By Stefano Bernabei
MILAN, Oct 12 (Reuters) - Italy's new budget proposes to give banks and insurance companies more speedy tax breaks on loan losses and writedowns in a move that will help lenders to clean up their balance sheets.
The tax provisions in the budget due to be presented to parliament on Tuesday follow lobbying by Italy's banks for deductions to be frontloaded instead of spread over 18 years.
Before calculating their taxes, lenders and insurers will be allowed to subtract from their earnings one fifth, rather than one eighteenth, of loan losses and writedowns booked in the financial year, a draft document seen by Reuters shows.
The new system would give an incentive to banks to clean up their balance sheets at the end of this year and could boost net profits in the next few years for a sector struggling under increasing bad debt as the banks continue to grapple with a prolonged economic recession.
Bad debts at Italian banks increased by 22.3 percent in August from a year earlier, Bank of Italy data show, and analysts have predicted that a banking health check-up by the European Central Bank next year will find that Italian banks need to raise more capital.
A shorter period of tax deductibility would bring Rome in line with fiscal rules applied in other European countries, bankers have said.
The proposed new rules would apply both to losses and writedowns on new loans and new losses and writedowns on past loans booked in 2013, the draft document said.
With Italy stuck in its longest recession since World War Two, souring loans on the country's banks balance sheets have nearly tripled since 2007 to 249 billion euros ($337.7 billion)in March, or about 14 percent of total loans, according to Bank of Italy data.
Bad loans are predicted to keep rising throughout 2014, with Italy expected to return to only modest economic growth next year. ($1 = 0.7373 euros)
(Writing by Francesca Landini; Editing by David Goodman) Keywords: ITALY BANKS/TAX
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