Cooperative banks will soon enjoy the benefit of tax breaks on mergers and acquisitions. Finance minister P Chidambaram, who signalled governments intention to extend tax benefits to these banks at par with other banking companies will introduce the relevant amendments in the finance bill 2007, said a senior government official.

The tax break will be in the form of a set off of the carry forward losses of the amalgamating company with the amalgamated company. The incentive is expected to accelerate the process of voluntary acquisition of weak UCBs by the stronger ones.

There are around 1,830 UCBs in the country, of which around 670 banks are in the Grade III and Grade IV category. Over the last couple of years, around a dozen strong banks such as Sarawat Bank, Cosmos Bank, Sham Rao Vittal Cooperative bank, have been on an acquisition spree. These banks took recourse to this route to expand their network, following RBIs ban to grant fresh branch licenses.

The ban has now been lifted, with the RBI indicating that branch licenses will be given to well managed and financially sound UCBs in states that have signed MoUs, subject to certain norms. Nine state governments including Maharashtra, which has the largest number of UCBs, have signed an MoU with the banking regulator.

We plan to ask RBI to grant one or two branch licenses every year. Strong banks can continue expanding their network through acquisitions and the tax breaks will speed up this process, said All India Federation of Urban Cooperative Banks CEO D Krishna. He reckons that lifting the ban on branch licenses for UCBs will not impact mergers.

Profit making UCBs have been paying income tax from FY06. The government has proposed allowing these banks to claim a tax deduction on the provisions made towards bad and doubtful assets in the finance Bill 2007. The Bill is slated to be considered by Parliament shortly.

Meanwhile, RBI too has announced a few measures this week which would help UCBs improve their performance. The most significant one is the decision to extend the relaxed prudential norms for tier I and tier II banks by one more year (till March 2007).

This means tier I banks, single branch banks and multi-branch banks operating within a single district with deposits up to Rs 100 crore, can classify a loan that is overdue for more than 180 days as a non-performing asset (against the 90 days delinquency norm). The relaxed prudential norms will enable UCBs to make a lower provision for NPAs. This, in turn, will improve their profitability.