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Banks NPA provisioning may need tax exemption
February, 27th 2008

Commercial banks could need tax exemption both on the NPA provisioning as well as reducing the lock-in period on the fixed deposits which is only available for deposits of over five years, according to analysts expectation from the Union Budget for the financial services sector.

Today, the law doesnt recognise provisions made by banks as per RBI norms, unless a loan is treated as a loss asset and fully written off. If granted, such a step would benefit banks by aligning their tax liabilities with book profits (effectively advancing recognition of deduction in respect of stressed assets), a note from Angel Broking on the banking sector said.

This (tax treatment on NPAs) has been one of the issues that have again been put forth to the finance minister and we hope it is resolved to benefit banks, the CMD of a PSU bank said.

Referring to the five-year fixed deposits offered by banks, a note from broking house Motilal Oswal notes that under the current disposition, the five-year clause provides a negative arbitrage opportunity for bank depositors while favouring mutual fund investors who invest for a period of three years. The anomaly needs to be removed and would be positive for the entire sector, the report said.

However a report from Emkay believes the Budget may not provide relief to banks on the request of setting right the negative arbitrage on bank fixed deposit vis-a-vis mutual fund.

The Motilal Oswal report also suggests the subvention on agriculture loans which is pegged at 2% be increased taking into consideration the rising cost of funds for the banking sector.

The subvention sees the government reimbursing part of the cost of the agriculture loan back to the banks to ensure loans to the farming sector are made more affordable.

Another area where analysts believe the relief should be given to commercial banks, notably PSU banks, relates to the extent of FII holding that is capped at 20%.

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