Banks for deduction on NPA provisioning

Public sector banks have sought deduction for provisioning for bad asset according to the Reserve Bank of India's (RBI's) regulations.

The proposal is being examined by the finance ministry in the run-up to Budget 2008-09. The banks have told Finance Minister P Chidambaram that there is a considerable divergence between the provisions made according to the RBI guidelines and the deductions allowed by the Income Tax Act.

They have suggested that the law may be amended to allow mandatory provision made by a bank or a financial institution according to the RBI guidelines as deduction and to tax any write-back of such provision.

Under the I-T Act, an amount not exceeding 7.5 per cent of total income computed by a certain formula is allowed as deduction. However, actual provisioning towards bad and doubtful assets is higher than the deduction allowed under the Act.

Banks have suggested that the present provision for bad and doubtful debts available under Section 36 of the Income Tax Act, 1961, may be replaced by an allowance based on provisioning according to the RBI guidelines.

Many public sector bankers were of the opinion that the regulatory compliance cost of commercial banks was very high compared with other financial intermediaries like mutual funds, which also mobilise public savings.

Banks have to maintain a statutory liquidity ratio of 25 per cent, a cash reserve ratio of 7.5 per cent and meet the priority sector lending target of 40 per cent of net bank credit. However, mutual funds do not have such obligations.

"The regulatory costs of banks should be reduced or similar provisions be made applicable to mutual funds also," said a top public sector banker.