Mumbai: The government should do away with tax-related benefits and other incentives for special deposit schemes, as they constrain deposit mobilisation efforts of banks, the Reserve Bank of India has said.

The special deposit schemes announced by the government from time to time hamper banks' efforts to garner funds from the public, the RBI said in its `Report on Currency and Finance.'

''The policy anomaly arising out of tax benefits needs to be removed to provide banks a level-playing field," the report said.

The RBI report also cited other operational constraints of banks that are often subjected to various regulatory requirements, such as directed learning, prudential regulations and limits on capital market exposures, whereas non-bank bodies do not face such restrictions.

''While these measures promote financial stability, they constrain the diversification opportunities thrown by a developing financial system," it said.

The non-bank institutions, the report said, also enjoy the advantage of having a leaner cost structure and can quickly adopt new technology to offer higher returns to investors.

Non-bank intermediaries like brokerages, asset management firms and MF firms also offer specialised services like cash management and wealth management for various investors, including high networth individuals, it said.

The RBI report also stressed that with sinkage of the traditional deposit base, the banks need ''to extend their outreach to prospective depositors/investors by expanding the ambit of specialised financial services offered by them by repackaging and re-designing of products to suit individual needs".

''The substitution of funds, particularly, in favour of units of mutual funds during the latter part of the 1980s and the early 1990s, to some extent, was facilitated by the availability of tax benefits under Section 80M of the Income Tax Act. Under this section, the dividend received by the companies was exempted from the income tax so long as the dividend paid by them was more than the dividend received'', the report pointed out.

Apart from corporates, individual investors were also attracted to units of mutual funds which offered tax sops. In addition to UTI, as many as 21 new mutual funds were set up between 1987-88 and 1995-96, which launched about 128 schemes, the report added.

Bank deposit growth continued to decelerate further in the third phase (1995-2005) with the average aggregate deposit registering a growth of 15.7 per cent, although income levels increased further reflecting the impact of improvement in real GDP growth, the report noted.