The next Union Budget for 2023-24 has high expectations for India’s micro, small, and medium businesses (MSME) sector, which accounts for almost 30 per cent of the country’s GDP and 45 per cent of total employment.
Without a question, the cash-strapped MSME sector has the most job creators and taxpayers. They create things and services that improve and add value to people’s lives across the country. However, despite strong intentions and support, the MSME sector has been in persistent hardship for several years. It certainly requires a lot more.
Accelerating the flow of finance to small businesses is critical for India’s goal of being the world’s fifth-largest economy by 2025, as the MSME sector has been a primary driver of the country’s rise to fifth place.
Currently, India’s 63 million MSMEs contribute to over 30 per cent of the country’s gross domestic output (GDP). They have already supplied approximately 50 per cent of India’s total exports in 2022, during which, the country’s exports have increased by 37 per cent year on year (YoY).
In terms of central initiatives, the Modi government offered an additional loan under the Emergency Credit Linked Guarantee Scheme (ECLGS) for 130 lakh MSMEs in the 2022-23 budget and extended it till March 2023.
HP Singh, Chairman & Managing Director, Satin Creditcare Network Limited, says, “NBFCs are a major contributor to driving India’s economy and are one of the major focuses of the government. The Government of India has introduced various new rules and regulations for the NBFC sector in FY 2022-23. The new regulatory framework, which was primarily introduced to create a level playing field for the MFI segment and help the RBI de-risk the sector, has been very beneficial. One of the major benefits of this new framework is its assessment of household income and debt obligations as a means to better underwriting, and the flexibility of responsible risk pricing approved by the board of the NBFCs, which helped build a stronger lending ecosystem and ensure the smooth functioning of the sector. NBFCs are a crucial part of the banking ecosystem in India. By providing lending services to low-income and high-risk individuals, the NBFC sector is helping strengthen the MSME sector in India. The NBFC sector is expecting this year’s budget to provide additional funds for small and medium NBFCs, which will ultimately help the growth of this sector. Furthermore, RBI increased the common household limit earlier this year to Rs 300,000 for loans to qualify as microfinance and the cap on NBFCs was increased to 25% of assets as opposed to 10%. This helped the NBFC sector grow strongly, and the number of unique borrowers sharply increased to 62mn in the second quarter of 2023 as opposed to 60mn in 1QFY23. We are hopeful that the budget will introduce additional regulations like these that will level the playing field for the NBFC sector. Additionally, the RBI has raised rates by a total of 190 basis points since May 2022 in order to curb inflation and its effects. We believe that the repo rates will further increase in 2023, providing an added cushion for dealing with inflation. We also would like to see some taxes relief, in terms of exemptions to NBFCs, within the 2023 budget.”
Kunal Mehta, Founder & Director, Arthan Finance, stated that, “The Budget for 2022 given by the government of India was built on the value of pro-growth through the lens of digitization. With a strong focus on economic recovery, the Finance Minister announced a 35% increase in CAPEX and extended the ECLGS for the MSME sector. This greatly helped in increasing and stabilizing the liquidity in the NBFC sector. These measures taken by the government in FY23 have helped boost recovery for the NBFC sector. With the role of NBFCs in supporting and augmenting the economic growth of India, we are hopeful that the government will continue to introduce initiatives that will ensure liquidity within the sector, helping its growth and expansion. Additionally, with the new regulatory framework introduced for the NBFCs by the RBI in FY23, we are expecting certain measures that will help harmonize the rules and regulations surrounding recovery measures and provide tax relief through certain exemptions. While we have been recovering well from the Covid-19 pandemic, with the information of new variants being introduced, the government needs to introduce certain initiatives that will strengthen the self-employed and the MSME sector of the country. The budget allocation for MSMEs in FY22 had more than doubled to Rs. 15,700 crores. The MSME sector contributes to around 30% of India’s GDP and will continue to be a driving force adding tailwinds to the economic growth of the nation. However, many MSMEs are unable to receive credit from banks. With NBFCs focusing on credit lending to these MSMEs, the budget allocation of 2023 needs to provide stronger support to the NBFC and MSME sectors, ensuring their robust growth. Additionally, the government needs to increase the credit for retail MSMEs to help them to secure loans from regulated entities with ease and place a stronger emphasis on building the credit lending ecosystem for the underbanked sector of India.”
Vasumathi Koganti, MD, IKF Finance Limited, says, “Vasumathi Koganti, MD, IKF Finance Limited states that “Non-Banking Financial Companies (NBFCs) play a decisive role in accelerating economic growth with a superior reach and understanding of the Unbanked and Underserved Small Road Transport Operators and Small and Medium Enterprises”. Therefore, the government should make audacious moves to encourage banks to increase significant funding to NBFCs in the upcoming budget. NBFCs look forward to relaxed tax regulations and liquidity assistance from banks.
Over a period of time, RBI has tightened the NBFC regulatory framework and brought them more in line with bank regulations. For eg. IRAC norms and 90 Dpd NPA classification are one of such acts. However, the cost of funds and the tax laws have not been at par with banks. Banks have strong liability franchises with a huge CASA base which brings down their cost of funds, whereas the challenge for NBFCs is raising the cheaper cost of funds, in adherence to compliance obligations on higher taxes compared to banks in several areas which invariably increase the overall cost of operations. We require a more obliging compliance framework to provide credit to unbanked and underbanked SRTO’s and small business owners and bring them into the formalizing lending system.
Furthermore, the NBFC industry is hoping that the government will standardize taxation and recovery policies. It anticipates tax relief by exempting NBFCs from paying tax on source-deducted income. A more flexible and cost-effective financing source for NBFCs is also urgently required”.
Nitin Sharma, MD & CPTO, CredAble, mentioned that, “Our expectation from Budget 2023 is for the government to plan for a long-term sustainable model for MSMEs. Considering the current economic uncertainty, MSMEs struggling with soaring commodity prices and raw material supply disruptions are hoping for some immediate relief. MSMEs need schemes much like the Emergency Credit Line Guarantee Scheme (ECLGS) to tide over the challenging times and meet the rising, time-sensitive capital needs.
With talks of the government taking a renewed focus on the Made in India brand and import substitution, MSMEs will be in a better position to grow and scale their operations significantly. There is also a dire need to introduce regulatory measures that will attract more FDI, which in turn, will boost the economic activities of MSMEs. In addition to the reduction in the corporate tax rates, we also hope for a reduction in the Income Tax rates for Partnership firms, LLPs, and proprietorships which comprise the majority of MSMEs. As very few MSMEs have been able to avail the facility of the recently launched TReDS (Trade Receivables Discounting System), owing to the lengthy process involved—there are expectations to further expand the TReDS facility to cover more MSMEs as well as include certain concessions. As the flow of funds to the MSME sector gets interrupted due to delayed payments, provisions to settle the payments faster as well as enable easier lines of credit for MSMEs are needed.
Akshay Mehrotra, Co-Founder and CEO, Fibe, stated that, “Annual budgetary exercise is the most anticipated regulatory update by the salaried individuals, the key contributors to the country’s tax revenue. It is expected that there will be a change in tax slabs or in terms of tax-related relief. As the working population is India’s primary source of tax revenue, they are the target of the most expected regulatory changes from the Union Budget 2023.
As it is expected that in the upcoming budget, some relaxations will be provided to the personal loan borrowers, we look forward to 35 per cent of the Indian lending market as a lender. The salaried group also anticipates long-term benefits like healthcare, higher education, superannuation, and post-retirement benefits from the government in the upcoming budget.
One of the most important demands the businesses have from the government for the next Budget is to further ease the financial burden for start-ups in the fintech industry. The industry also wants depreciation on the fixed assets used by fintech companies to save on taxes. The government should be helping smaller NBFCs and fintech companies, working on their product in Tier-2 and Tier-3 cities with adequate co-lending limits, rates to develop the fintech industry and become fully digitalized. We hope that the 2023 budget will prioritize the policies and add to the fintech sector growth.”
Arun Nayyar, Managing Director & CEO, NeoGrowth, says “MSMEs in India are underfinanced and unserved, and a huge addressable credit gap exists in India. SME focussed NBFCs and new-age digital lenders can play a critical role in reducing this gap through their deep market penetration, strong customer connects, and innovative technology and digital offerings. Access to capital to these players by the government can play an important role to enable inclusive growth of MSMEs.
In the upcoming budget, the government could introduce directives for commercial banks for lending to SME focussed lenders. Another encouraging directive could be if the government earmarks capital in the form of equity, debt or guarantees to enable lending to MSMEs.”
Sanjay Sharma, MD and CEO, Aye Finance, stated, “The year ahead could well be the point of inflexion for India. As the world veers precariously on the border of depression and China’s global growth engine takes a breather, the Indian growth rate seems relatively less affected. This can indeed give us the momentum to pull ahead in the world stakes. The budget should hence focus on supporting growth and stability, instead of conservative incrementalism.
As we pull ahead and reach for the 10 trillion dollar GDP, there is no time to lose in addressing the social inequalities. Support for the 70 mn micro-scale enterprises is the need of the hour and this budget could make a start on the following ideas:
1. Lending to micro-enterprises by NBFCs and Banks should be encouraged. Just as banks have to meet a specific priority lending quota for Agri, there should now be a specified quota for micro-enterprises in the priority lending.
2. Allocation for initiatives that help improve the quality of the produce of micro-enterprises. Here Govt should allow subsidies for private sector programs that can deliver technology and product improvement by such micro-enterprises at scale.
3. Health and critical illness covers at affordable premiums for micro-enterprise owners and their families – so that their businesses may be protected from these adverse events.
4. Continued Credit Guarantee support through CGTMSE and simplification of the legal recovery requirements for very small loans below Rs 2 lacs.
These bold steps will enable improvement in the flow of funds to the financially excluded micro-scale enterprises. This segment provides 95 percent of non-farm employment and we can no longer turn out heads away from their needs.
I believe that the Budget 2023 will bring in a period of progress and prosperity for all sectors – NBFCs and beyond – and catalyse policies and regulations that support holistic growth of the economy”.
Deepak Aggarwal, Co-Founder & Co-CEO, Moneyboxx, stated, “With 65 per cent of population residing in rural India and largely dependent on agriculture and allied sectors, fast and sustainable growth in the sector has long-lasting implications for inclusive growth. While policy initiatives such as priority sector lending targets, Jan-Dhan accounts, Mudra Yojana have led to improved access to credit over the years, further impetus is needed given that rural India received only 9% share of banking credit despite contributing close to half of country’s national income. New-age, Fintech players are expected to play a pivotal role along with banks in widening financial inclusion and ease of availability of credit. In the upcoming Budget, policies focused on addressing this structural credit gap and measures to boost rural income would be welcome.”
Shweta Gupta, Co-founder, MUDS Management, stated “The Union Budget will be presented against rising inflation, geopolitical uncertainty and a resurgence in COVID cases globally. A series of proactive steps by the government will play an instrumental role in putting the Indian economy on a growth trajectory. MSMEs and NBFCs are two formidable powerhouses of the Indian economy. Hence, due measures should be taken to foster an enabling environment for their growth. NBFC taxation should be on the lines of those of banks. Currently, they face higher taxes and an increased compliance burden compliance framework which impede their growth. Streamlining taxation and recovery policies is also the need of the hour.
For instance, NBFCs should be exempted from paying tax on source-deducted income from securitisation. For corporates, there is a need to bring uniformity in tax rates and implement a uniform 15 per cent rate to ensure the global competitiveness of the economy. Moreover, certain measures, such as offering a GST subsidy on PoS(Point-of-Sale devices), refinancing options for MSMEs on the lines of the National Housing Board’s refinancing scheme and the relaxation of an interest rate cap of 18 per cent on the Credit Guarantee Fund Scheme (CGS) will facilitate more accessible credit besides laying down the framework for the growth of the MSME sector, which accounts for 30 per cent GDP of the country.”
Meenakshi Vashist, Founder -CEO, TekUncorked, says, “The Finance Minister may unveil a range of initiatives to support India’s energy transition in the Union budget. Climate change is a reality and I am glad that people are realising this. The only way forward is to deploy energy-efficient technologies!
The government may offer a 5 per cent interest rebate on loans and a credit guarantee of 75 per cent of the loan amount or ₹15 crores per project to small and medium enterprises operating in this sector. So, great news for new SMEs deploying energy-efficient technologies! Here’s looking forward to Budget 2023.”
Rajarshi Bhattacharyya, Co-Founder, Chairman and Managing Director, ProcessIT Global, says, “Across the world and including India, the digital transformation and cybersecurity market growth have been phenomenal. As more businesses are digitally driven, robust digital infrastructure is required to scale, grow and implement cutting-edge cybersecurity solutions. Government should support extensively with public digital infrastructure spending and cybersecurity investments. The focus should also be on the ease of doing business and the reduction in compliance costs, especially for MSMEs and start-ups. Policy reforms that can further enhance private investments are required.
There should be an increase in investments in cybersecurity programs to ensure online safety while establishing accountability and trust. It should implement measures for addressing concerns around data privacy as well.”
Anil Pinapala, CEO & Founder of Vivifi India Finance, says “In the upcoming union budget, I hope to see a strong mandate for financial inclusion and assistance from the government of India for start-ups attempting to bring in credit for all transcending language, literacy, location, livelihood like FlexPay. Relaxation in norms and assistance with liquidity to lending NBFC fintechs who are attempting to offer credit to the under-served and unserved would be a welcome move. I also hope that non-prime lending could be brought under the priority sector so that NBFCs can truly work to bring credit to all”. We also hope initiatives from the government on whitelisting of digital lending apps to curb the frauds.”
Rakesh Kaul, Executive Director & CEO – Clix Capital, says “In India, NBFCs have played an instrumental role in making credit available to small businesses, so as to help them grow and scale. Considering that MSMEs contribute to one-third of the country’s GDP, account for 48% of exports and create 111 million jobs, it is imperative that the Government protect their interests. This is absolutely indispensable if India aims to become a $5 trillion economy by 2025.
Furthermore, as NBFCs have been playing a critical role in providing MSMEs with easy access to credit, in the upcoming budget, the industry expects the Government to implement budgetary relaxations to support the growth of NBFCs. This will let them participate in co-lending programs and enable them to push adequate funds in priority sectors.
The Government should also create a liquidity support system for NBFCs and broaden the guarantee scheme under CGTMSE, which in turn, will go a long way in ensuring a transparent and seamless flow of credit to MSMEs. Access to formal credit is one of the biggest challenges that MSMEs in the country is facing. Only 16% of MSMEs get access to loans from banks, while the rest has to rely on informal sources. MSMEs currently need around ₹25.8 lakh crore formal credit.
In this year’s budget, the Government should also look at simplifying the taxation regime as that would broaden the tax base bringing more funds into the national exchequer. NBFCs are demanding that they should be taxed in a manner that is at par with that of banks, since this is impacting their efficiency to reach out and serve the last mile customers and MSMEs, that are spread across the length and breadth of the country.
To empower NBFCs and such new new-age entities, the Government should look at introducing reliefs such as – no TDS on interest income, allowance/deduction on the provision made for NPAs, and centralized and uniform GST registration. Such holistic measures will help NBFCs proliferate deeper into our country making their innovative products and services available to vast cohorts of unserved and underserved sections of the population, including micro and small business owners.”