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Budget 2023 Update: Microfinance Company's Tax Relaxations And Schemes

Microfinance companies or institutions (MFIs) act as a bridge to lend money from banks to small business owners at a specific margin. Simply put, these institutes typically support low-income groups, which can be micro, small, and medium enterprises (MSMEs) or retailers.

These institutions had high hope for Budget2023. They expected to have relaxation in tax rules so that they can make more profit out of borrowers.

Increasing Borrowing Cost- Challenge
MFIs are struggling to derive more profit out of lending money these days. It is because the growth is registered in stable credit and loans. Alongside this, an increase in the stress level of the loan portfolio is also seen in this sector, as per RBI's Financial Stability Report, December 2022.

During February 2022, the borrowing cost for MFIs rose up from 200 basis points to 400 basis points. This upping left MFIs with no choice, but to increase their lending rates. Consequently, the burden was put on the borrowers, who paid more. If you look into the interest rate that these entities charged before, it ranged between 18 and 22 per cent. Later on, it jumped up.

Credit bureau CRIF High Mark in June 2022 observed and came out with the fact that about Rs 24,500 crore of loans were yet to repay even after 180 days after the due date. This whole scenario led to increasing the credit costs for all microfinance lenders, which consequently reduced their profit margin.

When it became an uphill batter to control the borrowing cost, MFIs' body Sa-Dhan came up front to throw the light on upping non-performing asset (NPA) numbers. This body revealed that about 12 per cent of overall loans (which was INR 2.76 lakh crore) were still NPA at the end of June 2022. However, the overall repayment collection got better as per a report.

Though the inflow of funds to this sector turned up, but these microfinance companies found it challenging to access money from banks. It was indeed a big gap that needs to be removed.

Till September 2022, these very companies' loans scrolled up at INR 3 Lakh crore, which was a 23 per cent increment if you compare it with last year as per RBI.

This is where these companies were expecting more flexibility from the government.

So, the budget 2023 introduced the revised credit guarantee for MSMEs from 1st April 2023. It will also infuse INR 9,000 crores. In addition, there will be a new credit guarantee scheme introduced for MSMEs. According to it, their cost of credit will be reduced by 1 percent. This reduction will attract loan-seeking MSMEs to borrow money.

Tax Regulations
Microfinance bodies in India appear in a crucial role, especially when it comes to providing credit. This is the biggest advantage for informal and other sectors because big lenders mostly avoid availing loans to them.

On the flip side, microfinance companies avail funding to these sectors. In all, microfinance company registration proves a silver lining for poor and financially illiterate companies. This is how these small companies counter external shocks, improving income and developing feasibility.

Though, these MFIs were expecting improvement in various taxes (such as ESOPs) that are associated with startups at the time of liquidation. They also anticipated that the MAT (minimum alternate tax) might come down. They also expected to have incentives for angel investors who put money in high-risk ventures.

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