By Shachindra Nath
India’s MSMEs deserves enormous credit for helping the country surpass the United Kingdom to become the fifth-largest economy in the world recently. The MSME sector, which accounts for one-third of India’s GDP, has benefited greatly from digitisation and various government initiatives to promote the expansion of MSMEs in India. However, it only represents a small portion of the potential of the MSME, which they are unable to fulfil because of their limited access to credit.
The inability to obtain credit at the right time has long been a challenge for Indian MSMEs. However, with the digitisation of finance and the help of fintechs and data tech NBFCs (non-banking financial companies), who are assisting the credit-underserved MSME segment by closing the enormous funding-growth gap, there are more ways to meet this need now.
Data tech NBFCs and fintechs have facilitated the extension of credit to MSMEs in prima-facie three ways.
First is through their agility to build platforms to help faster processing and reach. Next is their ability to extract data from various democratised data sources like the India stack and also entrench themselves in the supply chain or payments ecosystems for alternate data. Most importantly, the new-age entities can leverage their ability to create customised risk models backed by data to deliver credit to the segment.
While the NBFCs provide unprecedented support to the MSME ecosystem, they still fall short of banks in terms of liquidity, cost of funds, recovery, and taxation. The key question for the finance minister in the upcoming Union Budget is how to position NBFCs in the financial system in the absence of the necessary incentives. To advance hassle-free credit access, the NBFC sector anticipates that the government will give priority to the below policies in the upcoming Union Budget to relieve the stress of both lenders and borrowers –
Active liquidity support system for NBFCs
While banks and HFCs (home finance companies) have an active liquidity support system through RBI and NHB (National Housing Bank), there is no such support for NBFCs. Considering the stellar role of NBFCs in financial inclusion and job creation, it’s about time that the government, in consultation with RBI, creates a liquidity support system for NBFCs. We recommend that either SIDBI (Small Industries Development Bank of India) or NABARD (National Bank for Agriculture and Rural Development) should be made as the agency for providing active liquidity support to the NBFCs and there should be a budgetary allocation to SIDBI from the Government of India to provide this liquidity support.
Secondly, we recommend that the Government should reintroduce a partial credit guarantee scheme to cover onward lending to MSMEs. The Government has already introduced Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) to catalyse the flow of institutional credit to MSMEs. The Credit Guarantee Scheme (CGS) was launched to strengthen the credit delivery system and to facilitate the 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
As of now, PTC (pass-through certificate) investment is restricted to a very select set of banks and NBFCs. It needs democratisation. We urge the government to create a platform and make necessary regulatory changes to allow the participation of a large number of investors in PTCs through an active secondary market which has the potential to transform liquidity and cost for small and medium-sized NBFCs.
Lowering the loan limit for applicability of the SARFAESI Act from Rs 20 lakh to Rs 5 lakh
While the move to reduce the SARFAESI applicability from Rs.50 lacs to Rs.20 lacs is timely, ideally, the ceiling should be reduced to Rs.5 lacs. It will help in scaling up the disbursement of small ticket loans and also in the 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 a 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 certain category of loans in the profit & loss account, whether or not the company has received or realised such interest income. This anomaly defeats the purpose of introducing 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.
(Shachindra Nath, Vice Chairman and Managing Director, U GRO Capital. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)