Need to harmonise rules on taxation and recovery for NBFC too: FIDC

The Finance Industry Development Council (FIDC), an industry body for non-banking finance companies (NBFCs), has impressed upon the government on the need to harmonise provisions on taxation and recovery as well, even as the Reserve Bank of India (RBI) is harmonising regulations governing finance companies with that of banks

The Council has asked the government to exempt tax deduction at source (TDS) on interest payment made to NBFCs. Under Section 194A of Income Tax Act, tax is required to be deducted at the rate of 10 per cent from interest paid to NBFCs, FIDC said. But the section allows exemptions to persons making interest payment to institutions such as banks, life insurance companies and UTI.

“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.”, FIDC said in its letter to the finance minister.

They have asked the finance minister to exempt all deposit taking NBFCs (NBFC – D), 52 of them, under Section 194A. Also, non-deposit taking systemically important NBFCs, with an asset size of above Rs 500 crore (319 in total) should also be granted exemption.

Further they have said that the threshold for NBFCs to initiate recovery proceedings against loan defaulters under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act, 2002, should be reduced from Rs 20 lakh to Rs 1 lakh in order 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.

Recently, the RBI provided clarification on income recognition, asset classification and provisioning (IRAC) norms for banks, NBFCs and all-India financial institutions, which says classification of special mention account (SMA) and non-performing account (NPA) should happen on a day-end position basis and upgradation from an NPA to standard category should happen only after clearance of all outstanding overdues.

Experts have reckoned that this may lead to a spike in NPAs of NBFCs, including housing finance companies in the near term. FIDC has requested the government that smaller loans (retail and MSME) upto Rs 2 core may be permitted to be marked as SMA / NPAs as on month end. And, upgradation in respect of Rs 2 crore from NPA to standard category, may be allowed to continue by partial repayment of arrears.

They have also asked for a refinance mechanism for NBFCs. “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 in its letter.

Hence, they have suggested Small Industries Development Bank of India (SIDBI) to provide a refinance facility to NBFCs for onward lending to MSMEs and other appropriate sectors.