Banks, Fis Fight Shy Of Core Sector Bonds

Banks and financial institutions are shying away from tax-saving infrastructure bonds issued by public sector undertakings and private companies in the infrastructure sector, in the wake of a finance ministry indication that such gross investments would not attract tax rebate under 10(23)G of the Income Tax Act.

Since banks and institutions invest borrowed money, the rebate will be available only on the margin the difference between the cost of fund mobilisation and the coupon rate on the bonds. At a meeting with FI representatives, finance secretary Montek Singh Ahluwalia clarified that institutions can claim a rebate only on the taxable income, which is the margin.

 

Institutions cannot make a margin by buying these tax-saving bonds, which are being offered at around 12 per cent. Our cost of borrowing is around 14 per cent. We will make an effective loss if we buy them and there cannot be a tax rebate on losses, a senior official with the Industrial Finance Corporation of India (IFCI) told Business Standard.

Even in the case of banks, the cost of borrowings works out to around 10 per cent after taking into account provisioning under the cash reserve ratio and the statutory liquidity ratio, which leaves a margin of two per cent.

A 20 per cent tax rebate will work out to a mere 0.4 per cent on the investments made by a bank in infrastructure bonds. This is not enough to justify the purchase of tax-saving bonds when other taxable bonds are available on coupon rates of 14-15 per cent, according to financial circles.

Often, major corporates try to make it a pre-condition that they will access large loans from a bank only if it picks up a specified amount of bonds at lower rates. This is how some corporates manage to bring down their overall cost of funds.

This is possible in a situation of heavy liquidity. But now this is not possible because liquidity is extremely tight after the Reserve Bank enhanced the rates of CRR, said a PNB official. of the Punjab National Bank.