They say every action has an equal and opposite reaction. It rings true for the latest Ordinance on Banning of Unregulated Deposit Schemes (UDS) 2019, notified on February 21.
While experts cheer the move considering the government’s broad objective of banning illicit deposits that hurt small investors and preventing all transactions that don’t have a formal audit trail, inadvertently, it could have an adverse impact on India’s scores of small and medium businesses. The move also flies in the face of the NDA government, which has been making concerted efforts to prop up MSMEs, the latest being bank loan approvals in as little as 59 minutes.
At the core of the issue are Sections 2(4) and 2(17), which in essence prevents small businesses from borrowing from friends, family and partners for business purposes.
“For MSMEs, getting formal credit is still a distant dream. If anything, loans from friends and family should be encouraged. Instead, the latest Ordinance prevents that. There’s a need to re-frame the two sections (mentioned above),” said Buchibabu Gorantla, Senior Partner, Gorantla & Associates LLP, based in Hyderabad. He added that the architecture of the Ordinance as such was good, though it needs to be re-looked to make necessary amendments. “It was introduced in a hurry, without proper thinking and without a consultative approach. Proper research wasn’t undertaken,” he opined.
There have been similar concerns from several quarters in the past few days, and sensing the need, the Ministry of Finance, in a series of tweets, clarified that individuals can borrow money from relatives or friends for any purpose — business or personal. However, unless the necessary amendments are carried out, there won’t be any sanctity to the clarifications.
Importantly, the industry also sought clarity on capital received from partners in a partnership firm, which as per the Ordinance is excluded from the definition of a deposit. But ironically, partnership firm is entitled to receive a loan from relatives of any of the partners and it’s this asymmetry under the same Section 2(4)(f) that the industry is seeking clarity on. On its part, the Ministry of Finance has maintained silence so far and it remains to be seen how swiftly the uncertainty will be ironed out.
Meanwhile, following the ban on unregulated deposits, Peer-to-Peer (P2P) lending is expected to gain traction from small investors as SMEs are heavily dependent on informal resources, where transparency has always been an issue. “All unregulated deposits would now have regulated route that will not only help in boosting digital economy, but will also help in increasing the taxable income. Needless to say, P2P lending industry is poised to be a $5 billion industry by 2023 and can play a key role in financial inclusion and building a corruption-free nation,” said Rajiv M Ranjan, founder & CMD, PaisaDukan.
Sanjay Darbha, founder & CEO, PeerLend, said the Ordinance will help P2P lending sector in multiple ways. Firstly, all transactions carried out on NBFC-P2P lending platforms are regulated by RBI’s P2P master guidelines. “This will increase demand for formal credit and should be an upside for the P2P lending sector. NBFC-P2P lending platforms can become a formal route for many of the small-ticket informal transactions that are normally ridden with high transaction costs and significant collateral needs. P2P lending can finally emerge fully as a new asset-class for individual lenders in India,” he said.