Ashok Haldia MD & CEO, PFS
Infrastructure Finance Companies (IFCs) a new category of non-banking Finance company created by RBI in February, 2010 as a specialised financial institution to meet growing financing needs of infrastructure. These were extended benefit like higher lending/ borrowing exposure, access to tax saving bonds, ease in ECB.
At the same time applicable regulatory and governance norms were made stricter compared to other categories of NBFCs. It was expected that IFCs would developed to become main source for infrastructural financing in India.
Erstwhile, NBFCs like PFC and REC which were government owned, and those in the private sector registered themselves as IFC. Newer NBFCs like PTC India Financial Services Ltd.(PFS) specialised in financing power projects were also registered as IFCs.
It is now increasing felt amidst the concerns over quality of portfolio of commercial banks that universal banking model is not compatible for infrastructural lending and IFCs having proved their domain expertise, aptitude and approach should become effective alternative for infrastructural lending.
The share of private sector IFCs which needs level playing field is however less than 10% of infrastructural lending' by banks and IFCs.it is necessary to address key concerns hindering the growth of IFCs.
Anamolies in tax provisions causing unjustifiable discrimination compared to banks with which these compete in infrastructure lending need to be removed.
1. Exemption as available for banks from the provisions of Sec 194A of the Income Tax Act requiring TDS on interest income on loans given by IFCs since the process of collecting TDS and TDS certificates is quite cumbersome and fraught with administrative challenges. At any point of time a considerable amount of TDS certificate remain to be received for 2-3 years.
2.Deduction for Provision for NPAs for NBFCs -as per Section 36(1)(viia) of the Act, provision made for bad and doubtful debts by banks are allowed as a deduction to the extent of 7.5% from the gross total income (and 10% of aggregate average rural advances made by them).
However, IFCs under similar directions of Reserve Bank of India in regard to income recognition and provisioning are also compulsorily required to make provision for standard assets and for NPAs but are not allowed deduction under Section 36(1)(viia) of the Act .
3.Provision for maintenance of Special Reserve under Section 36(1)(viii) of the Act should provide for period say 3 years beyond which withdrawal of amounts from the reserve should not be taxable under Section 41(4A).
Currently ,Section 36(1)(viii) of the Act requires deduction in for providing long-term finance for industrial or agricultural development or development of infrastructure facility etc in India only if special reserve so created is maintained by the taxpayer and any withdrawal from such a special reserve is subject to tax as per Section 41(4A) of the Act in the year of withdrawal.
Other than rationalisation of tax provisions as aforesaid, the budget should allow and allocate to IFCs in general as a category, raising of funds by issuance of tax free bonds .This would reduce their cost of raising resources and make it competitive.
There is no reason to confine the allocation for government owned financial institution and not to give level playing field to IFCs particularly when these are also subject to equally stringent, if not more, regulatory and governance norms of RBI. Further in the year 2010 -11, to support IFCs, government allowed IFCs to raise tax saving bonds.
However, this was withdrawn after 2 years, as government owned FIs, having allocation of more lucrative tax free bonds did not evince interest there-in. The government should allocate for issuance of tax- saving bonds for non-government IFCs in the budget, helping them to broaden their resource base and lend to infrastructure projects at low interest rates.
The budget should further announce that non -government IFC, which fulfills the requirements of Section 2(72)of the Companies Act and of the government guidelines issued for the purpose in June 2011 as modified should be given status of Public Financial Institution.
Non consideration of such requests by the government has denied the IFCs excepting a very few, jurisdiction under SARFESAI Act and access to cheaper finance from pension funds and insurance funds among other fiscal and non fiscal advantages.