Reserve Bank revises norms for priority sector lending

The Reserve Bank of India (RBI) has revamped priority sector lending (PSL) norms.

Details:
Now, loans to sectors such as social infrastructure, renewable energy and medium enterprises
will also be treated as PSL.
The distinction between direct and indirect agriculture has been done away with. This means
banks can meet their entire agriculture lending target 18% of their net loans disbursed in the
previous year by funding to indirect agriculture, which includes loans to companies
engaged in the agriculture sector.
Loans to build agriculture infrastructure such as storage, as well as those for soil conservation
and watershed development, will now be considered as farm lending. Loans for ancillary
activities such as setting up agro clinics and agribusiness centres will also be part of farm
lending.
In the renewable energy segment, bank loans of up to Rs 15 crore for solar-based power
generators, biomass-based power generators, wind mills, micro-hydel plants, etc, will be
considered part of PSL. For individual households, the loan limit will be Rs 10,00,000 a
borrower.
On the home finance front, loans of up to Rs 28 lakh to individuals in metropolitan centres
and up to Rs 20 lakh in other centres will qualify as PSL, provided the overall cost of the
dwelling unit is Rs 35 lakh in the metropolitan centres and Rs 25 lakh in other centres.
Bank advances to microfinance institutions (MFIs) for lending to individuals, members of
self-help groups and joint liability groups will also qualify as PSL, provided the MFIs meet
the norms prescribed for micro lending (loan pricing, amount, etc).
Direct agriculture refers to individual farmers or groups directly engaged in agriculture
and allied activities. Now, food and agro processing units will form part of agriculture.

CATEGORIES OF PRIORITY SECTOR:

Agriculture
Micro and Small Enterprises
Education (educational loans granted to individuals by banks)
Housing
Export Credit
State sponsored organizations for Scheduled Castes/Scheduled Tribes
Consumption loans (under the consumption credit scheme for weaker sections)
Loans to the software industry (having credit limit not exceeding Rs 1 crore from the banking
system)
Minimum Limits:
The limits are prescribed according to the ownership pattern of banks. While for local
banks, both the public and private sectors have to lend 40 % of their net bank credit, or
NBC, to the priority sector as defined by RBI, foreign banks (with 20 branches) have to
lend 32% of their NBC to the priority sector.

Specific targets within the priority sector:

Domestic banks have to lend 18 % of NBC to agriculture and 10 % of the NBC has to be to
the weaker section. However, foreign banks have to lend 10 % of NBC to the small-scale
industries and 12 % of their NBC as export credit.
The rate of interest on various priority sector loans will be as per RBIs directives issued
from time to time, which is linked to Base Rate of banks at present. Priority sector
guidelines do not lay down any preferential rate of interest for priority sector loans.

What is MAT?

MAT was first introduced in 1996 to make companies pay at least some tax. That is because some were paying
little or no tax, as they were enjoying tax exemptions, but at the same time were reporting profits and even paying
handsome dividends to the shareholders.

According to brokerage CLSA, the list of MAT companies in India includes several large companies such as Shree
Cement, Dabur, and Godrej Consumer, power utilities such as NTPC, Power Grid Corporation, and JSW Energy,
and infra developers such as Adani Ports. The core business of these companies enjoys certain tax exemptions.
But these companies do report accounting profits. And so, the Government levies MAT.

How is MAT calculated?

MAT is calculated at 18.5 per cent on the book profit (the profit shown in the profit and loss account) or at the
usual corporate rates, and whichever is higher is payable as tax. Payers of MAT are eligible for tax credit, which
can be carried forward for 10 years and set off against tax payable under normal provisions.

Why is this an issue for foreign institutional investors in Indian capital markets now?

As mentioned in the introduction, foreign portfolio investors, or foreign funds that invest in stock markets here,
have received notices for liabilities under MAT to the tune of Rs.40,000 crore. But how is this possible, especially
after Mr. Arun Jaitley said in his recent Budget speech that he was exempting foreign investors from paying MAT
taxes? True, he said that, but that is effective only from April 1, 2015, and does not cover prior years.

How much are foreign institutional investors taxed currently?

Foreign investors in India have had to pay 15 per cent on short-term listed equity gains, 5 per cent on gains from
bonds, and nothing on long-term gains.

What does the new tax demand mean to them?

According to CLSA, MAT will be applicable on short-term and long-term capital gains and interest income. Also,
the potential tax liability could go back as far as financial year 2008-09.

What is the stance taken by the foreign institutional investors?

According to Vikas Vasal, Partner-Tax with consultants KPMG, foreign investors are of the view that MAT should
be levied only on the domestic companies and not on foreign companies or foreign investors. One of their key
arguments is that MAT can be levied only on book profits, to compute which there must be a requirement to
maintain books of accounts. As there is no such requirement, foreign investors argue, they should not be asked to
pay MAT.

How are the tax authorities going about this?

Taxmen are disputing the stance of foreign investors. They are going ahead with their demand, as the 2015
Budget did not provide for MAT relief retrospectively. The relief is available only from April 1, 2015.

The tax authorities would also be looking forward to how a tax case involving Castleton Investments, a fund, is
decided. In 2012, the Authority for Advance Rulings ruled that Castleton, having transferred shares from a
Mauritius entity to a Singapore one, is liable to pay MAT. The Authority for Advance Rulings is constituted to
provide clarity on tax assessment in cases largely involving non-residents. Their rulings, however, are only
persuasive and not binding.

The case is now pending in the Supreme Court.

Are there any other rulings on such issues?

A note by consultancy EY cites a few, including a 2010 case involving Timken and Praxair Pacific Ltd. In this, the
Authority for Advance Rulings held that foreign companies not having presence in India are not liable to MAT
provisions.

And in September 2014, the Delhi Income-tax Appellate Tribunal delivered a similar ruling in a case involving
The Bank of Tokyo and Mitsubishi UFJ. It observed that the intention of the legislature was very clear that
MAT provisions are not applicable to foreign companies.

So, the Supreme Court judgement on the Castleton case would be keenly watched for more clarity on the issue.

Has the Finance Minister responded in any way?

Yes, the ministry has said that foreign investors domiciled in countries that have tax treaty pacts with India do
not have to pay MAT taxes. These countries include Singapore and Mauritius. Also, the Central Board of Direct
Taxes has directed authorities to close treaty cases in a month. According to Rajesh H. Gandhi, partner, Deloitte
Haskins and Sells LLP, more than 30 per cent of investments by foreign institutional investors come from treaty
countries.

However, those outside of treaty countries, it could be long drawn legal battle. About a third of such investments
come from the U.S. Indias treaty with the U.S. does not cover capital gains provision, according to London-based
ICI Global, a lobby representing foreign investors.

Why is this important for Indian markets?

Foreign investors have been the major drivers of the stock market. They have pumped in over $50 billion in the
Indian markets since the election of Prime Minister Narendra Modi in May last year. Any uncertainty over tax is
likely to hurt investor sentiment.

MFI: Utlity

A new paper that summarises findings on microfinance uptake among beneficiaries

in seven countries, including India, overturns broad assumptions that underpin the
microfinance and self-help group movement. The randomised evaluations from
four continents show that microcredit does not have a transformative impact on
poverty.
However, it can give low-income households more freedom in optimising the ways
in which they make money, consume, and invest, according to the evaluations.
The studies were carried out in India, Mongolia and Philippines in Asia, Bosnia-
Herzegovina in Europe, Morocco and Ethiopia in Africa, and Mexico in North
America.
The key results, summarised in the paper Where Credit is Due, published by the
Abdul Lateef Jameel Poverty Action Lab (J-PAL) and Innovations for Poverty
Action (IPA):
Demand for many microcredit products was modest. In Ethiopia, India, Mexico
and Morocco, take-off ranged from 13% to 31% far lower than predictions by
partner MFIs.
Expanded credit access did lead to bigger investments in most cases. All but one
study showed some evidence of expanded business activity however, these
investments rarely resulted in profit increases.
Microcredit access did not lead to substantial increases in income. None of the
seven studies found a significant impact on the average household income for
borrowers.
Expanded access to credit afforded households more freedom in optimising how
they earned and spent money. Six studies suggest microcredit played an important
role in increasing borrowers freedom of choice.
There is little evidence that microcredit access had a substantial effect on
womens empowerment or investment in childrens schooling. But across all seven
studies, researchers did not find that microcredit had widespread harmful effects
either, even with individual-liability lending, or a high interest rate.
The research in India was done by Abhijit Banerjee, Esther Duflo, Rachel
Glennerster and Cynthia Kinnan. Spandana Sphoorty Financial Ltd was the partner
MFI; the borrowers were exclusively women.

What are Infrastructure Debt Funds?

Infrastructure Debt Funds (IDFs) are investment vehicles to accelerate the flow of long
term debt to the sector. IDFs aims at taking out a substantial share of the outstanding
commercial bank loans.

IDFs are set up by sponsoring entities either as Non-Banking Financing Companies

(NBFC) or as Trusts/Mutual Funds (MF). A trust based IDF would normally be a Mutual
Fund (MF), regulated by SEBI, while a company based IDF would normally be a
NBFCregulated by the Reserve Bank.
 RBI has allowed Indians as well as foreign investors to invest in debt instruments floated by
IDFs.