The tax breaks offered on bank term deposits of 5 years and above would be greatly welcomed by banks. About 15 per cent of the deposits in the banking system currently are in the above 5-year category.
Banks have been increasing their interest rates with a view to attracting long- term funds. This measure will provide a fillip to those efforts. Increasing exposure to housing sector (where loans are given for a 10 -15 year period) and more focus on infrastructure and project lending have forced banks to look for long-term funds.
Or else they would soon be running a serious asset-liability mismatch, since most of their deposits were short and medium-term.
The tax breaks given for NSC/PPF were often cited as impediments by banks in attracting long-term funds. The move to extend the tax break to them levels the field as it were.