1. Expectations for the NBFC sector
a. In the current market scenario, the benchmark interest rates are low but the borrowing cost for lower rated NBFCs have not reduced much. We propose that the Government (in consultation with RBI) should form a program by which, on an ongoing basis, the lower rated NBFCs can avail benefits of policy rate cuts. The policy rate cuts benefits are not currently, uniformly percolated down the rating scale till “BBB” ratings. The policy rate reduction benefits are restricted to only “AAA and AA+” rated companies.
Also, banks are credit averse despite adequate liquidity in the system. The negative market perception towards lower rated instruments among lenders causes the disparity in flow of credit spread to rating scale. Hence, we suggest the finance ministry, in collaboration with RBI, should come up with a program to arrest such negative perception which will benefit in improving Credit flow as well as competitive cost of funds to lower rated instruments.
This is backed by the below analysis. As can be noted from the table below, that the credit spread for BBB rated NBFCs have increased. Further, despite rate cuts by RBI, not all banks have cut the MCLR rates to similar extent. Thereby transmission of rate cuts by RBI has not happened, and at the same time risk aversion has increased – leading to no benefit of rate cuts to BBB rated NBFCs.
The above analysis is based on the data released by The Fixed Income Money Market and Derivatives Association of India (FIMMDA). It is an Association of Commercial Banks, Financial Institutions and Primary Dealers. FIMMDA is a voluntary market body for the bond, money, and derivatives Markets. Normally AAA & AA+ rated instruments get traded in the market and all lower rated instruments seldom gets traded. Hence the credit spread given by FIMMDA for lower rated instruments are imputed spreads.
However, actual market spreads are higher than these published spreads for lower rated instruments due to less liquidity (liquidity premiums are getting added). This is the only information available in the money market to analyse the transmission of the spread flow due to policy rate cut)
Spreads for AAA and AA rating category has declined considerably, e.g. AAA spreads for 6 months (0.5 yrs) is down by 109 bps between Feb'20 and Dec'20. Similarly, AA+ spread for 3 yr tenor is down by 43 bps during the period. However, A and BBB rating category spreads have increased during the same period of Feb'20 to Dec'20, e.g. BBB spread for 6 months tenor is up by 47 bps during the period.
b. Treating less than Rs10 lakh loans to SME sector as Priority sector lending by banks on a continuing basis without any cap on lending rates, as market forces will automatically decide on the rates based on supply of funds.
c. Opening a separate window for NBFCs with investment grade rating (but not in A and above category) for borrowings from Banks and MFs like LTROs, but on a continuing basis.
d. One-year standstill to be provided for carry forward of losses considering the year 20-21 is totally impacted and there will be losses in this year due to the pandemic.
e. Abolition of withholding tax for debts received from foreign entities – at least for one year till 31 Mar 2022
2. Expectations for Digital Payments Industry and Digital Lending
a. Liberalization of Digital Payments, such as waiver of Merchant Discount rate (MDR) on Credit and Debit Cards to encourage adoption of digital payments, beyond UPI.
b. Lower Income tax for Businesses having more digital transactions
At NeoGrowth, we also propose that there should be a scheme in which retailers having digital sales over a certain limit, say 70%/80% of all the sales (hard cash and digital), such retailer should be taxed at lower rate of income tax.
This will have following benefits:
- Promote more digital transactions
- Cash handling will reduce in Banks
- Shadow economy will be negated, and more MSMEs will come under formal tax net
- Will facilitate in bringing all the businesses in organized setup
- Will help in adherence to the financial inclusion policy of Government of India at a brisk pace
- Will provide proper trail of transactions which as a result helps in reporting requirements
c. Digital lending should have incentives like PLIs (Performance Linked Incentives) for manufacturing sector.
f. Fintechs including digital lending players should be given freedom to borrow money from foreign entities without the rate being linked to SBI prime rate and without any withholding tax for next 2 years.
3. Expectations for MSMEs
Restaurants, Hotels, SPAs and Salons and other retail focused businesses should be given tax holiday for a period of 12 to 18 months. GST relief should be given to induce more demand/consumption which can be passed on to the end customer by these entities to generate more business.
Published as received