Non-banking finance companies (NBFCs) have sought parity with banks on taxation, exemption from tax deducted at source (TDS) on interest payment, and a refinance facility for onward lending to MSMEs, among other requests presented to the government ahead of the Union Budget on February 1, 2022.

In a pre-budget memorandum presented to the Ministry of Finance last month, NBFC body Finance Industry Development Council (FIDC) highlighted funding remains a challenge for the sector, leading to an inadequate and erratic flow of funds to non-bank lenders.

“Most NBFCs (except the very highly rated NBFCs) depend upon banks for their funding needs since the money markets and other institutional sources of funding are shallow or are restricted to highly rated NBFCs. This has resulted in an inadequate and erratic flow of funds to NBFCs and increased concentration risk at a systemic level. There is a dire need for an effective refinance mechanism (on similar lines as the NHB refinance or any other effective method) to ensure diversity and greater regularity in sources of funds to NBFCs,” FIDC said.

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Therefore, NBFCs have asked the government to allow for a refinance facility via SIDBI for NBFCs for onward lending to MSMEs, along the lines of National Housing Banking for housing finance companies.

“Considering the sizeable nature of the NBFC sector, which accounts for 25% of the credit exposure in the country, and its systemically critical position, the Budget can re-examine a permanent NBFC refinance window from the Reserve Bank of India (RBI) or the designation/creation of an institution as a backstop for NBFCs. We expect the Budget to continue with some of the liquidity and guarantee schemes to ensure near-term funding availability for NBFCs (non-infra) and to provide guidance on the medium-term support framework for the sector, which could boost investor confidence and would be key for a sustainable revival,” rating and research agency ICRA said in a note recently. ​

The industry has sought an extension of Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) coverage to loans given to educational institutions, which are covered under the MSME definition.

“Given that these institutions are now being slowly opened in many states, there is a considerable need to provide adequate financing for the restoration of normalcy and growth of the institutions. Covering these loans under the CGTMSE scheme would facilitate greater flow of funds to this critical and socially important sector,” the memorandum read.

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FIDC also sought acceptance of arbitration as a valid legal step for debt recovery under the Emergency Credit Line Guarantee Scheme (ECLGS) to avoid lengthy and costlier civil lawsuits.

On the taxation front, it sought an exemption for Non-Deposit Taking Systemically Important NBFCs (NBFC-ND-SI) and Deposit-Taking NBFCs (NBFC-D) from tax deducted on the source on interest under Section 194A.

“Tax is required to be deducted at the rate of 10 percent from interest paid to NBFCs. This creates severe cash flow constraints since NBFCs operate on a thin spread/ margin on interest, which at times is even lesser than the TDS on the gross interest. Further, due to enormous transactions, NBFCs have to face severe administrative hardship in terms of collection of TDS certificates from their thousands of customers,” it said.

The NBFC body further said, “RBI has allowed banks and NBFCs to engage in Co-Lending to the priority sector. A single borrower may be co-funded by the bank and an NBFC in a pre-determined ratio. Both banks and NBFC may price the loan independently. However, the borrower shall be offered a single blended rate of interest. All the repayments made by the borrower (including the interest) by way of EMIs shall be made to an escrow account from where the amounts shall be credited to the bank and NBFC in respective proportion. In such a scenario, the borrower shall not be able to split the EMI and determine the exact interest component of the NBFC portion. Hence, TDS deduction shall be practically impossible. Therefore, it is important to bring both bank and NBFC at par on the TDS provisions.”

NBFCs have also sought to lower minimum loan ticket size to enforce security receipt under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act.

“The prime objective of giving NBFCs coverage under the SARFAESI Act was to bring parity with banks, HFCs and other FIs, and providing NBFCs with an important tool of recovery … The rider of Rs 20 lakhs does not fully justify the objective of bringing parity since the threshold for enforcing security interest under SARFAESI for HFCs, and other FIs is much lower at Rs 1 lakhs,” FIDC said.

Therefore, it has sought to reduce the threshold from Rs 20 lakhs to Rs 1 lakh to bring NBFCs at par with HFCs, banks, SFBs, and other financial institutions as asset classification norms are also at par for all the institutions.

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(Edited by : Yashi Gupta)