Amendments to taxation on debt mutual fund returns are expected to assist the country's banks in attracting deposits to finance the surging credit growth and boost profits, Bloomberg reported.
By abolishing tax incentives for certain debt mutual funds, banks can now receive up to $36 billion in deposits from asset managers, according to Sunil Mehta, the CEO of the Indian Banks' Association, said the report.
This provides relief to financiers who are facing risks of asset-liability mismatches due to the increasing difference between credit off-take and deposits, leading to elevated funding costs, it added.
The Reserve Bank of India reports that annual credit growth has risen to 15.7% as of March due to increased demand for loans from both companies and consumers, compared to the five-year average of 10.3%. However, deposit collection has only grown slightly to just over 10%, prompting bankers to seek ways to attract more funds, the report said.
Deposit collections by Indian banks have lagged as investors choose to invest in more attractive asset classes, such as debt mutual funds, which offered better yields due to a favorable tax regime. With inflation at 6.44% in February, real returns on bank deposits, which typically offer an annual interest rate of around 7% for two years, remain low, it added.
The removal of tax incentives on some debt fund investments will place a roadblock for the much-needed development of the nation’s bond market, said the report, quoting Niranjan Avasthi, Head-Product, Marketing & Digital Business at Edelweiss Mutual Fund.
Lenders have been raising deposit rates to make them more attractive to customers, posing risks to profits. The State Bank of India has increased the interest rates on some deposit plans by more than 100 basis points in the last year, data available on its website shows.
"Banks are likely to see a slower rise in the cost of deposits as the increase in deposit rates would be gradual now," said Karthik Srinivasan, group head of financial sector ratings at ICRA Ltd, it added.
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