Budget 2017: Banks seek tax balm to ease NPA pain

Banks have asked the government for lower taxes in the Budget and to compensate them for their efforts on financial inclusion. They have also demanded tax exemption on provisions against bad loans to be made 100%.

At present, only 7.5% of the capital set aside for NPAs and 10% of the rural advances can be deducted from the gross income of the bank while all other earnings are taxable.

A senior banker said, "Flat exemption of this order is unfair as banks have to keep aside capital for regulatory requirements like the cash reserve ratio where they earn no interest and also keep aside capital for bad loans to preserve the stability of the financial sector. So for this, the banks should be treated differently for tax purposes."

As per the Reserve Bank of India (RBI) guidelines, banks have to set aside 4% of their total deposits (current accounts, savings accounts and fixed deposits) as a cash reserve ratio with the central bank without earning any interest. Another 20.75% of bank deposits have to be invested in government bonds and 40% of their total bank loans have to be given as rural advances. Besides, they also have to set aside money against bad loans. In a low credit growth (around 4% for the banking system) and high bad loan scenario (10% of advances), as is the case with many banks, the taxes are often misdirected, according to bankers, as there are no profits to be taxed.

When the principal or interest component is unpaid for 90 days, a loan is termed as a non-performing asset (NPA) with 15% provision. If it is unpaid for a year, it becomes a substandard loan attracting 25% provision. And two years of no repayment from the date of the being classified an NPA turns a loan into a doubtful asset, calling for a 40% provision. Within a year, it becomes a loss account requiring 100% provision if the bank isn't able to get any repayment.

NPAs of banks have almost doubled in the last 15 months. From Rs 3,40,556 crore in September 2015, bad loans have risen to Rs 6,68,825 crore in September 2016, according to data from the RBI. A minimum of 15% of this total NPAs has to be kept aside as provision and banks are forced to pay taxes on this.

Banks have also said that they should be kept outside the purview of the Minimum Alternate Tax (MAT), especially when they are making losses. MAT is a tax to be paid by companies not on their profits but on their gross turnover and is targeted at companies who do not pay any taxes.

0f the loss-making lenders were forced to pay MAT. Banks compute two income statements; one is the corporate tax where they pay 34% tax just as any company and the other is MAT, which is at 18%. The higher of the two has to be paid as tax by the banks. So, when the lenders were making losses, the income tax department demanded MAT as the corporate tax was lower.

A senior banker said, "All the government schemes like financial inclusion, demonetization are run by the banks, and quite efficiently. There is a cost involved for which banks should be adequately compensated if they have to turn profitable. The 100% cash reserve ratio (CRR) requirement in September 2016 cost the banking system about Rs 1,500 crore of losses as the money was impounded by the central bank as reserves without any interest."