Non-banking finance companies (NBFCs) play an important role in providing credit access to businesses and individuals across the spectrum. By bringing in efficiency, diversity and reach to the financial system, NBFCs today constitute 20% of the formal credit in India. Clearly, a healthy NBFC sector is crucial for India’s growth journey. We hope the upcoming budget focuses on reforms that will re-energize the financial services sector and create an overall environment that will drive economic prosperity. From an NBFC perspective, our wish list would include the following:
1. The most important thing at this stage is the need to revive demand: The government and RBI are focussed on reviving the same. FM Nirmala Sitharaman has announced series of very important steps in that direction – cut in corporate tax rate and announcement of infrastructure spends have been landmark decisions. RBI has ensured sufficient liquidity, lower interest rates and a much better transmission of interest rates through the banking system. While all this lays the ground to spur investment led growth, some measures to drive demand led growth will accelerate the time taken to get back growth. Cut in personal income tax rates and more incentives to individual home and auto buyers can be a force multiplier. The increase in the ₹2 lakh tax rebate on housing loan interest rates under Section 24 of the Income Tax Act, will encourage demand for housing, especially in the affordable and mid-segment categories. With families going more nuclear and the need for rental housing, incentives may be offered to individuals to buy a second home. Also, for personal tax, the last relief in the form of deduction under section 80 C was in 2014, we look forward to an increase in the upcoming budget.
2. Allow strong NBFCs/ HFCs to access public deposits: Large and well capitalized NBFCs with a strong parentage should be allowed to access public deposits. Such NBFCs and HFCs should be subject to specific criteria such as AAA rating by at least two rating agencies and a profitable track record. Additionally, minimum net worth of criteria of ₹1000 crore can be introduced. This will create a new avenue for raising funds and will help diversify the borrowing profile of NBFCs. As the regulatory framework for NBFCs is steadily mirroring Banks, this step will also create a level playing field for all the players.
3. Revive projects: Several projects in the real estate sector, infrastructure and power sector have either been delayed or stuck. This has only added to costs and created stress in the sector. Reviving such projects is essential and will help regain business momentum. While a Fund has been set up to revive stuck real estate projects, the key will be to ensure it moves quickly in identifying, evaluating and funding viable projects.
4. Regular consultative mechanism with the RBI: There is need for a more institutionalized mechanism for RBI’s consultations with industry stakeholders to enable regular feedback and recommendations. Creation of a forum like AMFI will allow a more participative dialogue between the industry players and the regulator.
5. SARFAESI limit of 1 crore for NBFCs should be done away with: NBFCs are currently allowed to initiate action under SARFAESI only where the amount lent is ₹1 crore and above. Given that only systemically important NBFCs are notified under SARFAESI, this limit should be removed for NBFCs so that they are treated at par with banks and HFCs including co-operative and small finance banks who are not subject to such limits and can initiate SARFAESI action for any amount of loan as permitted under the SARFAESI Act. Reducing the limit for NBFCs will help improve recoveries.
6. ECBs: RBI in consultation with the government of India on July 3, 2019 decided to relax the end-use restrictions relating to external commercial borrowings for working capital requirements, general corporate purposes and repayment of rupee loans. The RBI stipulated tenor restrictions as below for availing the aforementioned relaxations: There is a very limited to a non-existent market for NBFCs (for that matter any Indian Borrower) to raise 7 / 10 year ECBs for on-lending or refinance. In order to make this window a real source of funding, ECBs having a maturity of 3 to 5 years should also be allowed for on-lending or refinance. Alternatively, a sub limit of say 25% within the overall ECB raised should be allowed for refinancing existing Rupee debt for NBFCs. Housing finance companies (HFCs) are permitted ECBs for financing prospective owners of low-cost affordable housing units. This should be expanded to include all types of home loans. Further, there exists a prescribed cap on ECB pricing. The withholding tax is a charge borne by the domestic borrower. This increases the overall cost of funding. There was a window created for raising ECBs without withholding taxes. This exemption from withholding tax for ECBs should be extended on a long term basis.
The author is Rajiv Sabharwal, MD & CEO, Tata Capital.