Budget 2019: Give priority sector status to gold loans

VP Nandakumar

On July 5, the new government will present the first Union Budget of its second term. The budget will set the tone for the next five years and offer insights into its thinking and critical focus areas. This union budget is significant as it will be the first statement of intent of the government on a host of critical issues, such as the stress in the financial sector affecting banks and non-banks alike, farm prices, employment creation, trade wars, protectionism etc. The Finance minister will, as always, have to walk a tight rope between fiscal prudence and spending on social welfare.

In this context, we at Manappuram Finance would request the FM to address some valid concerns affecting our industry, as listed below.
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1. Alignment of the Income Tax Act with RBI’s regulations:

While the Reserve Bank of India is looking to harmonise regulations for Banks and NBFCs, the Income Tax Act continues to differentiate.

This is best exemplified in Section 43D of the Income Tax Act 1961 which provides “….the income by way of interest in relation to such categories of bad or doubtful debts as may be prescribed having regard to the guidelines issued by the Reserve Bank of India in relation to such debts, shall be chargeable to tax in the previous year in which it is credited by the public financial institution or the scheduled bank or the State financial corporation or the State industrial investment corporation to its profit and loss account for that year or, as the case may be, in which it is actually received by that institution or bank or corporation, whichever is earlier.”

This provision is an exception to the accrual system of accounting, which is regularly followed by such assessees for computation of total income. Its effect is that such assesses (scheduled banks, public financial institutions, State financial corporations, State industrial investment corporations and certain public companies like Housing Finance companies) need not pay tax on the interest accrued in bad or doubtful debt till such time the interest is received from the borrower. By keeping NBFCs out of the purview of Section 43D, our tax laws are subjecting NBFCs to unequal treatment as compared to other financial institutions. While Banks are offered the benefit of doubtful interest recovery for tax purposes, no such forbearance applies to NBFCs even when the RBI mandates similar treatment of an asset, irrespective of whether the lender is a Bank or an NBFC.

Rectification of this inequality which allows for differential treatment (for calculation of tax payable) of the same borrower account by different lenders will be a step forward in the harmonisation of regulations and promoting a level playing field. It is, therefore, our suggestion that Section 43D of the Income Tax Act be amended to include NBFCs as well in its provisions.

2. Tax on Dividend income:

Under Section 115BBDA of the Income Tax Act, shareowner returns on equity investments are taxed three times.

Firstly, when the shareowner’s profit share (i.e. profit generated by the company) gets taxed as income tax on corporate profit. The second instance of taxation happens when dividend distribution tax is collected for the share of profit being passed on by the company to its shareowners (on which corporate income tax is already paid). The third instance occurs when the dividend (distributed by the company after paying income tax and dividend distribution tax) gets taxed in the hands of the shareowner, whose dividend income exceeds Rs.10 lakhs in a year (this provision was introduced in the 2016 budget).

Quite simply, no other form of capital gets taxed so heavily. Such punitive taxation of dividend effectively amounts to a tax on entrepreneurship that disincentivises investments in the economy besides distorting capital allocation. We, therefore, believe that this triple taxation (corporate income tax, dividend distribution tax and personal income tax on dividend income over ₹10 lakhs) is counterproductive and needs rectification. Accordingly, we suggest that dividend income be made tax free for all shareowners (as it was before the 2016 budget).

3. Tax on interest income:

We would also like to draw the honourable minister’s attention towards the tax on interest income where the present tax system offers an unfair tax arbitrage advantage to the debt funds of mutual funds (MFs) and insurance investment schemes. Investments made through the MFs debt scheme offers tax advantage over any other investments such as bank deposit, postal saving scheme or bonds. We suggest that this tax arbitrage be done away with. Interest income in the hands of the end user should be made tax free. This relaxation will offer banks and financial institutions leeway to raise deposits at a lower cost and will increase credit offtake.

4. Priority Sector Status for gold loans:

We also request the FM to allow for Priority Sector Lending (PSL) status benefits for Gold Loans extended by the NBFCs. Gold loan companies have been the most prominent agents of formalisation of the economy in recent years. We have created infrastructure across the country often at places where banks and other institutions have yet not reached. As a loan product, a Gold loan is not only uncomplicated and transparent, it often saves poor people from having to take recourse to moneylenders.

A significant chunk of gold loan is small ticket loans availed by small and marginal borrowers, small farmers, microenterprises etc. Gold loan NBFCs do not get the benefit of priority sector lending (PSL) status even when the loans are extended to the priority sector borrowers. In contrast, gold loans given to farmers by banks get classified as priority sector lending, even as gold loans by the NBFCs receive no such benefit.

We request that all micro gold loans (i.e. under ₹50,000) be made eligible for priority sector lending status. In this context, FM may also consider giving Priority Sector status for the bank’s lending to NBFCs for on-lending to priority sector borrowers such as microenterprises or farmers.

5. SARFAESI Act:

We draw Honourable Finance Ministers attention to the disparity in the mechanisms available to Banks and NBFCs to recover dues. While banks have regulatory provisions allowing them access to SARFAESI Act and DRTs, an NBFCs can enforce its security interest through SARFAESI only in those cases involving a principal amount of at least Rs.1 crore or more while the monetary limit prescribed for other classes of secured creditors is Rs.1 lakh

If the government and statutory bodies are working to bring parity between banks and NBFCs based on the nature of the businesses, it is prudent and just that NBFCs too receive similar treatment under the framework of recovering dues. Allowing NBFCs similar right of recovery under the SARFAESI Act will help the NBFC recover their dues efficiently.

6. LTV cap on gold loans:

Finally, we request the FM to remove the lending cap against gold jewellery. Currently, a Gold loan NBFCs can lend up to a maximum of 75% of the value of the gold, i.e. loan to value or LTV ratio of up to 75%. The current restriction is proving counterproductive because it is enabling pawnbrokers in the unorganised sector to make a comeback by luring customers with an offer of higher LTV.

Removal of the cap on LTV, combined with a prescription for higher risk-weight on loans, will help improve formalisation of the economy, ensure financial stability and most importantly, curb the re-emergence of money lenders who were becoming redundant through years of policy interventions.

The author is MD & CEO, Manappuram Finance Ltd.