MUMBAI: Banks have been vying with mutual funds for tax parity for years by offering the same tax advantages for long-term deposits. By withdrawing them from debt mutual funds, the parity has now been reached—not through tax benefits, but through other means.
Over Rs 180 lakh crore in deposits are with the bank, of which Rs 158 lakh crore are fixed deposits. Assets under management for debt mutual fund schemes total Rs 15 lakh crore and are growing. While the returns on debt funds have been comparable to those on FDs, they have also offered numerous tax advantages. In contrast to bank FDs, mutual funds are taxed at a lower rate, pay taxes at maturity, and benefit from indexation.
The finance ministry received a request from banks prior to the 2023 budget asking that interest on deposits up to Rs 5 lakh be made tax-free so that these instruments could compete with mutual funds and small-savings plans.
Banks have experienced difficulties with deposit growth, which has trailed behind loan growth, throughout the current fiscal year. Bank deposits increased by 10%, or Rs 16.8 lakh crore, up till March 10, while credit increased by 15%, or Rs 18.4 lakh crore. By selling their government bonds, banks were able to bridge the Rs 1.6 lakh crore gap between loan growth and deposits, but this was only a short-term fix.
“The most recent tax proposals will eliminate the benefit Debt MFs have over Bank FDs and put a stop to the existing tax arbitrage. As a result, some retail investors will transfer funds to bank FDs. Once more, deposits are up, according to Suresh Ganapathy, associate director of equity research at Macquarie Capital.
Ganapathy claims that the present loan to deposit ratio of 75% is higher than the historical average, indicating that there may soon be a competition for deposits. According to Ganapathy, “we expect the pressure to obtain resources to fund credit growth will remain, maintaining a cap on deposit rates.”
The drawback for banks is that they will now need to find new investors to purchase their subordinated debt and extra tier I bonds, which help increase their capital adequacy, if money leaves debt mutual funds. The majority of investors in these instruments up until now have been debt funds.
Also, in the case of projects, corporates could have trouble finding long-term investors for their bonds, a function that was formerly handled by mutual funds. The pressure on the banks to make up for the lack of debt mutual funds would rise as a result.
