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Finance Bill 2023: Manageable Impact on NBFCs

On February 1, 2023, the Honourable Finance Minister (FM) Nirmala Sitharaman delivered the Finance Bill 2023(FB). The FM amended FB 2023 while presenting the bill for approval by the Lok Sabha on March 24, 2023. A finance bill is a money bill defined in Article 110 of the Constitution. 

By this bill, the government is proposing to collect new taxes, change the current tax system, or keep the current tax system in place beyond the time period that parliament has agreed. A Memorandum with clarifications of the provisions of the Finance Bill is attached to it. Only in Lok Sabha, the Finance Bill can be introduced. 

Finance Bill 2023 and expected favourable measures

Expectations for banks, NBFCs, and fintech in the lending sectors were high when the honourable Finance Minister Nirmala Sitharaman introduced the Budget 2023. According to information released by the RBI on January 13, 2023, bank credit increased by 16.5% from the previous year. According to the Economic Report for 2022–2023, credit growth is also anticipated to be quick in the fiscal year 2024.

So, everyone’s attention was focused on the Finance Bill 2023 to see if the government would take any favourable measures to promote the lending industry and India’s macroeconomic growth. Credit access, improved financial services, and financial inclusion have all fuelled this beneficial development. Following that, please find the most recent Finance Bill 2023 and its moderate impact on NBFCs.

Amendments made to the Finance Bill and its impact on NBFCs 

The amendments also suggest that beginning on April 1, investments in debt mutual funds will be subject to short-term capital gains tax. Investors would lose the long-term tax advantages that had made such investments so famous because of the change. 

• Budget amendment: Change in taxation on debt mutual funds – The government passed changes to the Finance Bill 2023, with the elimination of the long-term capital gains (LTCG) tax benefit from debt mutual funds (MFs) being a key point. This modification may have an effect on investment flows into mid- to long-term schemes, which currently have about Rs 6 trillion in AUM. The funding of corporate bonds by debt MFs, which presently makes up about 10–11% of all corporate bond funding, could also have a detrimental effect.  

• Effect on NBFCs: Mutual funds would be a source of funding for some non-banking finance companies (NBFCs) and housing finance companies (HFCs). Due to the potential for fewer inflows into debt MFs, they might have to rely more on banks for funding than mutual funds.  

• Although NBFCs are predicted to suffer as a result of this shift, it should still be manageable. Just 36% of NBFC borrowings come from bonds, and debt management funds’ exposure to NBFC bonds has reduced since the IL&FS crisis. Just about 15% of NBFC bonds are now funded by debt MFs. Although this also covers commercial papers, several NBFCs, such as Chola Investment & Finance (CIFC) and Mahindra Finance (MMFS), have higher borrowings from MFs. 
• According to the amendment, short-term capital gains will be taxed on April 1, 2023, for mutual funds with less than 35% invested in stocks. The debt MF indexation benefit will be eliminated. Investments in debt mutual funds are now considered long-term capital gains and are subject to a 20% tax rate with indexation benefits. 
• As the appeal of pure debt MFs is diminished compared to FDs by the absence of the tax-related benefit, inflows to mid-longer duration debt MFs may lessen. Companies may still prefer investing in debt MFs over FDs due to higher liquidity and return expectations, although some retail/HNI flows to debt MFs may shift to FDs.  
• Almost 36% of NBFC/HFC borrowings come from corporate bonds, while debt MF investment in NBFC/HFCs has significantly decreased. According to the prediction that debt MFs finance 15% of NBFC/HFC NCDs. 

Other initiatives by the government 

Because of the pandemic, government programmes like the Jan-Dhan, Aadhaar, and Mobile (JAM) trinity, UPI (universal payments interface^[1]), and other regulatory frameworks have become more popular, enabling banks, NBFCs, insurers, and fintech to provide a wide range of financial solutions to MSMEs. Giving NBFCs, MSMEs and the underbanked people access to financial services in many locations.  

MSMEs have primarily received funding from NBFCs. The declining GNPA ratios from the peak of 7.2% observed during the second wave of the pandemic to 5.9% show a consistent improvement in the asset quality of NBFCs. It’s excellent to see that the government has amended taxation in the MSME sector and offered other essential steps that support MSMEs’ economic growth. Overall, this year’s budget has been balanced and pragmatic. 

NBFCs will need to concentrate even more on their pricing power to sustain profitability and focus on higher-yield categories for expansion in a climate of rising interest rates and fierce competition from banks. Stronger NBFCs will continue to perform better and develop stronger in the years to come. These NBFCs will have stronger business models, adequate capital, good underwriting capabilities, and a focus on digital strategy.

It is also encouraging to note that the RBI and policymakers acknowledge the role that NBFCs play in fostering genuine economic activity and satisfying credit demand, particularly for the unbanked. Another encouraging development for the sector is the latest RBI Scale-based regulations, which will boost NBFCs’ standing to parity with other public sector NBFCs. We anticipate gaining additional operational flexibility under these new regulations to accommodate the rising credit demand and support India’s economic expansion.

Simplified Digital ID process requirement for lenders

The Union Budget 2023 includes a number of other tech-driven measures, including simpler “Know Your Customer” (KYC) process for financial services. Your PAN number will now serve as a standard form of identification. You can simply get credit facilities with the use of a risk-based strategy rather than a uniform KYC process for everyone. 

Also, all fintech, NBFCs and MSMEs will benefit greatly from the government’s development of its Digital Locker services. Before, access to this facility was only permitted for individuals. Fintechs may now acquire and exchange documents instantly with the safe option for storing important documents. 

Moreover, the range of personal document storage has been expanded. This facility allows you to store important documents safely, such as: 

• PAN card 
• Academic records 
• Driving licence 
• Aadhaar card 

It makes it quicker and simpler for you to get credit when you need it. Banks and other financial organisations may now store and share data quickly and securely online with the growth of Digital Locker services. 

Conclusion 

The proposed change appears to tax these mutual funds similarly to bank deposits, which are subject to slab taxation rates. Additional government programmes, including the 75 Digital Banking Units (DBU) across 75 districts, are an additional effort to make financial services accessible throughout the entire nation. Lending organisations are also searching for newer sources of funding that will allow them to provide better loan options. 

NBFCs will contribute more to the socio-economic framework of the Indian economy in 2023. In India, the potential for credit penetration is still huge. By collaborating with fintech and developing new business models with tailored products, NBFCs may raise the bar.

Also Read:
Key Highlights of the Finance Bill 2023
The Finance Bill 2023 and its Impact on Angel Investors