Group representing NBFCs seeks approval to offer credit through UPI

Industry should be 'permitted to carry out certain activities restricted to banks', says FIDC

A group representing non-banking finance companies (NBFCs) has requested the government to let the sector offer credit on Unified Payments Interface (UPI), making the proposal ahead of the Budget on July 23.

 

The Finance Industry Development Council (FIDC) has also sought tax relief in the Budget and a regulatory role for itself. The Reserve Bank of India (RBI) only allows banks to offer credit lines on UPI, facilitated through Rupay credit cards and pre-approved credit lines.

 

“Considering the fact that the upper layer NBFCs are now subjected to regulations akin to banks, it is imperative that NBFCs are also permitted to carry out certain activities which are so far only being restricted to banks,” said FIDC in a letter to Finance Minister Nirmala Sitharaman, referring to the RBI’s four-tiered scale-based regulatory framework for NBFCs.

 

Allowing NBFCs to use UPI that way will improve credit access to individuals and small businesses not served by traditional banking services, according to FIDC. “By being part of the UPI network, NBFCs can offer integrated payment and credit solutions, making it easier for customers to access loans and repay them digitally,” it said.

 

FIDC has sought the RBI’s approval to become a self-regulatory organisation for NBFCs.

 

It has requested the Finance Ministry to exempt NBFCs from tax deduction at source (TDS) under Section 194A of the Income Tax Act. Accordingly, 10 per cent tax is deducted from individuals paying interest to NBFCs, causing cash flow constraints. According to FIDC, this is challenging as NBFCs operate on a thin margin and at times it is less than the TDS on the gross interest. Individuals making payments to banks, life insurance companies and other financial institutions are exempted from such tax deduction.

 

Ambiguity in tax law creates confusion in co-lending, where a single borrower may be funded jointly by a bank and an NBFC in a predetermined ratio. While the borrower is offered a single rate of interest, the bank and the NBFC may price the loan differently. Loan payment through EMIs, including the interest, has to be made to an escrow account from where amounts have to be credited to the bank and NBFC.

 

The borrower will not be in a position to split the EMI and determine the exact interest component of the NBFC, making TDS deduction “practically impossible”. It is therefore important to bring both banks and NBFC at par on the TDS provisions, FIDC said.

 

FIDC has also requested the government to relax the profitability criteria mandated for NBFCs under the credit guarantee scheme for financing micro, small and medium enterprises (MSMEs). It reiterated some of its earlier proposals, including the need for a refinance window for NBFCs. The window would involve development finance institutions like SIDBI providing refinancing to NBFCs for lending to MSMEs and the priority sector, with a special fund allocation from the government.