Regulating finance companies akin to banks can disrupt the traditional lending model of such entities, the Finance Industry Development Council (FIDC) told Finance Minister Nirmala Sitharaman in its pre-Budget memorandum.
If NBFCs are to be regulated like banks, the typical non-banking finance company (NBFC) model of lending will suffer, which will have an impact lending to the unbanked/underbanked segment of the society, the FIDC said. “Flexibility” is the key that is required primarily from the borrower’s perspective, the memorandum said.
After some large systemically important NBFCs went belly up in the past few years, the Reserve Bank of India (RBI) looked to reduce the regulatory arbitrage between banks and NBFCs by tightening norms and regularly monitoring finance companies.
Further, the FIDC has asked for harmonisation in provisions related to taxation and recovery for NBFCs with that of banks. “There is an urgent need to exempt NBFCs from TDS Deduction u/s 194A in order to ensure harmonisation and remove the ambiguity in Co-lending,” it said.
According to Section 194A of the Act, any person making payment of interest is required to deduct tax at source (TDS) of 10 per cent. There are certain exemptions given under this section wherein the person making payment to various institutions like banking companies, life insurance companies, and UTI, etc., is not required to deduct TDS. Accordingly, any person making payment of interest to banks is not required to deduct tax. However, no such exemption has been provided to NBFCs from the applicability of section 194A.
The industry body has asked for exemption for NBFCs from TDS on income from securitisation thereby enabling better business operations through improved and smooth cash flow resulting in better performances by all the NBFCs.
The FIDC has also sought relaxation in the NPA recognition norms for small loans (retail and MSME) given to individuals and small businesses, wherein they have sought that loans up to Rs 2 crore may be permitted to be marked as special mention accounts (SMA)/ non-performing assets (NPAs) as on month end. Also, they have sought that such loans be upgraded from NPA to “standard category” should be allowed to continue by partial repayment of arrears.
RBI’s November 12 circular mandates daily stamping of all loans irrespective of size, and prevents all loans that are classified as NPAs to be upgraded unless the overdue amount is repaid in full.
FIDC has again asked the Small Industries Development Bank of India (SIDBI) to provide a refinance mechanism to NBFCs for onward lending to MSMEs and other appropriate sectors. “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.
NBFCs’ asset base scales past Rs 54 trn
Asset base of non-banking finance companies (NBFCs) have touched Rs 54 trillion as of March 2022, which is almost 25 per cent of the balance sheet of banks in the country, Minister of State for Finance Bhagwat Krishanrao Karad said on Tuesday.
Addressing a CII event on NBFCs, the minister said the credit demand in the NBFC sector was expected to grow to almost Rs 30 trillion as these finance companies had become one of the major drivers of growth for the economy.
“It has helped the MSME sector scale up their operation and create more jobs. NBFCs had helped create higher credit growth than the commercial banking sector. It has customised products and has become the innovation machine of the financial landscape in the country,” Karad said.
The NBFC sector has come a long way from the mess it had found itself in after the IL&FS crisis in 2018. There was a liquidity crisis in the sector as banks became selective in lending to the finance companies in the wake of the crisis. Following the crisis, the central bank tightened its regulatory noose on the sector so that such events do not happen in the future.