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Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) to be continued during the Eleventh Plan period with a capital subsidy of Rs 28,000 crore. Allocation of Rs 5,500 crore for 2008-09.
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Corpus for the Rural Infrastructure Development Fund (RIDF-XIV) to be raised in 2008-09 to Rs 14,000 crore, with a separate window for rural roads.
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No relief to the infrastructure financing sector in terms of tax rates.
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Infrastructure financing companies to benefit under the public private partnerships proposed under various infrastructure schemes. The corpus for the Rural Infrastructure Development Fund will facilitate such PPP projects in the rural segments as well.
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Companies that finance rural electrification will benefit from the additional subsidy offered to RGGVY.
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Rural Electrification Corporation will benefit from the additional subsidy offered to RGGVY.
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IDFC to benefit from private participation in infrastructure projects.
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HDFC to benefit from the subsidies offered to rural housing due to the company's focus on the same.
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Earlier income received from lending to infrastructure sectors was exempt from the Income Tax under clause 23G of Section 10 of Income Tax Act, which was withdrawn subsequently. Given the rising pressures on the lending institutions' cost of funds and given the rising importance of infrastructure sector, Budget 2008-09 is expected to restore this exemption.
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Maintain the tax incentives on housing loans.
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Sec 80IB to be amended to permit real estate developers to avail benefit under section 10(23G)
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Provide NBFCs with tax benefits on NPAs as in the case of banks.
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| Budget 2005-06 |
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Budget 2006-07 |
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Budget 2007-08 |
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Encourage trading of mortgage-backed securities.
Tax exemptions on interest paid on home loans to continue.
The allocation to 'Indira Awas Yojana' (flagship rural housing scheme) increased from Rs 25 bn in the current year to Rs.27.5 bn in BE 2005-06. About 1.5 m houses to be constructed during the next year.
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Leasing and hire purchase to be treated on par with loan transactions and interest and installment of principal amount to be abated in calculating value of the service
Tax exemptions on interest paid on home loans to continue
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To facilitate Public Private Partnership (PPP) in infrastructure financing, a fund with a corpus of Rs 1 bn is to be created, which would contribute upto 75% of preparatory expenditure in the form of interest free loan to be recovered from the successful bidder
Tax exemptions on interest paid on home loans to continue. However, renting of immovable property for use in commerce or business brought under the purview of service tax
National Housing Bank (NHB) to introduce 'reverse mortgage' under which a senior citizen who is owner of a house can avail of a monthly stream of income against mortgage of his/her house, while remaining the owner and occupying the house throughout his/her lifetime, without repayment or servicing of the loan
Regulations will be put in place to allow the creation of mortgage guarantee companies
Surplus forex reserves shall be deployed in infrastructure financing schemes by establishment of two wholly-owned overseas subsidiaries of IIFCL.
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| [Read more on Budget 2005-06] |
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[Read more on Budget 2006-07] |
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[Read more on Budget 2007-08] |
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| Key Positives |
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Independent operations: The RBI has mandated that the exposure of a bank to a single NBFC should not exceed 10% of the bank's capital funds as per its last audited balance sheet. This is to dissuade misusage of the NBFC structure to avoid compulsory regulatory requirements of a banking entity (e.g.: CRR, SLR) and save on costs. Also, the RBI proposed to limit the NBFCs promoted by foreign banks having presence in India. In this case, a NBFC, which is a subsidiary of the foreign bank's parent or where the foreign bank is having management control, would be treated as part of that foreign bank's operations in India and brought under the ambit of consolidated supervision. |
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Co-branded credit cards and sale of third party products: The RBI has allowed NBFCs to issue co-branded credit cards (in consonance with banks) and vend third party products. Both these measures are expected to generate fee-based revenues for the NBFC, which they were devoid of so long. |
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Tax incentive on housing loans: The tax incentive allowed by the finance ministry on housing loans in the previous budget propelled incremental credit offtake in the mortgage loans segment bringing the mortgage loan to GDP ratio to 6% from the erstwhile 2%. |
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Tax benefits to FIs: The finance ministry proposed amendments in the tax laws to offer tax breaks to financial institutions (FIs) merging with banks (with retrospective effect). This was beneficial to FIs that have got converted to banks (IDBI and the like). |
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Conversion into banking entity: The RBI has allowed NBFCs with a good track record and net worth over Rs 2 bn to convert into a commercial bank. However, the number of licenses to be issued may be restricted to two or three of the best acceptable proposals. Conversion into banking entity will enable the FIs to access low cost deposits and improve their margins. |
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90 day NPA norm: Housing Finance companies have shifted to the 90 day norm of accounting for NPAs which has brought their risk appraisal system at per with that of banks. |
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| Key Negatives |
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Higher risk weightage: The risk weightage on mortgage loans has been increased to 125%, which has additionally burdened the capital adequacy ratio of HFCs. |
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High borrowing costs: High cost of borrowings to housing finance companies (HFCs) and high stamp duty dampens growth rates. HFCs are also not yet given 'Universal Banking' status for offering wholesale and retail finances under one roof. |
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Interest rate dampener: The interest rate movement in the short term is likely to be with an upward bias. Although a marginal hike will not trigger any sensitivity, a movement beyond 100 basis points may dampen incremental offtake. |
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Growing competition: NBFCs as a class do not offer any products that are distinct from what the banks are capable of offering. NBFCs were historically strong in the retail and vehicle finance segment and they leveraged on local relationships to grow their business. However in the last 3-4 years banks have aggressively taken away market share both in the retail as well as the vehicle finance segment. |
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