Banks look for lower lock-in period for tax-saving fixed deposits

Banks expect deposit growth to pick up if the lock-in period for tax-saving fixed deposit (FD) schemes is brought down to three years from the current five years. It will also help lenders bring their tax-saving deposit schemes in parity with mutual funds’ equity-linked saving schemes (ELSS).

“It will help us bring the tax-saving bank FDs in parity with mutual funds’ tax savings schemes. We want it (lock-in period) reduced to three years. It will also help us attract more deposits,” said M Narendra, chairman and managing director of Indian Overseas Bank.

In a pre-Budget consultation with Finance Minister P Chidambaram on Monday, bankers demanded the lock-in period be brought down to three years to channelise more funds into the banking sector. Deposit growth in the banking system has been lower than credit growth for the last two years, which is increasing the asset-liability gap for banks.

According to J Moses Harding, head of the asset liability committee and economic and market research, IndusInd Bank, there is availability of tax arbitrage for depositors between banks and non-bank financial institutions, which now act as intermediaries between banks and depositors. The plea to the finance minister is to set a level playing field for banks and deposit taking institutions, and extend this benefit to develop financial institutions.

The demand comes at a time when the banking sector faces slow deposit growth. Bank deposits grew 13.35 per cent year-on-year in the fortnight ended December 14 to Rs 64.33 lakh crore, shows Reserve Bank of India (RBI) data. RBI’s deposit growth projection for 2012-13 is 15 per cent but many bankers are of the view that the sector could lag this projection.

As on November, assets under management in ELSS schemes were Rs 25,027 crore, shows data from the Association of Mutual Funds in India. Suresh Sadagopan, who runs the Ladder7 financial advisory feels if in the Union Budget the tenure of tax-savings bank fixed deposit schemes is reduced to three years, then it will be detrimental to ELSS schemes.

Sadagopan said, “Investors invest in ELSS because the tenure is three years, compared with other tax-saving schemes. A major chunk of these investors will shift to investing in tax-saving bank fixed deposit schemes.”