Budget 2023: NBFC sector’s top 5 expectations from Finance Minister

India’s NBFCs are looking towards the upcoming Union Budget with anticipation. They are keen that the government gives priority to the below areas to enable them to extend hassle-free credit access.

Active liquidity support system
We recommend SIDBI (Small Industries Development Bank of India) or NABARD (National Bank for Agriculture and Rural Development) be made as the agency for providing active liquidity support to the NBFCs.

Accordingly, there should be a budgetary allocation to SIDBI from the Government of India to provide this liquidity support.

Secondly, we recommend the reintroduction of a partial credit guarantee scheme to cover onward lending to MSMEs. The Credit Guarantee Scheme (CGS) was launched to strengthen credit delivery system and to facilitate flow of credit to the MSE sector, create access to finance for unserved, under-served and underprivileged, making availability of finance from conventional lenders to new generation entrepreneurs.
However, NBFCs are unable to borrow from the market or from the banking system. By reintroducing the partial credit guarantee scheme, banks can extend financial support to the NBFCs for onward lending and extend much-needed credit to the MSME sector.

Development of active secondary market of PTC:
The government would do well to democratise PTC (pass-through certificate) investments, currently restricted to a select set of banks and NBFCs.

By creating a platform and making necessary regulatory changes, the government can enable higher participation. An active secondary market for PTCs can potentially transform the liquidity scenario and cost of acquiring funds for small and medium sized NBFCs.

Lowering the loan limit for applicability of SARFAESI Act:
Reduction of the SARFAESI applicability from Rs 50 lakh to Rs 20 lakh is a welcome move. Ideally, if the ceiling is Rs 5 lakh, it will help in scaling up disbursement of small ticket loans and recovery thereof.

Parity in Income Tax treatment on NPA provisions:
Section 36 (1)(vii)(a) of the Income Tax Act, 1961, provides that a bank shall be allowed a deduction of provision of bad and doubtful debts to the extent of 8.5% of the total income.

However, for NBFCs, the allowance is up to 5% of gross total income. While many of the regulations of banks and NBFCs are being aligned, this provision should also be aligned and NBFCs should be allowed similar limits under tax laws.

Taxation of interest on NPAs on accrual basis:
As per Indian Income Tax provisions, interest income from NPAs (non-productive assets) is to be taxed on actual receipt or credit to profit & loss account, whichever is earlier. This provision is applicable to all banks, financial institutions, NBFC and HFCs.

However, NBFCs and HFCs, adopting IND AS accounting standards, have to recognise the interest income on the net carrying value of a certain category of loans in the profit and loss account, whether or not the company has received or realised such interest income.

This anomaly defeats the purpose of introduction of the provision for taxing such interest income on receipt basis and the NBFC/HFCs end up paying tax on such interest income on accrual basis since credited to profit & loss account.

Accordingly, the relevant provisions need an amendment to tax such interest income only on receipt basis.

(The author is Vice Chairman and Managing Director, U GRO Capital)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)