Published Editorial

Budget 2013: FM perfects the tightrope walk, balances banking sector expectations

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Tejas Desai and Jaiman Patel

Senior tax professionals
Ernst & Young

The banking sector garnered a fair share of spotlight in the Union Budget 2013-14 presented in Parliament.

Expressing the need to strengthen the financial services sector and to meet the stringent requirements under the BASEL III norms, a capital infusion of Rs. 14,000 crore in public sector banks has been proposed. Taking into account the wide network of bank branches and the low penetration of insurance in the country, banks have been permitted to act as insurance brokers. Further, the farm loan scheme has been extended to private sector banks which will help them achieve their priority sector lending targets.
The Finance Minister, in what could be termed as the stand out proposition in the Union Budget, has proposed to set up India's first Women's Bank as a public sector bank that exclusively serves women and will be run predominantly by women. An initial capital of Rs. 1,000 crore is proposed to be allotted for this purpose.
Currently, interest paid on loan for a self-occupied property up to Rs. 1,50,000 is allowed as deduction from total income of taxpayer. In order to provide a fillip to the housing sector, the FM has increased the amount of permissible deduction by Rs. 1,00,000 over and above the existing limit for loans granted by banks not exceeding Rs. 25 lakh availed in financial year 2013-14. The scheme comes with the condition that the value of the house should not exceed Rs. 40 lakh and the taxpayer should not own any residential house on the date of sanction of the loan. This is also expected to boost the demand for housing loans in the banking sector.
In a stressed environment, asset reconstruction companies create significant value by acquiring non-performing assets (NPAs) from banks and financial institutions, and then by recovering such NPAs. The Budget clarified that income earned by securitization of trusts shall be exempt from tax, which would be levied only at the time of distribution of income by such trusts. This clarification shall be welcomed by the banking sector.
The Budget has also clarified that no distinction is to be made for provisions for rural advances and urban advances under section 36(1)(viia).
Currently, the amount of bad debts written off to the extent it exceeds the credit balance in the provision for NPAs made under section 36(1)(viia), is allowed as a deduction. In this connection, the Supreme Court recently held in the case of Catholic Syrian Bank Ltd, that if the write-off is in respect of urban advances then the provision made in respect of rural advances cannot be reduced from such a write-off. 
Therefore, for a taxpayer to whom section 36(1)(viia) applies, the amount of deduction in respect of the bad debts actually written off shall be limited to the amount by which such debts exceeds the credit balance in the provision for NPAs account made under section 36(1)(viia) without any distinction between rural advances and other advances.
While some of the proposals listed above would have a positive effect on the banking sector, overall the budget appears to have evoked mixed reactions from the banking industry, if the bank index of the stock exchange is anything to go by.
(The views expressed here are personal.)