RBI backs full tax exemption for banks' bad debt provisioning

The Reserve Bank of India (RBI) has urged finance minister Arun Jaitley to allow banks struggling with poor loan recoveries to get full tax deduction on the provisions made for bad debts.

Such a facility of full tax deduction will shore up banks, which face challenges from demonetisation and sluggish loan recoveries in the ongoing third quarter, RBI stated.

Banks are currently eligible for a deduction of up to 7.5 per cent of the total income as bad loan provisioning.

RBI and some bankers want this to be 100 per cent deduction on all bad debt provisioning in the upcoming Budget, sources added.

Presenting the RBI's views at a pre-budget talks between banks and finance minister Arun Jaitley, deputy governor SS Mundra said banks should be given more time to classify a loan account as sub-standard.

The RBI had, on 21 November, temporarily relaxed prudential norms for banks and non-banking finance companies, allowing short-term deferment of classification of loan dues of small borrowers as sub-standard.

RBI had granted banks an additional 60 days beyond what is applicable to them for recognition of a loan account as sub-standard, thereby saving them the burden of provisioning. This followed the 8 November demonetisation announcement by Prime Minister Narendra Modi.

Meanwhile, the Indian Banks' Association (IBA) is reported to have sought a deferment of adoption of Ind AS accounting standards by banks for a couple of years. Banks are required to adopt Ind AS - the Indian equivalent of IFRS - from 1 April 2017.

Presenting the case of NBFCs, the Finance Industry Development Council, a representative body of asset-financing non-banking finance companies, meanwhile, suggested a more favourable eligibility norms for NBFCs to get refinance from MUDRA.

At the pre-budget meeting, FIDC also made a case for removal of the minimum loan ticket size of Rs1 crore for NBFCs to invoke the Sarfaesi law for recovery of dues.