India: Tax Breaks for NPA Provisioning Will Help MFIs Save ₹150 Crore

Mar 2016
India, March, 08 2016 - Microfinance institutions (MFIs) can now enjoy tax benefit on provisioning for non-performing assets (NPAs) on par with banks.

Budget 2016-17 had proposed that non-banking finance companies (NBFCs) will be allowed to claim tax deductions on the provisions for NPAs up to 5 per cent of total income.

At present, only provisions made by banks and financial institutions for bad and doubtful assets are allowed as a tax deduction. Banks are permitted to claim tax deduction for such provisioning up to 7.5 per cent of their total income.

NBFC-MFIs, which are also subjected to the same prudential norms — such as capital adequacy, provisioning, mark to market, and asset liability management — were not given this benefit.

There are 56 NBFC-MFIs in the country and the RBI mandates that they provide for 50 per cent of the outstanding EMIs (equated monthly instalments) if there is no payment for 90 days and 100 per cent provisioning after 180 days.

When asked on the likely impact of the new tax break, S Dilli Raj, President, SKS Microfinance, told BusinessLine: “It will have a positive revenue impact for the sector and will create a level-playing field for micro-lenders on par with banks.”

According to industry body Microfinance Institutions Network (MFIN) data, MFIs provided credit to 2.88 crore clients with a gross loan portfolio of ?42,331 crore as on December 31, 2015. The portfolio at risk remained under one per cent for third quarters of the current fiscal.

So, if NPAs are estimated at one per cent, they will be ?423 crore. If full provision is made for that at the effective tax rate of 34.61 per cent, the tax break will be ?146 crore.

Even though there is no complete parity with banks in this regard as banks are allowed 7.5 per cent and NBFCs only 5 per cent, MFIs are still happy.

Seen in the context that it was zero till last year and was not even allowed as a tax deductible expenditure, the Budget this year makes a ‘good’ beginning, the SKS official said.

“More than the actual revenue impact, this move is welcome because NBFCs are eligible for a dispensation which was allowed only to banks hitherto,” the Dilli Raj added.

There are other benefits as well. The tax norms on securitisation of portfolio were tweaked to give tax benefit to the trust. This removes the cloud over securitisation and there could be more securitisation deals going forward.


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