Banks are seeking a level playing field on garnering funds as they believe they are placed at a disadvantage vis-a-vis mutual funds and insurers that offer tax breaks to customers. Ahead of the budget, banks have made representations to the finance ministry to make investments in fixed deposits of up to ₹5 lakh tax free as they want small-ticket deposits to become competitive with small savings plans and insurance products.

The Indian Banks Association (IBA) made the representation on behalf of banks, which have lately seen deposit growth trail the pace of credit expansion.

"Banks are increasingly losing out against national savings schemes, mutual funds and insurance products that offer tax-free savings to small customers; hence we have made budget representations to the finance ministry to bring in provisions that make small value deposits more lucrative," said a banker who was part of the meeting.

"We have submitted that interest on fixed deposits of up to ₹5 lakh be made tax free so that banks can become competitive against other savings products."

The wedge between credit and deposit growth continued to widen and stood at 9 percentage points at the end of November. While credit expanded at 17%, deposits increased at 8.2%. The pace of deposit growth tumbled in November from 9.5% in October. Total banking deposits are at ₹173.7 lakh crore.

Credit to deposit ratio has been increasing over the past year, and touched 74.4, climbing more than 5 percentage points in the period.

Despite increase in rates, bank deposits have continued to lose out to insurance schemes, which offer high tax-free returns, and to tax-saver mutual fund plans.

Meanwhile, banks have also sought relief on tax paid from gains on one-time settlement schemes.

"Currently, we have to pay tax on the entire loan amount; for example if we receive ₹70 on a ₹100 loan, the law stipulates tax be paid on the entire loan. We have requested the income tax rules be amended to consider haircuts on such loans," said another banker.

Another demand for the consideration of the finance ministry relates to the prevalent pension scheme. Nationalised and co-operative banks have sought that the pension scheme be amended and brought under a pay commission-like structure, which gets automatically upgraded periodically. Currently, the pay scales in state-run banks are decided by bipartite settlements between unions and the management.

"Trillions of rupees are lying as pension funds with banks but past employees are not getting fair benefits. It is time rules are amended so that retired employees get equitable gains," said a banker cited above.