Give tax sops, incentives for savings, to attract small deposits, Bankers ask FM

"We have demanded to incentivise the domestic savings to reinvigorate the domestic demand. Laying a roadmap for banking sector through clear and tangible signposts is vital
– Arundhati Bhattacharya, chairman, State Bank of India

"The savings and investment climate of the country will improve (post Budget). The limit for tax-free bonds may be enhanced so that more investors can participate. There will be reforms in infrastructure, power and road sectors so that investments can flow into the sectors after which banks can see quality demand for credit"

– Vijayalakshmi Iyer, CMD, Bank of India

Lakhs of depositors in the country will have reason to cheer if the government pays heed to banks' demand of hiking the threshold on tax deduction at source (TDS) on interest earned on deposits from the present Rs 10,000 to Rs 25,000. Surely, it will also give a big boost to banks' efforts to mop up deposits.

At present, bank depositors have to pay TDS if they earn an interest of Rs 10,000 and above on their deposits. "The limit of Rs 10,000 was fixed a long time and that it needs to be hiked to a higher limit. Ideally, it needs to be linked to inflation," says a senior banker.

Arundhati Bhattacharya, chairman, State Bank of India (SBI), told dna, "We have demanded to incentivise the domestic savings to reinvigorate the domestic demand. Laying a roadmap for banking sector through clear and tangible signposts is vital."

Banks pay deposit insurance premium to Deposit Insurance Corporation (DIC), which protects all depositors money up to Rs 1 lakh of all commercial banks, both public and private. Banks pay a service tax of 12.36% on the deposit insurance premium. Bankers say it is unfair to tax them on the premium they fork out for protection of depositors.

Vijayalakshmi Iyer, chairman and managing director, Bank of India, told dna, "The savings and investment climate of the country will improve (post Budget). The limit for tax-free bonds may be enhanced so that more investors can participate. There will be reforms in infrastructure, power and road sectors so that investments can flow into the sectors after which banks can see quality demand for credit. There will be an improvement in the investment climate so that foreign institutional and foreign direct investments can flow into the country."

The provisions or the capital that banks keep aside for bad loans are also taxed under income-tax. Bankers have requested that provisions which are made according to the RBI prescription to be kept outside the ambit of income tax.

They argue it is idle money which is kept aside as a buffer to comply with the regulatory stipulations, and banks do not earn any money on it.

A banker said, "Any provisions over and above the regulatory provisions can be taxed. Or else, banks will make high provisions and enjoy tax benefits but on regulatory mandated there should be tax exemptions."

M V Tanksale, chief executive officer, Indian Banks Association (IBA), told dna, "Under the aegis of the IBA, we have asked for rationalisation on both the direct and indirect taxes. Rationalisation of income tax provisions and strengthening the debt recovery tribunals (DRTs) are other demands we have put forward to the government."

All commissions that banks earn have a TDS. Bankers have also demanded for tax exemption on certain commissions so that the other income or the non-core income are not adversely impacted. For example, banks have been demanding exemption on foreign bank charges that is collections charged on export documents and certain other commissions that banks pay.

"All banks anyway pay advance taxes so we have demanded for certain tax exemptions so that our bottom lines are not impacted," said a banker associated with charting of the demands from the sector.

"On a broader perspective, our expectation is also on quality fiscal consolidation through better pruning of non-plan expenditure, but more robust capital expenditure. And laying a roadmap for banking sector through clear tangible signposts," said Bhattacharya.

Ratings agency Icra in a report said the budget will provide public sector banks (PSBs) with a roadmap to adequate capitalisation over 2015-19. For PSBs eligible for additional government equity, adequate budgetary allocations could be made so that an estimated Rs 2 lakh crore-plus could be accessed over 2015-19. For PSBs ineligible for such equity infusion, enablers may be created (for example, provision to issue non-voting shares, etc) so that they can raise an estimated Rs 2 lakh crore from the market over the same period. Announcement on setting up a 'bad bank' or any other mechanism to reduce vulnerable advances of PSBs (gross NPAs plus standard restructured advances), which were relatively high at around 11% as on March 31, 2014.

Some of the other measures include launch of affordable urban housing schemes to improve inclusive growth and the income-tax amendments to provide tax reliefs to non banking finance companies at par with banks.

Taxation issues do pertain to securitisation transaction. The sale of bad loans to asset reconstruction companies (ARCs) can be written back to the profit & loss book, but banks want this to be tax-exempt.

Raising capital will be critical for most banks as the sector opens up for more competition with new bank licences, payment banks and insurance companies setting up shop. It is expected that the government will open avenues for banks to raise funds from the markets in view of increased competition.

With this in mind, the government is expected to bring about several changes in the banking space with a clear focus on asset recovery, and a roadmap for capital raising, among others, apart from concrete steps to revive capital expenditure.