RUN-UP TO THE BUDGET: BANKING. Locked capital needs to be freed

Faced with rising bad loans, increased provisioning requirements, and a consequent pressure on capital, banks want the government to do them a good turn in the upcoming Budget by suitably tweaking the Income-Tax Act to alleviate their problems.

Among others, they want bad loan provisions to be allowed fully as deduction and the amount withdrawn from the special reserve to be exempted from tax after a specified period. Banks have made this pitch in the backdrop of their bottomlines being hit due to loan loss provisioning and the government facing constraints in recapitalising the state-owned banks.

Currently, the Income-Tax Act, 1961, restricts deduction for bad and doubtful debts up to 7.5 per cent of the total income plus 10 per cent of the aggregate average advances made by a bank’s rural branches.

A public sector banker said that as banks regularly report the provisions made in their books of accounts to the Reserve Bank of India, the bad loans provisioning should be allowed in full for computing profits in the year of making the provisions.

In case the government does not agree to this, bankers have suggested an alternative — the deduction should be stepped up to 15 per cent (instead of the existing 10) of the aggregate average advances made by the rural branches of a bank. They are of the view that this will motivate banks to focus more on priority sector lending, a thrust area for the government.

Banks want the I-T Act to specify that the amount withdrawn from the special reserve, created and maintained by them to provide long-term finance for eligible business, after a specified lock-in period of, say, five years will not be subject to tax.

Currently, for any special reserve created and maintained by banks, an amount not exceeding 20 per cent of the profits derived from eligible business (of providing long-term finance) is carried to such a reserve account.

The amount transferred to the reserve account can be withdrawn, but will be taxed. So, profitability of banks gets hit, lowering the capital funds considered for computing capital adequacy.

This has resulted in banks retaining the amounts in perpetuity, long after the purpose for which the loan was granted has been fulfilled. The release of such capital will benefit the economy.

To make the most of their recovery efforts, banks want transfer of immovable properties in the case of bad loans to be exempted for the 1 per cent tax deducted at source (TDS).

Currently, when banks sell mortgaged properties to recover loan arrears, 1 per cent TDS is made by the buyer, resulting in lower recovery of arrears.

To make fixed deposits more attractive and at par with equity-linked savings schemes and mutual funds, banks want the lock-in period on deposits eligible for tax savings under Section 80C of the I-T Act to be reduced to three years from five.

Under Section 80C, premiums towards life insurance and unit-linked insurance plans, subscriptions to Public Provident Fund, investments in National Savings Certificate and Equity Linked Savings Schemes, and repayments of the principal amount in a home loan, qualify for deduction (up to a maximum ₹1.5 lakh) from a tax payer’s gross total income — that is the tax liability can be reduced by ₹1.5 lakh.

They have also suggested that the limit for fixed deposits under Section 80C be upped from ₹1 lakh to ₹1.50 lakh.

Further, they want the limit for TDS on interest from term deposits upped from ₹10,000 to ₹50,000. Currently, banks are required to deduct TDS at 10 per cent in case the interest payable on deposits exceeds ₹10,000 in a year.

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