Regional rural banks, providing access to credit in under-banked areas, may be able to reduce their tax liability if the finance ministry accepts a recommendation to this effect.

The committee on financial inclusion, headed by C Rangarajan, the chairman of Prime Minister's Economic Advisory Council, has recommended that the profits transferred to their reserves by such banks should be exempted from tax till the banks achieve the standard capital adequacy ratio (CAR).

According to Reserve Bank of India [Get Quote] guidelines, regional rural banks need to show CAR of 9 per cent on their balance sheet starting from March 2008.

Alternatively, the committee has said such banks should be allowed to set off 40 per cent of their annual gross profit from their tax liability.

It is likely that an announcement to this effect may be part of the Budget 2008-09. Regional rural banks (RRBs), which were earlier exempted from tax, were brought under the tax net since 2006-07.

A senior executive with an RRB said the committee's suggestion was a welcome step. "We have been demanding this for a long time. It will help in reviving our banks," he added.

"If the CAR guideline is implemented, then most of the 86 regional rural banks cannot show more than 2-4 per cent of CAR. They will have to divert their profits to meet the requirement," a bank official said.