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Harshvardhan Lunia

Harshvardhan Lunia is the Cofounder and CEO of Lendingkart Group.

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Budget and Its Impact on the NBFC Sector

The NBFC players were also seeking some relief from the hardship in terms of collection of TDS certificates (relating to interest) from their customers (which run in thousands).

With the high-profile demonetization drive preceding it and a series of State legislature elections to follow, made 2017-2018 Union Budget an extremely critical financial event that the country has witnessed in the last decade or so. With the tone for a cashless economy already being set, the Budget predominantly focused on driving digital adoption through a series of initiatives including reform measures to the digital payment system and proliferation of digital literacy in rural India. With the focus on accelerating the financial inclusion drive, the budget had some positives for the Small and Medium Enterprise sectors in the country. The decision to double the refinancing capability of Small Industries Development Bank of India (SIDBI) from Rs. 5,000 crore to Rs. 10,000 crore per year, increasing credit limit for Pradhan Mantri Mudra Yojana (PMMY) and reduction in income tax rates for smaller companies are some of the measures that will definitely help in enabling growth of our SME segment.

However, in my opinion, the budget just fell short of being a change catalyst for the NBFCs. It could have been more definitive in terms of strengthening the NBFC industry which has for quite sometime been the backbone for our SME sector. With the SME/MSME sector growing faster than commercial vehicles, the NBFC sector needed to be provided with adequate policy support in the budget to help meet the growing financing needs of the economy to support the Digital India and Make in India initiatives from the Government. Although the announcement to allow high value NBFCs access to capital market is a positive sign, yet this is not enough as close to half of SMEs in the country are reaching out to NBFCs which operate at a much smaller scale in terms of their net worth. Moreover, with different kinds of lenders existing in the ecosystem, coupled with the lack of a uniform lending structure, has meant that most of our SMEs end up paying high rates of interest and are often fleeced by money lenders. With the existence of mix of players in the ecosystem and without a definitive regulatory mechanism in place, the industry needed the finance ministry’s support in terms of bringing in policies that would help in enabling more freedom to the NBFC players who at least have a structured lending mechanism.

Some amendments in the existing Income Tax Act especially for the NBFCs could have helped in enhancing the efficiency of functioning of the sector. First, the interest income on sticky advances is recognized by banks, financial institutions and state financial corporations only on receipt basis under section 43 of the Income Tax Act. The said benefit is not extended to NBFCs, snubbing the fact that NBFCs are subject to the prudential norms and, like the above institutions, are mandatorily required to defer income in respect of their sticky advances in the books of accounts. The Budget 2017-18 was expected to bring in similar measures to support NBFCs by way of extending the benefit of Section 43.

The NBFC players were also seeking some relief from the hardship in terms of collection of TDS certificates (relating to interest) from their customers (which run in thousands). With the payment of interest to banking companies, LIC, UTI, Public Institutions already being excluded, it was expected that the Budget 2017-18 will provide parity to the NBFCs by providing them similar exemptions.

NBFCs are vital clogs in India’s institutional lending machinery that substantially support the Government’s financial inclusion mission. However, the sector still needs freedom in terms of having diversified funding options that will also help in bringing down the final borrowing rates for customers. This is where the current Budget could have done a lot more in terms of rationalizing and liberalizing the sector to allow a greater operational freedom for NBFCs.

Given that the Indian economy is today the fastest growing major economy in the world, the opportunities for SMEs to grow and contribute to the nation’s growth are immense. The plan charted out by the Government to create policies and programs that are inclusive is well appreciated by all. While the current Union Budget might not have everything that the industry would have wanted, we are extremely confident that other announcements through the course of the year will help build robust SME and NBFC sectors.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house


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