Smaller lenders seek to use franking credits to pay levy Credit co-operatives have called for debate on a proposal to allow the sector to use its $1.5 billion stockpile of franking credits to help fund the planned deposit insurance scheme. Smaller banks and credit unions, which rely more on deposit funding than large banks, are likely to be disadvantaged by a 0.05 per cent levy on guaranteed deposits from 2016, experts say. In response, professor Kevin Davis from the Australian Centre for Financial Studies has suggested lenders be allowed to use franking credits to fund their contribution, rather than cash. Franking credits, distributed with dividends, are tax credits granted to shareholders when companies have already paid tax on their profits. The big banks have billions in accumulated franking credits but would be unlikely to use them to fund the levy because the credits are a hit with shareholders. Most customer-owned banks, on the other hand, are unable to distribute franking credits to their members, causing them to build up. Damien Walsh, the managing director of customer-owned bankmecu, said the lender had about $75 million in franking credits, and Professor Davis's suggestion was worth considering. "We have an an accumulating pool, and at the moment we don't have a mechanism to distribute those franking credits," Mr Walsh said. Mark Degotardi, head of public affairs at the Customer Owned Banking Association, estimated the sector had about $1.5 billion in accumulated credits, and was adding $150 million to $200 million worth of the credits a year. "The option proposed by Kevin Davis should be considered, along with other ideas to give customer-owned banking institutions a simple, marketable and efficient mechanism to distribute franking credits," he said. Labor and the Coalition plan to introduce the levy on bank deposits, which is forecast to raise about $500 million a year. Mr Degotardi said both sides had indicated they were sensitive to the levy's potential anti-competitive impacts on smaller institutions. Separately from the levy, customer-owned banks have been in discussions with Treasury for years about ways to make use of its $1.5 billion in franking credits. Mr Walsh said the goal was to develop a type of deposit product that would allow members to receive franking credits as part of their interest payments - which would make saving through bank deposits much more tax effective.