NBT on banks likely to push lending rates up
Despite the Treasury’s attempts to downplay t he impact of the Nation Building Tax (NBT) on the banking and the finance sector, the International Monetary Fund (IMF) argued otherwise and said the tax has the potential to push up the lending rates and thus it would not be helpful for the economy.
Budget 2014 proposed to extend the 2 percent NBT to the banking and finance sector and the Finance Ministry yesterday said the tax would come into effect from January 2014.
“There is a potential for the spreads to go up, the lending rates to go up and that’s not helpful for the economy at this stage of development,” said IMF Resident Representative Dr. Koshy Mathai.
Nevertheless, the Treasury last week dismissed the measure having an impact on the intermediate cost or lending rates because the 2 percent NBT would be applied to the VAT base and not to the income or turnover.
Meanwhile, expressing a conflicting view to the Treasury, Central Bank Governor Ajith Nivard Cabraal was recently quoted as saying to Reuters that the impact of NBT would be passed on to the customer.
This raises a question whether the Central Bank’s attempts to increase private sector lending through easing of monetary poli-
The imposition of the NBT on the financial
services by itself, holding everything equal, certainly will tend in the direction of raising lending
rates
cy would be diluted by this move.
Hence, asked if the NBT would offset the desired goal of the Central Bank’s easing of monetary policy, Dr. Mathai responded in the affirmative, if other factors remained constant.
“The imposition of the NBT on the financial services by itself, holding everything equal, certainly will tend in the direction of raising lending rates.
But the government has made many good points that overall there’s not much scope for worry because the public sector, including the state sector enterprises, are not borrowing (from the banking sector) as much as they did before.
Corporate income tax rates are much lower now than they were three-years ago, so again a small increase in the NBT may not be a huge factor. So, there is some cushion there. So, I am not trying to overplay. But still, per say, ceteris-paribus – keeping everything else constant, this measure would tend to increase the interest rates,” he explained.