Budget 2017: Economy

Co-operative banks to reap huge benefits

: Extension of exemptions enjoyed by banks on non-performing assets (NPAs) to co-operative banks and other specified institutions are likely to benefit the co-operative sector, analysts said.

The gross NPA of scheduled commercial banks have increased from ₹3,125.74 billion as on March 31, 2015 to ₹5,961.42 billion as on March 31, 2016.

Currently, under the Income Tax Act, interest income earned by scheduled banks, public sector financial institutions and some specified corporations and companies are taxable in the year when such interest is credited to profit and loss account or when it is realized, whichever is earlier.

The accounting standards do not require such entities to recognize interest on NPAs until such time it is received. Therefore tax is not chargeable on such interest on accrual basis but only charged on actual realization. Now this has been extended to the co-operative sector.

“With this proposal in the Finance Bill 2017, the co-operative banks which have been reeling under massive bad and doubtful debts will get a substantial relief on par with scheduled banks,” said Riaz Thingna, Director, Grant Thornton Advisory Private Limited.

In addition to this, the Finance Bill also proposes to enhance the limit of allowable provision of doubtful debts from 7.5 to 8.5%.

Presently banks including co-operative banks and other specified institutions allowed deduction in respect of any provision of bad and doubtful debts to the extent of 7.5% of its gross total income.

However, Mr. Thingna said, in view of the large quantum of NPAs, this limited deduction not been found to be sufficient for banks to clean up their balance sheet and improve the liquidity of banks by reducing their tax liability.

Mr Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA said that this proposal is expected to reduce tax liability and cash outflow from the banks going forward, which could be used for incremental lending, the impact on the return on assets and equity though positive is expected to be quite marginal.

In general, the Finance Bill 2017 has been particularly focused on the financial services sector both on the regulatory front as well as direct tax front. Some important policies, reforms in the tax provision which will particularly incentivise the sector.

“While we await the details, the Government's plan to introduce legislative changes or a new law to confiscate the assets of errant borrowers is credit positive and should aid the lenders in their recovery measures and help reduce the stock of impaired assets that currently plague the banking system,” Mr. Srinivasan added.

Banking sector is having huge amount of NPAs and it is in dire need of improving its capitalization. To address some of these problems faced by the sector a few critical direct tax proposals have been introduced in the Finance Bill 2017.

Some important policy reforms in the tax provisions which will incentivise the sector are: extending concessional withholding tax rate of 5% on the interest earned by specified foreign entities issued for external commercial borrowings or bonds and G-Sec and Masala bonds ; enhanced deductibility of provision for NPAs of banks (including non-scheduled cooperative banks) from 7.5 to 8.5% and reduction in corporate tax rate to 25% for MSME companies.

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Printable version | Jun 11, 2021 5:25:35 PM | https://www.thehindu.com/business/Co-operative-banks-to-reap-huge-benefits/article17129603.ece

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