Budget 2017-18 And Its Impact On P2P Lending Industry

The Union Budget 2017-18, presented by Finance Minister Arun Jaitley on February 01, 2017 is yet another prudent budget.

At a time when India has been struggling to accelerate the economic growth, many were expecting the Government to divert slightly from the path of fiscal consolidation in the Budget.

But contrary to this belief, the finance minister not only did reiterate his commitment to fiscal consolidation but also prefer to focus on the quality of spending. It has honored the recommendations of the Fiscal Responsibility and Budget Management (FRBM) Committee which presented its report recently. The FRBM Committee report has advised the Government to curb the fiscal deficit at 3.0% of GDP every fiscal for next three years with a permitted deviation of up to 0.5% of GDP. However, As per the report, the Government shall exercise the ‘Escape Clause’ only when it expects the effects of such stimulus to be extraordinarily positive for the economy.

The Government has increased budgetary allocations for infrastructure development substantially. Besides, it has strengthened its support for rural development schemes as well. By doing this, the Government endeavors to create more jobs and boost consumption and lay the foundation for achieving 8% plus economic growth.

Here’re some highlights

• Total allocation to infrastructure has gone up by 13.5% from Rs 3.49 lakh crore to Rs 3.96 lakh crore.
• Budgetary support for agriculture and allied industries has gone up 20.8%.
• For FY2017-18, the Government has doubled the credit disbursement target to Rs 2.44 lakh crore, Under Pradhan Mantri Mudra Yojana.
• The affordable housing has received the precious ‘infra’ tag now. This will help the sector raise higher funds at extremely competitive rates.
• The Government has set the target for agricultural credit at a record high level of Rs 10 Lakh crore.
• For ensuring the availability of high-speed broadband in as many as 1.5 Lakh gram panchayats, the Government has allocated Rs 10,000 crore.
• The Government has taken a number steps to promote digitization. It endeavors to beef up digital payment infrastructure and grievance handling mechanisms.
• The Government aims to promote and rather mandate petrol pumps, fertilizer sales outlets, municipalities, block offices, road transport agencies, universities, colleges and hospitals among others for accepting digital payments.
• The Government has been mulling over plans to introducing structural reforms in the digital payment system. This initiative will include, amending Payment and Settlement Systems Act, 2007 and create the Payments Regulatory Board within RBI.
• The proposal to modify the Negotiable Instruments Act with the aim of fast-tracking the digital payments will also be taken up in FY 2017-18
• Under presumptive income tax scheme, those with mercantile trade turnover up to Rs 2 crore can declare 6% of the turnover amount as their presumptive income provided they receive their income in non-cash means. Otherwise, the presumptive income is taken as 8% of the turnover
• Permissible limit for claiming cash expenditure, including the capital expenditure, has been reduced to Rs 10,000.
• No transaction above Rs 3 Lakhs shall be made in cash.

All announcements above are extremely positive for the economic development. The effort of the Government to promote digital economy in a big way is likely to pay off rich dividends in coming years. P2P Lending platforms shall benefit immensely from this emerging trend.

How has the Budget 2017-18 affected the P2P Lending sector in particular?

As you may be aware, P2P Lending platforms predominantly focus on satisfying the credit demand in the unsecured personal loan segment and in the small business loans section. Therefore, it is directly affected by the interest rates, the performance of the mainstream banking and financial companies and the pace of economic activities.
In the aftermath of demonetization, there is a belief that the more money will be retained in the banking system, as we shift away from the cash-dominated economy to a less-cash economy. This is a positive development for banks and Non-Banking Financial Companies.
However, that won’t translate automatically into a greater financial inclusion as the credit channels in India face some unusual problems which are difficult to deal with. Therefore, the role of P2P Lending platforms will become crucial in future.

The story in detail…

Indian Banks, especially those engaged in the industrial lending, have been plagued with the problem of deteriorating asset quality. As per the Financial Stability Report released by RBI in December 2016, Gross Non-Performing Assets (NPAs) of assets of Scheduled Commercial Banks (SCBs) increased from 7.8% in March 2016 to 9.1% in September 2016. Subsequently, total stressed assets also jumped to 12.3% from 11.5% earlier. Urban cooperative banks and NBFCs have also been struggling with the asset quality concerns.

On this backdrop, there were expectations that, the Government may announce a concrete plan to resolve the problem of stressed assets. The Budget 2017-18 fell short on this count. The Finance Ministry neither presented a formidable plan to fix the asset quality problem nor did it pump in any substantial capital in Public Sector Banks to increase their risk-absorbing capacity. Budget 2017-18 has allocated mere Rs 10,000 crore for the recapitalization of banks. Although the Finance Minister has promised that, the more capital would be infused as and when needed, the fiscal situation may not offer any such liberty in FY 2017-18.

Moreover, aggressive plans to ramp up the infrastructure in the country may create a crowding effect on formal credit facilities. Banks with bulging stressed assets will have a limited risk appetite for aggressive lending. The Government has directed SIDBI to refinance credit institutions providing unsecured loans to in an attempt of promoting the financial inclusion program. However, the refinance facility would be available for those institutions lending at a reasonable cost to masses, based on their credit history.

In other words, those with little or no credit history may still get deprived of formal credit. Under such a scenario, a large part of the demand for unsecured loans may remain unmet. P2P Lending platforms may have an important role to play here.

The wave of digitization may help small and medium scale traders and entrepreneurs operating mainly in the informal sector to create a digital record of their cash flows. This might improve their prospects of securing loans on the P2P Lending platforms.

There are some shortcomings

The P2P Lending industry was expecting the Finance Minister to issue a clarification on the taxation front.

In the past, the tax department sent notices to start-ups that raised lower funds (based on valuations) in subsequent rounds of fundraising. The tax department has been of the view that, any valuation premium enjoyed in the past, makes the company liable to pay tax on capital gains, on a deemed basis. This hasn’t gone down too well with start-ups that often gasp for fresh capital and any such unfavorable tax treatment make matters worse. The budget disappointed on this count too.

Nonetheless, start-ups are now allowed to claim the tax holidays in 3 out of first 7 years from the day of incorporation—earlier they had to claim tax breaks in first 5 years.

What’s the road ahead…

Post demonetization, P2P Lending sector has been already witnessing greater queries from borrowers for higher funds and for a longer duration. The thrust of the Government on digitization provides additional growth triggers.

However, for that to happen, it’s important that RBI starts regulating the sector and issues prudential guidelines. It would not only boost the investors’ confidence but will also weed out non-serious players.