Nbfc shares: Budget 2023: The NBFC sector’s top 5 expectations from the Treasury Secretary

India’s NBFCs are looking forward to the forthcoming union budget. They are keen for the government to prioritize the following areas to allow them easy access to credit.

Active liquidity support system
We recommend SIDBI (Small Industries Development

) or NABARD (National Bank for Agriculture and Rural Development) may be appointed as agency to provide active liquidity support to the NBFCs.

Accordingly, SIDBI should be budgeted by the Government of India to provide this liquidity support.

Second, we recommend reintroducing a partial loan guarantee scheme to secure on-lending to MSMEs. The Credit Guarantee Scheme (CGS) was created to strengthen the lending system and facilitate the flow of credit to the MSE sector, provide access to finance for unserved, underserved and disadvantaged companies and make financing from conventional lenders available to new generation entrepreneurs close.

However, NBFCs cannot borrow from the market or the banking system. By reintroducing the fractional loan guarantee scheme, banks can provide financial support to NBFCs for on-lending loans and provide much-needed loans to the MSME sector.

Development of PTC’s active secondary market:
The government would do well to democratize PTC investments (pass-through certificates), which are currently restricted to a select group of banks and NBFCs. By creating a platform and making the necessary regulatory changes, the government can enable greater participation. An active secondary market for PTCs can potentially change the liquidity scenario and the cost of acquiring funds for small and medium-sized NBFCs.

Credit Limit Reduction for SARFAESI Law Applicability:
The reduction of SARFAESI applicability from Rs 50 lakh to Rs 20 lakh is a welcome move. If the cap is ideally Rs 5 lakh, it will help increase small loan disbursements and collections.

Parity in Income Tax Treatment of NPA Provisions:
Section 36(1)(vii)(a) of the Income Taxes Act 1961 provides that a bank is permitted a deduction for provisions for bad and bad debts of up to 8.5% of total receipts.

However, for NBFCs, the allowance is up to 5% of total gross income. While many of the regulations of banks and NBFCs will be aligned, this provision should also be aligned and NBFCs should be given similar tax restrictions.

Taxation of interest on NPAs on an accrual basis:
Under Indian Income Tax Regulations, interest income from NPAs (non-productive assets) is taxable when actually received or credited to the income statement, whichever is earlier. This provision applies to all banks, financial institutions, NBFC and HFCs.

However, NBFCs and HFCs that adopt IND AS accounting standards are required to report interest income on the net book value of a specific category of loans in the income statement, regardless of whether or not the entity has received or realized such interest income.

This anomaly defeats the purpose of introducing the provision to tax such interest income on a voucher basis and the NBFC/HFCs end up paying tax on such interest income on an accrual basis as it has been credited to the income statement.

Accordingly, the relevant provisions need to be amended in order to tax such interest income only on the basis of income.

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

(Disclaimer: Experts’ recommendations, suggestions, views and opinions are their own. These do not represent the views of The Economic Times)

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