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C. Shivkumar

Bangalore , Jan. 10

PUBLIC sector banks are unlikely to be impacted by the sunset clause in the Income-Tax Act on provisions for non-performing assets.

Under Section 36 (I, vii-a ) of the IT Act, bankers were allowed an income tax deduction of up to 10 per cent on their provisions for NPAs. This clause introduced in 2002 was close ended and is due to expire March 31 this year, implying that it would be available only for the assessment year 2004-05. Bankers said that the sunset clause would mean that the tax exemption on provisions for NPAs would reduce to 5 per cent.

But bankers said that a few PSU banks were already taking exemption under another proviso of Section 36 which provided for a deduction of 10 per cent of the aggregate rural lending and 7.5 per cent of the profits from agricultural lending. Bankers said that as a result only a few banks would be impacted by the sunset clause.

A handful of PSU banks and new generation private sector banks with low farm loan portfolios were likely to be impacted.

This was partly because most public sector banks have a large farm lending asset base and they have aggressively expanded this base during the last three years to take advantage of the clause. For most public sector banks, agricultural lending comprises a substantial chunk under the priority sector advances.

Farm lending has outstripped retail to become the fastest growing segment. Farm loans have jumped this year by over 24 per cent.

Bankers said that their tax liability would increase on the basis of the loan recoveries taking place this financial year. The average recovery expected this year of past NPAs is expected to be at least Rs 400 crore each.

This figure alone is expected to substantially help in boosting the bottom lines of the banks, though this would also simultaneously contribute towards escalating the tax liability.

Consequently many of the bankers have now switched to farm lending, and are rapidly pushing up farm loan portfolios to help bring down their tax liabilities, the sources said. Bankers said that this was also one of the major factors that contributed to high credit deposit ratios currently.

Average CD ratios of banks were currently about 64 per cent. Most banks were increasingly lending from their recoveries to the farm sector for setting off some of their tax liabilities.

At the same time bankers have also moved the Finance Ministry for seeking deferral of the sunset clause for provisioning of non-performing assets. This is necessary since a couple of PSU banks still fall short of the industry average NPA coverage ratios.

Most public sector banks presently have a NPA coverage ratio of over 75 per cent. This implied that banks' provision covered 75 per cent of their NPAs, bringing down their net NPAs to less than 2 per cent.

However, if the tax deduction were withdrawn in line with the deadline, bankers said the weak PSU banks would suffer leading to a further delay in their balance sheet correction.

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