Sops for lending

Sops for lending
The Hindu Business Line, June 16, 2009, Page 8

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Tax concessions alone will not open the tap for bank finance. Facilitating land acquisition for core projects and curbing time and cost overruns are as important.
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As Budget time approaches, various stakeholders, hurt by economic cycles, urge tax concessions of one kind or another. Since September, when the current crisis first hit Indian shores, pleas for such tax relief have been aired by exporters and domestic producers trying to maintain not just profit margins but output in a falling market. So far, the government has responded fairly rationally by reducing excise taxes, a common demand of domestic manufacturers. Now banks are asking the policymaker for tax concessions for lending to infrastructure, one of the most critical sectors for the next phase of economic growth. How should North Block respond?

The most rational policy at this point of time, when the fiscal deficit has begun to skid out of control, would be to refuse. A pragmatic ploy, however, would be to agree to restore a tax sop for long-term lending to core projects so that banks are encouraged to get into the act. In 2007, tax benefits under the Income-Tax Act 1961 were withdrawn — a move that bankers feel served as a disincentive to lending for core projects. Although another provision allows 20 per cent of the interest to be tax-deductible, bankers would like the earlier provision restored. Bank lending over the decades has steadily increased as a proportion of total offtake but it has tended towards land transport. Also, a major portion of the lending has been focussed under Central priority lending schemes. But as a committee set up by the RBI recently noted, banks should contribute to project finance in the core sector. Banks have been constrained in such financing for several reasons, not the least of which is the project gestation, and the dangers of cost and time overruns that delay revenue and cash-flows and thus the bank’s options to start recovering its dues. But the biggest deterrent to banks may be the lack of clarity on key issues that builds risks into the initial phase of such projects; land acquisition for roads or any core projects, for that matter, could, and have, led to litigation and sometimes violent opposition that delay the completion of the projects.

Tax concessions alone will not open the tap for bank finance. Ensuring a hassle-free environment for land purchase and curbing time and cost overruns may prove to be as important.