Lower rated NBFCs can avail benefits of policy rate cuts

With over 30 years of experience in the payments and fintech industry, focusing on business leadership, payment processing, small and medium enterprise (SME) lending, corporate development, business operations, technology and strategy, Piyush Khaitan has successfully founded a number of companies and has taken them to new operational heights.

A seasoned campaigner in the fintech space, he is currently the Founder and Managing Director of NeoGrowth Credit Private Limited, a company that provides unsecured loans to small businesses repaid by card receivables, e-commerce sales and other non-cash payments. Prior to NeoGrowth, he had founded and served as the Managing Director of Venture Infotek, which was India's largest payment processing company. Venture Infotek was divested to an MNC in 2010 in a landmark transaction. Speaking to Bizz Buzz, Khaitan delves at length on the expectations of non-banking finance companies (NBFCs), digital payments industry and MSMEs from the forthcoming Union Budget

Its Budget season again. All the sectors have their own expectations and more so in the wake of the challenging times that the economy is passing through. What are the key expectations of the NBFC sector from this Budget?

Well, let me put them one by one and also explain why they are justified. 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 the RBI) should form a programme by which, on an ongoing basis, the lower rated NBFCs can avail benefits of policy rate cuts. The policy rate cut 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 the RBI, to come up with a programme to arrest such negative perception, which will benefit in improving the credit flow as well as competitive cost of funds to lower rated instruments.This is backed by studies and analysis. Recent analysis suggests that the credit spread for BBB-rated NBFCs have increased. Further, despite rate cuts by the RBI, not all banks have cut the MCLR rates to a similar extent. Thereby transmission of rate cuts by the RBI has not happened, and at the same time risk aversion has increased leading to no benefit of rate cuts to BBB-rated NBFCs.

Could you please mention where the data for this study is sourced from?

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. Example, AAA spreads for six months (0.5 years) is down by 109 bps between February 2020 and December 2020. Similarly, AA+ spread for three years tenor is down by 43 bps during the period. However, A and BBB rating category spreads have increased during the same period of Febuary 2020 to December 2020. Example, BBB spread for six months tenor is up by 47 bps during the period.

Our Budget expectations also include, treating less than Rs 10 lakh loans to the 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; 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; 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; Abolition of withholding tax for debts received from foreign entities at least for one year till 31 March 2022.

The digital payments industry and digital lending industry must be having their own expectations as well!

If you ask me, I would say, these expectations are a) Liberalisation 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 per cent/80 per cent of all the sales (hard cash and digital), such retailer should be taxed at lower rate of income tax. c) Digital lending should have incentives like PLIs (performance-linked incentives) for the manufacturing sector. D) 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 the next two years. e) Any average three-year bonds should be considered for Tier-II capital and CRAR where the fintechs are lending for not more than 24 months and less than Rs 10 lakhs per customer.

What would be the benefits or how does the industry stand to gain from all these?

This will promote more digital transactions and cash handling will be reduced in banks. Shadow economy will be negated and more MSMEs will come under the formal tax net. It will also facilitate in bringing all the businesses in the organised setup besides helping in adhering to the financial inclusion policy of the Government of India at a brisk pace. Also, it will provide proper trail of transactions which as a result helps in reporting requirements.

What would be the expectations of MSMEs from the upcoming Union Budget?

Restaurants, hotels, Spas, 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.