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The change
The Budget has proposed a slew of measures to ease the pressure in the NBFC sector. Bringing in more parity in the tax treatment of interest on bad loans vis-à-vis banks, extending a one-time partial credit guarantee to public sector banks (PSBs) for high-rated assets of financially sound NBFCs, strengthening the regulatory authority of RBI over NBFCs, facilitating participation on the TReDS platform and shifting the regulation of the housing finance sector from NHB to RBI are some of the key proposals.
The background
Over the past year, many NBFCs have been selling their loan portfolios to raise funds, as liquidity in the bond market and banks (for some) dried up. But given the persisting adverse risk perception, many NBFCs have found it difficult to sell their assets at a reasonable price.
Per the Budget, for the purchase of high-rated pooled assets of financially sound NBFCs amounting to ₹1 lakh crore, the government will provide a one-time six-month partial credit guarantee (PCG) to PSBs for a first loss of up to 10 per cent. Essentially, credit enhancement is a facility through which a corporate can raise funds more easily by securing backing from other institutions (in this case, the government). The Centre will make good the loss up to 10 per cent in case of such assets bought by PSBs from NBFCs.
At present, for banks, under Section 43(D) of the Income Tax Act, interest income on bad and doubtful debts is taxed only in the year it is received. But for NBFCs, such interest is charged to tax on an accrual basis. It is now proposed that deposit-taking NBFCs and systemically important non deposit-taking NBFC be taxed on a receipt basis. The Budget has also done away with the need for NBFCs to create a debenture redemption reserve (DRR), setting aside 25 per cent of the amount raised through the issue of debentures through a public issue.
The verdict
The NBFC sector had hoped for a special refinancing window, which the Budget did not offer. But the proposals are welcome nonetheless, as they build some confidence within the sector. The Finance Minister went all out and urged banks to start lending to cash-strapped NBFCs. The demand of the sector to bring parity on tax treatment on interest on bad loans with banks has been around for many years. Bringing a level playing field between banks is a positive. While the Centre offering PCG to assets bought by PSBs is welcome, it is unclear what constitutes financially sound NBFCs and how the contours of the PCG will play out. But given that many NBFCs have mostly been monetising good assets to raise funds, how much of an impact it will make on the entire space needs to be seen. Also the PCG is for just six months, offering only some comfort, as losses usually take place in the later part of the loan.
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