Chidambaram to meet bank chiefs on Feb 6

Finance minister P Chidambaram will meet chiefs of public sector banks on Monday in the run-up to the budget. Among other things, the meeting will focus on the interest rate scenario, banking sources said.

Although the Reserve Bank of India has hiked short term reverse repo rate by 25 basis points in the quarterly review of monetary policy, state-owned banks have not raised their prime lending rates as yet as the finance ministry has been talking about reversal of interest rates by April.

Bankers are also pitching for tax sops for fixed deposits. Banks are of the view that investments in medium and long tenure deposits should be given some exemption from tax. At present, there is no tax relief for customers who invest in bank fixed deposits.

"Unless the depositors get some tax concessions on long term deposits, they will not keep funds with the banking system and we will suffer from resource crunch," said a senior banker. This is particularly significant as the system is witnessing phenomenal credit growth.

The financial services industry also wants tax authorities to give guidance on tax treatment that would be applicable for certain fund-based activities such as those carried out by the asset reconstruction companies

Banks want tax benefits on returns from security receipts issued by asset reconstruction companies (ARCs).

The rationale is, when an investor receives dividends that accrue from mutual fund investments are tax free. On the other hand, the returns on security receipts issued by ARCs are taxed.

Banks, however, want an exemption on these returns in the wake of the fact that ARCs have become functional now.

This will help in the development of ARCs in the country, said a source close to the development. Sources say that ARCs are relatively a new phenomenon in the country and the tax department so far has not explicitly indicated the tax implications for such entities.

Banks also want a separate tax treatment for losses coming out of consolidation.

"Typically when a bank acquires a weak banking entity, the former takes a hit on its financial performance because of huge losses taken on its book. So banks want some tax brakes to tackles such M&As effectively," sources said.