Budget Impact
	Reduction in small saving rates: It would enable housing finance companies and financial institutions to lower their deposit rates, which already stands on a higher side (compared to cost of funds for banks). Consequently, these financial entities would be able to improve their interest spread to an extent if they do not reduce the lending rates proportionately.
	Corporatization of IDBI: Reforms in the financial sector have posed new challenges for the development finance institutions (DFIs) like IDBI. It is proposed to make legislative changes to corporatise IDBI within the coming year to provide it appropriate flexibility. The financial institution has already accumulated large NPAs (gross NPAs of Rs 109 bn) due to its lending to steel, textiles and chemicals sector. With its corporatization, IDBI would now be able to take independent decisions for future loan investments.
	Lowering tax incentives for individual investor: The deduction under Section 88 (investments in life insurance, PPF, NSC) will now depend on the income of the individual. While Individuals with an income in excess of Rs 500,000 will lose this benefit altogether, those with incomes in between Rs 150,000 and Rs 500,000 will get a deduction of only 10%. Also, dividend income will now be taxable in hands of the recipient. The rate applicable will be not 10%, but the tax bracket under which the individual falls. For example, if you are in the top most tax bracket, you will have to pay a tax of 30% on such receipts. Lowering of tax incentives is likely to have some impact on housing demand (principal repayments of loans up to Rs 20,000 is eligible for 20% rebate). Individuals in higher tax bracket may not go for investments in housing (if they are investing for the purpose of saving tax).
	Extending the duration of tax deduction: Deduction for interest payable on housing loans for self-occupied houses (Rs 150,000) is allowed even where such houses are acquired or constructed after March 31, 2003, as long as the acquisition or construction is completed within three years from the end of the financial year in which the loan was taken.
	Mortgage Credit Guarantee Scheme:This scheme would be provided to all housing loans thereby fully protecting lenders (housing finance companies) against default.
	Boost to infrastructure:An Infrastructure Equity Fund of Rs 10 bn will be set up to help in providing equity investment for infrastructure projects. Public sector insurance companies, financial institutions and some banks would initially make contributions to the fund.

Industry wish list
	Housing finance companies (HFCs) are seeking level playing field after the aggressive entry of banks into the sector. This is due to the fact that HFCs are not allowed tax exemptions against provision for non-performing assets (NPAs) unlike banks and financial institutions.
	Remove the anomalies between sections 10(23) G and 80IB. Section 10(23) G allows a tax holiday on loans and investment in infrastructure projects of five-year duration. According to section 80IB, a housing project would qualify for an infrastructure project if among the other things it is started after October 01, 1998 and completed by March 2003. This affectively means that the project has to be completed within four and a half years time.
	Long-term bonds/deposits of HFCs should qualify as eligible investments under Section 54EC for exemption of capital gains tax.
	NBFCs are asking for tax deduction in line with FIs for providing funds to infrastructure related projects. FIs are currently allowed deduction up to 40% (u/s 36 (1) (viii)) of profits derived from providing long term funding for infrastructure, on the condition that a reserve fund is created out of these profits.
	The government is likely to extend the benefit of a 10-year tax holiday to housing projects by rationalizing it in line with the core sector projects. The government is also in favour of relaxing the already expired April 1, 2001 deadline for commencement of housing projects.
	The FM is planning to set up an Infra Equity Fund to provide a single window clearance to fresh infrastructure projects. The fund would be set up with contribution from FIs, LIC and SBI. The corpus of the fund would be spelt out in the forthcoming budget.

	Key Positives			Key Negatives
	Non-banking finance companies (NBFCs) with a good track record and net worth over Rs 2 bn are permitted to convert into a commercial bank. However, the number of licences to be issued in the next three years may be restricted to two or three of the best acceptable proposals (including permission for entry of new banks). The RBI has already granted licence to Kotak Mahindra to convert into a bank.			As per the RBI guidelines, financial institutions (FIs) are required to adhere to statutory norms applicable to banks if they wish to convert themselves in universal bank. However, it is practically difficult for them to maintain CRR and SLR requirements with the current high cost of funds. This is denting their plans of transforming into universal banks.
	Housing finance industry is likely to grow at a strong rate with lower interest rates, firm property prices and higher tax incentives.			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.
	HFCs are exempted from paying withholding tax on foreign currency borrowings. This enables HFCs to tap foreign markets to raise funds at lower cost. (External commercial borrowings (ECB) route recently suffered a blow due to imposition of withholding tax ranging from 10%-25%).			Entry of banks and FIs in the industry has increased the pressure on interest spread of pure HFCs like LIC and HDFC.
	FII limit for HFCs and financial institutions has been increased to 49% from earlier 40%. Automatic foreign direct investment in NBFCs is also allowed up to 100%.