New Delhi/Mumbai: Indian banks are hoping they get the government’s nod to issue tax-free infrastructure bonds and some a tax concession for 2011-12.
Public sector banks are also looking for the finer details of the government’s capital infusion plans, which will boost capital adequacy and raise the government’s stake to 58% in many.
Currently only Industrial Finance Corp, Life Insurance Corp, Infrastructure Development Finance and some other non-banking infrastructure finance firms are allowed to issue tax-free bonds.
The lucrative tax-free bonds are a hit with investors, and with India’s push for fast infrastructure growth, banks sense a huge opportunity.
Government plans to spend $1.5 trillion over a decade to overhaul its creaky infrastructure and bring the power supply, pot-holed roads and crowded railway network up to speed with the aspirations of one of the world’s fastest growing economies.
“In the infrastructure sector, there is a problem of funding. So how to intensify the banks in terms of higher amounts of allocation for the sector (should be addressed in the budget),” M.Narendra, chairman at state-run Indian Overseas Bank told Reuters.
It will provide greater funding flexibility and better asset and liability management for banks and will benefit those with higher infrastructure exposures such as ICICI Bank , Punjab National Bank, Axis Bank , Yes Bank and Kotak Mahindra Bank, Citigroup analysts wrote in a note.
Indian banks can currently claim a tax levy only on 7.5% of the money they set aside for sour loans, but with increased pressure from various quarters, the government may decide to raise the limit to as much as 50%, bankers and analysts said.
“It makes sense,” said Vaibhav Agrawal, an analyst with Angel Broking. He explained that having a better tax structure, instead of an arbitrary percentage figure, will be benefit banks.
A reduction in effective tax rates will be a positive for all, particularly State Bank of India , the nations’ top lender, Citigroup said.
Banks are also expecting a doubling of tax-free investment limit to Rs200,000 that will increase deposit mobilisation, and a shrinking of the lock-in period to 3 years from five will put fixed deposits at par with equity-linked savings schemes, Angel Broking said in a pre-budget note.
Indian banks will also keenly watch the fiscal deficit figure - seen at around 4.8% of gross domestic product according to a Reuters poll.