Advances made by banks for setting up agro-processing/cold storage projects, supply of inputs to agriculture, and construction of educational institutions/hospitals has been classified as 'infrastructure lending' by the Reserve Bank of India.
Besides giving a leg up to the rural economy, banks stand to gain as they will enjoy tax benefit on the spreads (net interest margin) they earn. Making advances to the 'infrastructure' sector allows banks to enjoy tax relief under Section 10(23)G of the Income Tax Act, 1961.
For example, if the cost of funds of a bank is 5 per cent and the rate of interest charged for setting up an infrastructure project is 10 per cent, the administrative cost of the bank is 0.5 per cent.
Then the spread of 4.5 per cent is exempt from Income-Tax. Hitherto, the entire 10 per cent (rate of interest) was exempt from Income-Tax.
The RBI expanded the scope of the definition of infrastructure lending following announcement in the May annual policy.
Infrastructure lending by banks includes advances to road projects, including toll road, a bridge or a rail system; a highway project; a port, airport, inland waterway or inland port; a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system; telecommunication services, domestic satellite service etc.
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