Non Banking Financial Institutions are present in all competitive fields such as, vehicle financing, housing loans, leasing, hire purchase and personal loans financing etc. NBFC's are not required to maintain cash reserve ratio and statutory liquid ratio.
Priority sector lending norm of 40 per cent (of total advances) is not applicable to them. While this is at their advantage, they do not have access to low cost demand deposits. As a result their cost of funds is always high, resulting in thinner interest spread. But currently with surplus liquidity in the system, the cost of funds for NBFC's has substantially eased thus improving their margins.
The Finance Industry Development Council, the trade body of the domestic NBFCs has submitted its whish list to the finance minister with main focus on direct and indirect tax issues, funding and recovery mechanisms.
Industry expectations
Exemption from TDS on interest payment to NBFC-AFCs (Asset Financing Companies) on loans under section 194A (3) (iii) of the IT Act.
Increase in exemption limit of TDS on interest paid on fixed deposits for NBFC from Rs 5,000 to Rs 10,000 as done for banks last year.
Extend the benefits under Sec 36 (1) (viia) and Sec 43D of the Income Tax Act, 1961, to NBFC-AFCs in line with banks, financial institutions and housing finance companies where provisions made for non-performing assets (NPAs) should be allowed to be deducted while arriving at the taxable profits of NBFCs.
Setting up of a new refinance mechanism for NBFCs providing road transport, similar to National Housing Bank (NHB) for HFCs.
To start an exclusive refinancing window for the NBFCS-AFCs, similar to that of NHB for housing finance companies, to address the problem of funding in the long-term.
Remove the service tax on hire purchase (HP) and leasing transactions.
Allow Infrastructure/power financing companies to float tax-free bonds.
To increase the limit of deduction under Section 24 for interest on housing loan (for self occupied property) from Rs 150000 to Rs 250000.
Analyst Expectation
As per Section 194A of the Income Tax Act, tax has to be deducted out of the interest payment made by any borrower to the lender at the rates in force i.e. currently 20 per cent TDS is applicable. However Banks and other financial institutions are exempted from the purview of this section implying that if the payment of interest is made to them, the borrower is not required to deduct TDS out of the interest payment. This stipulation puts NBFCs in a disadvantageous position and creates severe cash flow constraints since NBFCs operate on a very thin spread of interest income. Thus by making them in par with Banks and other financial sectors NBFC's will improve their cash flow and create positive impact on their margins.
The Increase in exemption limit of TDS on interest paid on fixed deposits for NBFC from Rs 5,000 to Rs 10,000 will bring NBFC's in par with banks. It will also help NBFC's to mobilize more deposits. Increasing the existing ceiling for TDS will also bring down the administrative cost per unit since it will avoid fragmentation of deposits to a large extent.
To provide tax benefit on NPA's as in par with banks has been a long standing wish of NBFC's. It will be beneficial for to grant NBFC tax benefit on NPA's as in par with banks since they too follow the provisions norms as prescribed by RBI. Also by giving the exemption, NBFC's profit and loss account would appear stronger as they had been treating these provisions as expenses as of now.
The service tax in case of lease and hire purchase transactions should be levied only on lease management fee or processing fee. This will make it in tune with the levy of service tax of loan transactions, where interest component is totally exempted from the levy of service tax.
Flow of funds is set to improve if Infrastructure/ power financing companies are allowed to float tax-free bonds on their own. Funds will be available at more competitive rates, which will help these companies to reduce their cost of funds and thus improve their margins.
Currently as per Sec 24(b) of the Income Tax Act, 1961 a deduction up to Rs 150000 towards the total interest payable on the home loan towards purchase / construction of house property can be claimed while computing the income from Self Occupied house property. By increasing this deduction amount to Rs 250000 we could see some spurt in demand from home loan segments.
Companies to watch
Sundaram Finance, Bajaj Auto Finance, Cholamandalam DBS Finance, Shriram Transport Finance, Reliance Capital
Outlook:
NBFC's have been persistently asking government to treat them in par with Banking and other financial institutions with regard to tax benefit, funding and treatment of NPA's. But sofar, the government has not yet accorded this benefit to NBFC's so far. Considering the useful role-played by NBFCs, especially to the small and medium enterprises and small truck owners etc, they need to be facilitated.
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