Bankers to meet RBI on base rate issue on Friday

Bankers are worried that the new model will affect their business of giving short-term loans to corporate clients at cheaper rates (below PLR), as lending rates on such loans will go up at least by 2% in the base rate system

With the 1st April deadline to migrate to the base rate model fast approaching, bank chiefs are likely to raise concerns about the new system and seek an extension of the deadline during their scheduled meeting with top Reserve Bank of India (RBI) officials on Friday, reports PTI.

Bankers are worried that the new model will affect their business of giving short-term loans to corporate clients at cheaper rates—below the Prime Lending Rate (PLR)—as lending rates on such loans will go up at least by 2% in the base rate system.

According to bankers, the base rate, a function of the cost of deposits, may be in the range of 8.5%-9.5% for most banks, which were lending to top-rated corporates at much lower rates, sometimes as low as 6%.

"When the lending rates rise in the new system on account of (the) base rate model, we may lose corporate customers who may seek other avenues to raise funds," said Allen C Pereira, chairman and managing director, Bank of Maharashtra.

According to him, creating a separate benchmark for short-term loans would help lenders retain their long-time corporate clients whose demand for working capital forms a good part of banks' loan-books.

Bankers are likely to seek time till July to prepare for the migration to the new model as they feel the April deadline gives them very little time to complete the huge task of gathering segment-wise data required to arrive at their respective base rates.

"Each bank has to calculate its own base rate. Banks which don't have their full operations under core banking may find this difficult. They may need some more time," said M Narendra, executive director, Bank of India.

Similar views were expressed by a majority of the bankers in a meeting with the Indian Banks Association (IBA) last month. In a letter to the RBI recently, the IBA had sought an extension till July to implement the base rate model.

In a move to bring in more transparency into bank lending, the regulator had issued draft guidelines last month to replace the existing benchmark prime lending rate (BPLR) model with the base rate.

The actual lending rates charged to borrowers would be the base rate plus borrower-specific charges, which will include product-specific operating costs, credit risk premium and tenor premium.

The central bank was apparently unhappy with the practice of banks lending at much lower rates than the BPLR to top-rated corporates, while the common borrower had to borrow at higher rates.

Standard Chartered Bank's India chief executive, Neeraj Swaroop, said that the new model has both 'plus and minus' aspects, which should be discussed by all stakeholders.

Citibank's chief financial officer Abhijit Sen said that lenders might be forced to administer two types of interest rates, particularly in infrastructure and mortgage loans, for a significant time if the customer was unwilling to switch to the new model.

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    Indian government approves linkage for 11 thermal projects

    Coal linkages for 11 supercritical units of 660MW each, which will come up in the 12th Plan period of 2012-17, have been sanctioned

    The Indian government is believed to have approved fuel linkage for 11 thermal power projects of NTPC Ltd and Damodar Valley Corp Ltd (DVC) totalling an investment of over Rs29,000 crore, reports PTI.

    "Coal linkages for the 11 supercritical units of 660MW each, which would come up in the 12th Plan period (2012-17) have been sanctioned," a coal ministry source said.

    These 11 units include nine units of NTPC's power plants at Nabinagar (3x660MW), Meja (2x660MW), Solapur (2x660MW) and Mouda (2x660MW) and two units of DVC's Raghunathpur plant in West Bengal.

    The global tender for sourcing equipment for these units was floated in October last year.

    Supercritical units are environment friendly and improve efficiency of thermal power projects. The equipment would be used in five power projects in Bihar, Uttar Pradesh, Maharashtra and Jharkhand.

    The Cabinet committee on infrastructure gave its approval to the bulk tender in September last year.

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    Supreme Court allows deductibility of bad loans

    The recent judgement by the apex court will be of great help to businessmen and the same can be relied upon for all the current or future assessments in determining the allowability of bad loans when written off in the books of accounts of the assessee

    The Supreme Court has ruled that it is not obligatory on the taxpayer to prove whether a loan has become a bad loan, once such loan has been written off in the books of accounts.

    The apex court in a ruling in the case of TRF Ltd versus Commissioner of Income-Tax held that the position in the law is well-settled and after 1 April 1989, it is not necessary for the assessee to establish that the loan, in fact, has become irrecoverable.

    This is an important decision rendered by the Supreme Court on the issue of allowability of bad loan as a deduction from business income and this sets at rest the doubts and the widespread litigation that was prevalent in the matter, said Ameet Patel, partner, Sudit K Parekh & Co.

    In a tax-alert note, the chartered accountancy firm said that the Income-Tax Act, 1961 has a special section that allows deduction from business or professional income in respect of bad loans. The relevant section is 36(1) (vii).

    Earlier, the section was worded in a manner which was interpreted to mean that the taxpayer needed to establish conclusively to the satisfaction of the assessing officer that the amount written off had actually become bad. This led to a situation where most of the times, the taxpayer had to put in extra efforts to show that the loan had actually become bad, the steps taken for recovery of the same and whether any legal action had been taken against the loaner.

    Practically, in many cases, bad loans were not allowed as a deduction because the taxpayer was not able to conclusively establish that the loan had become bad.

    However, with effect from assessment year 1989-90, there was an amendment in the said section whereby the necessity for establishing the fact that the loan has actually become bad has been done away with. After the said amendment, the only conditions to be fulfilled by a
    taxpayer for successfully claiming a deduction in respect of bad loans are as under:

    1. The amount which is claimed as a deduction should have been taken into account in computing the income of the assessee for the year in which the amount is written off or any earlier year and
    2. The amount should be written off as irrecoverable in the books of accounts of the assessee for the accounting year in which the claim for deduction is made.

    The wordings of the Section 36(1)(vii) read with circular 551 dated 23 January 1990 issued by the Central Board Of Direct Taxes (CBDT) leave no scope for debate that any amount incidental to the business or profession of the assessee, which is taken into account in computing the assessable income would be allowed for deduction as a bad loan, if it is written off in the books of the assessee in the previous year.

    Despite the above clear provisions of the law, many tax officers continued to disallow the claim for bad loans on the ground that the taxpayer had not conclusively established that the loan had actually become bad. In most cases, the matter had been taken up for litigation. Many Tribunal Benches have held against the Income-tax Department and in favour of the taxpayer that after the amendment to Section 36(1) (vii), the taxpayer does not have to prove the fact that the loan has actually become bad. 

    Indian courts have time and again reaffirmed the above view and accordingly allowed the claim of bad loans deductibility.

    In a judgment in the case of the Commissioner of Income-Tax versus Star Chemicals (Bombay) Pvt Ltd, the Bombay High Court has reiterated the view that the fact that the loan has been written off as irrecoverable in the accounts of the assessee will suffice for claiming it as a deductible bad loan. It is for the assessee to decide whether the loan has become bad or not and the assessing officer can never insist on production of demonstrative and infallible proof that the loan has become bad.

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    Sayan Majumdar

    10 years ago

    The article is a a gross mistake. Please do not follow it. The case laws and circular cited herein has no relation to bad loans, it is only with respect to bad-debt and the word 'bad loan written-off' is not mentioned anywhere in the texts of the judgments.

    Editor: please check the facts and authorities before publishing an article like this.


    1 decade ago

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