The government is studying a proposal to waive taxes on the provisioning of non-performing assets (NPA) by banks, especially on farm sector lending. At present, NPA provisioning is taxed at the rate of 30% (net of surcharge), which is the corporate tax rate.
The finance ministry is likely to announce a liberal subsidy to settle NPAs that have arisen in the ailing farm sector, effectively bringing down their tax rate. Government sources said finance minister P Chidambaram could make an announcement to this effect in Budget 2008-09.
Banks may also be allowed a one-time settlement of NPAs in the rural sector. The Radhakrishna Committee, in its report, recommended that an agriculture package of Rs 1 lakh crore be directed at the farm sector. However, an official source said, ?The government is planning to provide all financial assistance to the farm sector, but the proposal to direct Rs 1 lakh crore at the farm sector may not be accepted.?
Banks have seen a marked increase in the gross NPA level in the last couple of years. This is primarily due to rising interest rates. Public sector banks had a gross NPA of 2.6% as of September 2007. The net NPA was 1.05%. A large part of that came about after farmers failed to make repayments in 2006-07 due to crop failure. Though sources said NPA levels are not alarming, bank chiefs are under pressure to bring them down.
According to a Fitch report, it is difficult to assess whether there would be an improvement in the NPA level, especially as the operating environment has become challenging with rising interest rates and loans starting to season. ?It is perhaps more likely that NPAs would continue to rise gradually and specific loan loss provisions would need to be stepped up,? the report added.
Meanwhile, sources said the finance ministry would try and expand the coverage of the National Agriculture Insurance Scheme. Only 16% of the country?s farmers are covered under the scheme. The finer points of the programme are to be finalised after consulting state governments, which bear part of the Rs 300-crore cost.
