With the capital adequacy of public sector banks (PSBs) being robust now, the government may not require to infuse fresh capital into them for the second year in a row. Given the early signs of new investments in manufacturing and buoyant credit flows, the PSBs will not hopefully need such succour from the government in the coming years as well.
Recapitalisation of PSBs had become for a norm for a few years to FY22 owing to the “twin balance sheet crisis” and rise in banks’ NPA levels. The government had provided Rs 20,000 crore each to help PSBs shore up their capital base in FY21 and FY22. Given their improved financials, banks are now in a position to raise capital from the markets themselves. However, the Budget FY24 may provide a tidy sum to bolster the capital base of public-sector general insurance firms.
Meanwhile, banks, which have been promised incentives worth Rs 2,600 crore for the promotion of RuPay Debit Cards and low-value BHIM-UPI transactions for the current financial year, are looking for more tax sops. They have sought extension of beneficial rate of 5% to interest income received by non-residents from investment in government securities (G-secs), which is currently available to foreign portfolio investors (FPI). The recommendation is made by the Indian Banks Association (IBA) to the government ahead of the Union Budget 2023, along with a list of other tax related suggestions that might aid the banking sector.
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The government along with the Reserve Bank of India
Currently, FPIs are charged concessional rate of 5% on investments in G-secs under section 115AD of the Income Tax Act. The gains made by NRIs from investment in G-secs is charged in the range of 10-20%. The concessional tax treatment to NRIs for investments made under FAR shall increase its attractiveness among investors, it said.
“This would level the playing field for non-residents not registered as FPIs, who wish to invest in these specified G-secs. This would also attract a new set of non-resident investors to invest in Indian G-secs through the ICSD platform,” it said.
Among other things, IBA has also sought clarity on bad debts on credit cards business as it is leading to difference of opinion between lenders and the income tax authorities. The assessing officers of the income tax department classify credit card business as non-banking activity and are not allowing the deduction on non-performing assets (NPAs) in the segment.
“Banking industry was expecting some clarification on this point in present Budget. However, it remained untouched,” the association said.
Overall credit card spending declined 12.4% to Rs 11.5 trillion in November, sharply lower than Rs 1.29 trillion a month ago, as per latest data from the Reserve Bank of India (RBI), while in volume terms transaction declined 8% in November to 235.1 million. The gross NPA ratio of the entire banking system fell to a seven-year low of 5% as of September 30 while the net NPA ratio declined to ten-year low of 1.3%, as per a central bank report.
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The IBA has also sought full deduction on provisions made on bad, doubtful and standard assets. Currently, banks are not allowed to claim full provision made on bad and doubtful debts. The tax department has capped deduction on provisions on bad and doubtful assets at 8.5% of total income of the bank. The rules drafted by CBDT also need to be changed as per existing framework. While the banks are required to recognise delinquent assets as per 90-day regime, the tax rules require them to calculate provisions as per old rules, recognising bad loans after 180 days.
Banks have also sought clarity on income from perpetual bonds, which is another point of contention between banks and the taxman. The interest paid by the lenders on perpetual bonds to the bond holders are treated as dividend. IBA has also sought lower tax slab for foreign banks. While domestic banks have a lower rate of 22%, branches of foreign banks are taxed at the base rate of 40%, creating significant disparity between Indian and foreign banks, IBA said.