Financial analysts says... Raising NBS’ lending limit has tax implications

Financial analysts says… Raising NBS’ lending limit has tax implications

Apr 29, 2014 News

Government may have been threading carefully in delaying its decision in green lighting a hike in the lending ceiling of the country’s premier mortgage finance institution to $15M.
According to local financial analysts, even with the current, restricted ceiling of $12M, New Building Society (NBS) and its borrowers are ahead of the game and should not complain too much.
As a matter of fact, NBS, if it wants to operate like commercial banks, can apply for a banking licence which will allow them to lend up to any amount.
Over the weekend, Kaieteur News broke a story in which the institution, quoting unnamed sources, expressed unhappiness over a three-year-old application to raise its lending ceiling.
NBS officials reportedly said that they are seeing an increased number of applications for mortgages above $12M. The Society is not allowed to lend above that.
The application was made three years ago to Finance Minister, Dr. Ashni Singh.
However, yesterday financial experts explained that NBS is an entity created by an Act of Parliament.
It enjoys full tax exemption and can therefore pay higher interest on deposits and charge lower interest on loans. Up to a few years ago, it was not under the Financial Institutions Act (FIA) and it was not required to comply with the stringent rules regarding providing for doubtful loans which apply to financial institutions licensed under that law.
“When the NBS was enjoying the uneven playing field relative to the commercial banks, it did not complain. It has now been brought under the FIA while the commercial banks and certain other financial institutions have been designated approved mortgage companies,” one analyst said.
Under this arrangement, the interest earned on loans up to a maximum of $8M is exempt from taxes. This arrangement gives borrowers access to a greater number of lending agencies and therefore more choice.
“It is true that there is no statutory limit on the amounts which commercial banks can lend for housing purposes but once the loan is for more than $8M, the interest thereon is taxable. NBS can lend up to $12M and therefore has a competitive advantage of a margin of $4M.”
Regarding the delay by the Finance Minister in rendering a decision, Kaieteur News was told that the Minister must no doubt consider the tax implications.
“If the increased limit is approved, the value of the taxes which the Government would lose would be considerable. Borrowers would naturally prefer to borrow from the NBS with its lower lending rates than from the commercial banks. The more business is diverted from the commercial banks to the NBS, the greater the loss of revenue to the Government.”
There were also questions about the benefits that NBS is receiving which at first glance appears too generous.
One of these is the Mortgage Interest Relief, a measure introduced by Government to help reduce interest payments. While NBS has been complying, local commercial banks are still in discussion with the Guyana Revenue Authority on how the Mortgage Interest Relief Regulations could be made to work within its system.
“The regulations require the banks to give monthly credits for the tax on the customer loan and for the banks to make a claim on the GRA quarterly. This would mean that the banks are required to make an interest free loan to the Government. The banks are not prepared to do so.”
According to one analyst, borrowers under approved lending schemes and all NBS borrowers benefit twice on the same transaction…from the lower rate of interest charged because the interest is tax free and second, on the tax rebate of 30% of the interest on the loan.
“I think this is far too generous given the country’s fiscal position.”

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Financial analysts says… Raising NBS’ lending limit has tax implications

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