Page 51 - Banking Finance April 2023

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targets: lending versus a negative externality earned from PSLC trading which in turn will help evaluate
(environmental pollution). The targets in the case of Priority the economics of the facility to individual banks. In sum, it
Sector Lending Certificates are a floor and not a cap. is the banks, not the priority sector, which have benefitted
from the PSLC scheme.
Criticism:
Reserve Bank of India Deputy Governor R. Gandhi said that However, from a macro perspective, deficiencies in PSL
"PSL certificates, which will be eligible for classification under aren't the only problem confronting rural development; the
respective categories of priority sector, bought by banks, crying need is to improve the overall agricultural situation
may dent the growth of securitised market." No reason has through a package of modern initiatives encompassing every
been shared for this assertion. aspect of the farm sector.
Alternatives: Increased public investment will augment credit absorption

A direct tax combined with a system for delivering credit to capacity. Institutional realignments are equally pressing. It
the priority sector could be an alternative to Priority Sector needs to be weighed whether today, so many banks of so
Lending targets. If there are no Priority Sector Lending many genres with so many branches and schemes are
targets then this would obviate the need for Priority Sector required at all. Consolidation on all fronts would improve
Lending Certificates. policy-level efficacy, operational efficiency and reach of the
rural credit delivery system in significant ways. And, finally,
Conclusion: undue external interferences need to be leashed, if not
All banks need to disclose appropriately the commissions eliminated.

Blow for bond mkts as long-term tax benefit scrapped
for debt MF

The government has proposed changes in taxation of debt mutual funds under which no benefit of indexation for
calculation of long-term capital gains (LTCG) on debt mutual funds will be available for investments made on or after
April 1, 2023.

However, as per the proposed changes in the Finance Bill 2023, only those debt mutual funds will lose these benefits
where equity investment in such schemes is less than 35 per cent.
From April 1, 2023, such debt mutual funds will be taxed at income tax rates as per an individual’s income. The move
will remove the tax advantage a debt mutual fund has compared to bank deposits.
Commenting on the development, Fintoo Founder Manish P Hingar said with the proposed amendments debt mutual
funds may no longer receive indexation benefits and will be taxed at marginal rates. “This will also affect gold funds
and international funds. As a result, bank fixed deposits will become more attractive as both debt funds and bank
fixed deposits will be subject to the same taxability of maturity proceeds,” he said.

This may have a negative impact on all debt funds, particularly in the retail category, as ultra-high net worth and high
net worth individuals may choose to invest in safe havens like bank fixed deposits. “We may see a shift from long-term
debt funds to equity funds, and money may be directed towards sovereign gold bonds, bank fixed deposits, and non-
convertible debentures in the debt category. This is good news for banks as they can attract customers with higher
interest rates and increase their borrowing and saving book sizes,” Hingar said.

According to Niranjan Avasthi, Head, Product, Marketing and Digital Business, Edelweiss AMC, the removal of
indexation benefits from debt mutual funds is a big loss for bond markets that are still struggling with liquidity. “MFs
are the only large active institutional investors who bring whatever little liquidity we have in the bond market.
Insurance and some others are HTM investors,” Avasthi wrote on twitter. Shares of HDFC AMC was down 4.76 per
cent and that of Aditya Birla Sun Life AMC fell 2.76 per cent in intra-day trades.

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