MUMBAI: The increase in short-term and long-term equity capital gains taxes and discontinuation of indexation benefits for property sales have reduced the regulatory arbitrage that other investments held over deposits, potentially drawing more future savers to traditional banking instruments.
Bankers expect more term deposits now with the disappearance of the arbitrage, likely helping lenders that are struggling to raise liabilities in line with asset expansion.
“Even if it does not lead to inflows into deposits, I think it will arrest any further outflows as savers will look at this avenue more closely,” said Sanjay Mudaliar, executive director at Bank of Baroda. “Increase in government spending is also a big positive for banks because it could lead to higher inflows into bank deposits. So, all in all, the budget has been positive for banks because it has not aggravated the deposit challenge. Of course, banks will have to step up efficiencies to make full use of these measures,” he added.
In her budget speech on Tuesday, finance minister Nirmala Sitharaman proposed to hike the short-term capital gains tax on all listed equity instruments to 20% from 15%. Long-term capital gains on listed equity instruments and specified financial and non-financial assets have been hiked to 12.5% from 10%. Moreover, the indexation benefit has also been removed from all the assets for computing long-term capital gains which will disallow any inflation adjustment, increasing the tax outgo.
Shivaji Thapliyal, head of research at Yes Securities said that the government’s move is indirectly positive for banks and negative for physical assets and equity investments.
“These steps are, therefore, positive for banks from an incremental deposit accretion perspective. Household savings that will be incrementally created will tend to flow into bank deposits as opposed to real estate, gold, stocks and equity mutual funds, ceteris paribus. The impact, however, is not expected to be dramatic,” Thapliyal said in a note after the budget.
The government’s move comes even as banks are facing the worst deposit crunch in almost two decades, widening the gap between banking credit and deposits. At the end of June, bank deposits were growing at 11.1% year-on-year, much slower than the systemic credit growth of 17.4%, according to RBI data.
Bankers said that they do not expect any material change due to the government’s move but are hoping for some change in savers’ mindset post this move. “Interest on deposits continues to be taxed at the highest bracket and also the interest on savings accounts exceeding ?10,000 – that does not change. But yes, in the long term we can expect savers to choose the safety of fixed deposits as the tax arbitrage is now come down,” said the executive director of a large public sector bank.
