Banks see credit growth for SMEs & self-employed after GST roll out


On 1st July 2017, one of the biggest tax reforms in the country came into action. Though there was a lot of hype about the same, the common people failed to get the zest of the topic. Most of them worried about the impact it could have on their lives. After demonetization, it was another big move by the largest democratic government in the world. Banks plays major role in MSME growth.

What is GST?

GST the acronym for Goods and Services Tax, is applicable on supply of goods and services. It is a unified taxing system that would replace the current taxes of excise, VAT and service tax. 

Why GST?

The main aspiration of GST is to simplify tax hurdles for the entire economy. In the earlier scenario, there were different VAT laws in different states which posed difficulty in interstate transactions. Most businesses have to pay and comply with 3 different taxes – excise, VAT, and service tax.

GST will bring uniform taxation across the country and allow full tax credit from the procurement of inputs and capital goods which can later be set off against GST output liability. This reform gives equal footing to the big enterprises as well as SMEs.

As every coin has two sides, GST too came with its own benefits and laybacks. While there was some reduction of taxes in certain sectors, the rest faced an upsurge. However, this might enlighten some minds to know that concept of unified taxation is no alien; this has been implemented successfully in several other countries. But the economic scenario of India is quite different from those nations and this brings the big question of how India will tackle this change.

It won’t be wrong to quote that the implementation of GST has shaken the financial world posing a great impact on every sector. The banking sector has also got its share of the blow. 

GST Impact on SMEs and credit growth

It is speculated that GST has made banking services more expensive. The most striking impact was on deployment of the ATM which has become more expensive now with a tax rate of 28% imposed on it. However, there is a bright side to the chapter of GST as well. With the digitalization initiative, now there will be transparency in business information and taxation details.

The moneylenders are hopeful with the single producer tax imposed which would definitely create a common market across India thus boosting credit growth. Earlier getting a loan for financing micro and small scale industries was a big nightmare. The accounted loan sanctioned in this section was just 0.1%. 

Why did the banks not lend to SMEs?

In India, there are numerous SMEs, start-ups and growing businesses that need financial support the most, but the banks failed to play their role of lending money here. Here are some of the obstacles that kept the banks away from extending their helping hand to the needy businesses:

  1. Lack of Financial Information: The financial information presented by the SMEs is not adequate, even their legitimacy is questionable at times. This is the biggest reason that makes the bank turn their back to the pleas of these business ventures.
  2. No Track Record : Young businesses fail to present a sustainable track record and banks rely on the history to process the loan
  3. Lack of Security: Banks need to scrutinize a lot of things before releasing the funds to make sure that the banks don’t incur loss. In case of SMEs the uncertainty is huge, so they need some kind of guarantee to ensure the payback.

How GST tackled this scenario?

With the implementation of GST, the detailed information of the businesses and taxes would be available in an electronic format and it would be much easier for the banks to process the loans for SMEs and self-employed portfolios. Once the full cycle of data is available and the bank could ascertain the legitimacy then there will definitely be acceleration in the credit growth of these segments.

GST opted for a unifying tax replacing the existing multitude of taxes. Earlier there were numerous taxes applied on a single item like service tax and excise duties for central and state taxes, such as octroi, entry tax and VAT. The picture of the banking industry was also somewhat similar. But now the service taxes that were applicable on almost all banking services, are going to be absorbed in the GST: Hence, the rate of the levy has gone up from 15% to 18%, but the impulse remains almost the same.

What’s the Banker’s say?

HDFC bank chairperson Shyamala Gopinath quoted “Some traction in government-led infrastructure investments, partly by restarting stalled projects could help turnaround domestic credit growth,”

The thoughts of Axis Bank, ED, Rajiv Anand also resonates with same frequency. He stated “What GST will provide us is that for many of these smaller companies, we will have data: So, our ability to understand these businesses, and therefore, lend to them will improve dramatically. We tend to underestimate the ability of businesses to change as circumstances change and many of these businesses will change, given the fact that it has become much more expensive to do business in cash.”

Business in India

Easy funding and bank support would encourage people to start their own business. The initiatives taken by the government like start up India, women entrepreneur and digital India will see a new dawn. The forecasts say that the coming era would belong to the business minded people and more and more crowd would move towards self employment rather than opting for the conventional 9 to 5 job.

GST is definitely a big game changer. The SMEs should buckle up and start investing in the right accounting software and keep a good discipline to record the transactions. This would prove to be a big boon in terms of getting back TDS and GST Payments in the GSTN linkages.

There are tremendous opportunities in India for business growth. The path for a better, prosperous India is paved and we have to take the steps forward.

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