.jpg?downsize=773:435 "Budget 2017: Banks Get Higher Tax Relief On Bad Loan Provisions")
In a bid to provide some relief to banks saddled with high levels of bad loans, Budget 2017 proposed to increase the allowable provision for non-performing assets (NPAs) by a percentage point to 8.5 percent.
In order to give a boost to banking sector, I propose to increaseallowable provision for non-performing asset from 7.5% to 8.5%. This willreduce the tax liability of banks.Arun Jaitley, Finance Minister, In Budget 2017 Speech
“Provisions made by banks for bad loans are not treated as expenditure,” said Abhishek Bhattacharya, director and co-head, banks at India Ratings & Research. “Previously, banks would have to pay income tax on these provisions, less 7.5 percent. This reduction has now been increased to 8.5 percent.”
The government also proposes to bring non-scheduled cooperative banks on a par with scheduled banks with respect to taxation on interest receivable on non-performing accounts. Now, non-scheduled cooperative banks will have to pay taxes on actual receipt of interest on NPAs, rather than on accrual basis.
The proposed amendment on increase in deduction available to Indian banks for provisions for bad and doubtful debt from 7.5 % to 8.5 % of adjusted total income and whereby non-scheduled co-operative banks are allowed to offer interest on sticky loans on receipt basis would certainly in addition to other measures introduced, help banking industry to strengthen their financial position.Sameer Gupta, Tax Leader - Financial Services, EY India
Bad loans across banks, and especially for government-owned lenders, surged after the Reserve Bank of India conducted an asset quality review in the second half of 2015. The central bank, in its Financial Stability Report, expects gross NPAs to rise to 9.8 percent by March 2017 from 9.1 percent at the end of September. By March next year, this number could rise even further to 10.1 percent.
Capital Infusion
As part of its Indradhanush programme, in Budget 2017, the government proposed to allocate Rs 10,000 crore towards recapitalisation of public sector banks. The government had committed to invest a total of Rs 70,000 crore over four years ending March 2019.
The government has committed to provide additional allocation when required.
“Our expectation was that the government would not provide growth capital, but would instead focus on giving banks bail-out capital. In terms of a planned road map, it is clear that nothing more is forthcoming. This is good because, good money should not chase bad,” said Bhattacharya.
India Ratings expects demand for additional tier-1 bonds to rise as banks look to raise funds to meet capital requirements.
Also Read: Budget 2017: No Increase In Allocation For Bank Recapitalisation
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