Microfinance institutions (MFI) are looking for some respite in the form of reduction in GST rates, and incentives for lending to the underserved population, from the upcoming Budget.

The MFI industry, which has been reeling under pressure post demonetisation on account of a substantial dip in collection rates, resulting in the rise of non-performing assets (NPA), has just started showing signs of recovery.

According to Ratna Vishwanathan, former CEO, Microfinance Institutions Network, the industry will benefit if the Centre either brings down or exempts MFIs from GST.

The benefit of lower GST or its exemption will in turn be passed on to end-users.

Crucial link

"MFIs act as a crucial link in lending to the poorest of poor. The industry will be happy if the government reconsiders the issue of GST," Vishwanathan told BusinessLine.

The current GST rate for MFIs stands at 18 per cent, which is higher than the 12 per cent service tax charged earlier. This (higher tax incidence) is passed on to end consumers.

This could pose a hindrance to the task of achieving financial inclusion as it will push the cost up, said P Satish, Executive Director of Sa-Dhan, a self regulatory organisation for the microfinance industry.

"If a customer borrows directly from bank there is no GST. However, if he borrows from an MFI which acts as a business correspondent to a bank, then GST is levied. This is an aberration," he said.

Disparity in tax treatment

According to Jugal Kataria, Chief Financial Officer, Satin CreditCare, there is a disparity in tax treatment meted out to the MFI industry.

While provisions made by banks on their NPAs are permitted for tax deduction, the provisions made in the books of MFIs cannot be treated as an expense for tax purposes.

"In the light of demonetisation and its big impact on MFI portfolios, this issue is more pertinent today than ever before," he said.

Though bank lending to MFI qualifies as priority sector lending, they still charge a commercial rate of interest which ranges from 11 to 14 per cent for different institutions depending on the rating, size etc.

"In order to achieve the agenda of financial inclusion, there should be some incentive in the Budget through RBI or through banks, for lending to MFIs at attractive rates of interest in order to serve the underserved population," said Kataria.

Capital adequacy ratio

The government should also consider slashing the capital adequacy ratio for NBFC-MFIs from the current 15 per cent to 10 per cent to give a boost to the industry, said Kuldip Maity, MD & CEO, Village Financial Services.