Business Standard

Raise tax exemption limit, banks tell FM

Lenders express concern on rising bad loans and recovery; demand 100% tax deduction on bad debt

BS Reporter New Delhi
In a pre-Budget meeting on Tuesday, banks and financial institutions have asked Finance Minister Arun Jaitley to increase the Rs 1-lakh deduction limit under Section 80C of the Income Tax Act in order to encourage household savings. They also expressed concerns on the deteriorating asset quality and constraints in recovering bad loans.

While banks suggested that medi-claim tax exemption limit be increased from Rs 15,000 to Rs 50,000 a year, the Life Insurance Corporation of India (LIC) asked for a separate deduction limit only for life insurance.

According to an executive present in the two-hour meeting, the finance minister — who was “more responsive” than his predecessors — asked his officials how much would the revenue loss be if the deduction limit was increased and how it could be bridged from other measures.

“Tax department officials said the exchequer loses Rs 31,000 crore a year on Rs 1 lakh deduction, and if the limit was increased to Rs 2 lakh, the loss would increase to Rs 62,000 crore, assuming all taxpayers availed the tax benefits,” said the executive quoted above.

According to a finance ministry statement, Jaitley told the representatives of the banks and financial institutions “we together need to steer the economy in the right direction”.

Listing of LIC

Banks also suggested diluting government stake in LIC by listing it on the bourses. The LIC chief reportedly said the issue comes up every year and listing the insurer had its own pros and cons.

“Listing of LIC can be a huge game-changer for the Indian financial system… I am not saying that this is an idea which necessarily needs to be in the July Budget, but over the next few years,” said Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Bank. He said this would give additional revenue to the government, while the Centre could continue to hold at least 51 per cent in LIC.

Ashvin Parekh, managing partner at Ashvin Parekh Advisory Services, said if LIC is made a corporate entity and listed, the corporate governance practices would also be restructured. According to him, the government will be required to infuse more funds into LIC since the mandatory capital it has would not be adequate.

According to the LIC Act, LIC policies carry ‘sovereign guarantee’, which means the policies are guaranteed by the Centre. The Act says the sum assured by all policies issued by the LIC, including any bonuses declared, will be guaranteed as payment in cash by the Centre.

Industry experts say although the government might continue to hold a 51 per cent stake in LIC, it is not clear whether the guarantee will continue to apply once it is listed.

Earlier reports by erstwhile insurance regulators and accounting firms said listing would help LIC have a level-playing field in the industry. However, before LIC hits the market with an initial public offering, the government should recapitalise the entity. According to the Insurance Regulatory and Development Authority, all insurance companies should have a minimum share capital of Rs 100 crore.

Bad loans

The issue of banks’ rising bad loans and their recovery was extensively discussed in the meeting. Banks asked for a 100 per cent tax deduction on provisions towards bad debt.

Naina Lal Kidwai, group general manager and country head at HSBC India, said more flexibility was needed to enable banks to recover assets. Some suggestions were also made for strengthening the present SARFAESI Act to ensure fast recovery of bad loans, she added.

The finance ministry might set up a National Asset Management Company (NAMC) to take over bad loans of banks, particularly in the infrastructure sector, and help revive sick units. As asset reconstruction companies are facing capital constraints in their efforts to recover loans, the banks will be stakeholders in NAMC. It can act as an aggregator of non-performing assets and clear stressed assets quickly from a consortium instead of the normal practice of a partial takeover.

Some banks asked the finance minister to give a statement in the Budget how public sector banks would be recapitalised. They also sought clarity on the government’s thinking with regard to dilution of stake in public sector banks below 51 per cent, as recommended by the P J Nayak committee.

“There were suggestions on recapitalisation of banks, financing of infrastructure. All the public sector banks need capital. There were issues about infrastructure lending because that is the need of the day,” said Rajiv Rishi, chairman and managing director, Central Bank of India.

Finance Industry Development Council, a representative body of all the asset financing NBFCs (non-banking financial companies), sought tax parity between banks and NBFCs. Besides, coverage of systemically important NBFCs under the SARFAESI Act needs to be given priority, said Raman Aggarwal, director, FIDC. Among the other suggestions are continuation of interest subvention scheme for investment lending in agriculture sector, insurance awareness be made part of corporate social responsibility, availability of cheaper credit to 100 mid-cap exporters, interest subsidy for solar power projects, and re-look at various provisions of New Companies Bill.

Kotak also suggested changes in the Rajiv Gandhi Equity Saving Scheme so as to encourage people to shift their savings from unproductive assets such as gold to equity market.

Economists give fiscal consolidation recipe

As Finance Minister Arun Jaitley looks for ways to ensure fiscal consolidation in the forthcoming Budget, a key economic advisor believes that subsidy bill could be cut by one per cent of GDP (gross domestic product) without causing much pain to the people.

"If there is political will, then one can easily cut down (subsidy) by one per cent of GDP without actually bringing  a lot of pain to the people," Principal Economic Advisor Ila Patnaik said at a Federation of Indian Chambers of Commerce and Industry (Ficci) meet in New Delhi on Tuesday.  She said fiscal consolidation was not that hard, but economic slowdown and high inflation had made it a difficult task. Economists also pressed for rationalising subsidies at their interactions with Jaitley.

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First Published: Jun 11 2014 | 12:50 AM IST

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