Banks seek tax sops for long-term FDs

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Mumbai: With depositors showing a distinct proclivity to park their funds in short-term fixed deposits, banks have moved the Finance Minister to consider suitable amendments to Section 80C of the Income Tax Act, 1961, so that long-term FDs become attractive.

In other words, banks want a level-playing field (vis-A-vis other eligible investments under Section 80C) so that they can step up mobilisation of long-term fixed deposits.

Parity with other savings instruments (u/s 80C) - employees provident fund, public provident fund, tax saving mutual funds, national savings scheme, infrastructure bonds, etc - is what banks are seeking for the long-term FDs garnered by them. They want the lock-in period on long-term FDs reduced from 5 to 3 years.

In order to provide liquidity, banks want to be able to grant loans against long-term FDs. Further, they want such deposits to be exempt from the purview of Tax Deducted at Source (TDS) and the maximum limit of savings under section 80C to be doubled to Rs 2 lakh so as to augment capital formation and provide tax relief to tax payers.

"Term deposits kept with banks for a period of 5 years or more are eligible for deduction under Section 80C of the Income-Tax Act. However, banks cannot grant loans against these deposits. Hence, liquidity is not available to depositors and this makes the scheme unattractive,"said a top banker who is in the know of the representation made by the Indian Banks’ Association.

According to a study by credit rating agency CARE, in 2008, deposits of over 5 years maturity accounted for only 15.4 per cent of the total FDs of scheduled commercial banks. A large chunk i.e. 47.6 per cent of the total FDs were of up to one year maturity. The proportion of FDs in the over 1 year to 3 years, and over 3 years to 5 years maturity buckets stood at 28.5 per cent and 8.5 per cent, respectively.

"In order to match higher credit demand, banks increased their focus on term deposits in FY07 and FY08 as it was difficult to fund high credit growth solely through growth in current account and savings account deposits. Banks have offered attractive interest rates on deposits with tenure of 1.5 years or less. Depositors were more inclined to park funds in short-term deposits as the spread between the long-term and short-term deposits had narrowed. This has changed the term deposit mix in favour of short-tenure deposits,"the rating agency said.

As on March 31, 2008, banks had 47.6 per cent of total deposits of up to one year maturity, while short-term (of up to one year duration) loans and advances were 38.1 per cent of the total loans and advances. However, mismatch arose in the case of deposits, and loans and advances of over 1 year duration.

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While on the liabilities side, 52.4 per cent of the total FDs had a maturity of over 1 year, on the assets side, 61.9 per cent of the total loans and advances had a maturity of over 1 year.

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