to-risk weighted asset ratios.

This was especially in a situation when most of the large banks were expected to migrate to the Basel II norms, which mandate the risk weighting to be done on a dynamic basis.

More Stories on : Non-Performing Assets | Public Sector Banks

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