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During a pre-Budget consultation with stakeholders from the financial sector and capital markets, the Finance Industry Development Council (FIDC)—a key representative body of Non-Banking Financial Companies (NBFCs) —has called for major reforms to ease operational burden and improve liquidity for NBFCs.
One of their requests was the reduction in the loan amount threshold for enforcing security interest under the SARFAESI Act, from Rs 20 lakh to Rs 1 lakh.
The council highlighted the current threshold leads to significant delays in the resolution of stressed accounts, taking up to five years, thereby escalating the number of non-performing assets (NPAs) on NBFCs' balance sheets and their legal costs.
Raman Aggarwal, director of FIDC, emphasised the absence of the SARFAESI Act’s provisions for loans below Rs 20 lakh hampers the resolution of distressed accounts.
“This delay not only increases stressed accounts but also inflates litigation costs for NBFCs,” he added.
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In addition, FIDC called for the relaxation of regulatory norms to facilitate smoother fund-raising from banks, which would ease the financial pressures on NBFCs.
Aggarwal also suggested the creation of a dedicated fund to support sectors like MSMEs, electric vehicles, infrastructure, and green energy.
He stressed this would address the growing financial needs of emerging sectors and bolster NBFCs' capacity to lend to these vital industries.
Radhika Gupta, CEO and managing director of Edelweiss Asset Management, said more streamlined business processes, advocating for policies that would enhance capital market efficiency and attract greater investment.
Another key recommendation focused on tax provisions related to interest payments. The FIDC requested an exemption from the Tax Deduction at Source (TDS) under Section 194A of the Income Tax Act.
Currently, NBFCs are subject to TDS on interest payments, even though similar exemptions apply to banks, insurance companies, and other financial institutions. FIDC argued that the 10 per cent TDS deduction creates cash flow constraints for NBFCs, which operate with narrower margins.
The administrative burden of managing these TDS deductions, especially in light of large-scale transactions, adds complexity to NBFC operations.
The FIDC highlighted the issue of TDS deductions in co-lending arrangements between banks and NBFCs, where a single loan is jointly funded by both institutions. Since the borrower pays a blended EMI, it becomes impractical to determine and deduct the exact TDS for the NBFC portion of the loan.
The council urged for the harmonisation of TDS provisions between banks and NBFCs, which would simplify operations and remove ambiguities in co-lending agreements.
It called for development financial institutions like SIDBI to provide refinance options to NBFCs for on-lending to MSMEs and priority sectors, with special government fund allocations to enhance the reach of these initiatives.
The meeting was attended by Union Finance Minister Nirmala Sitharaman along with key financial sector officials, including the finance secretary, secretaries from the departments of economic affairs and financial services, chief economic adviser, and prominent figures from major financial institutions such as Ashishkumar Chauhan (MD & CEO, National Stock Exchange), Hitendra Dave (CEO, HSBC Bank), and Rahul Bajoria (MD, Bank of America).
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