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Why being GST-compliant can actually increase your creditworthiness : 15-07-2017


Goods & Service tax aka GST, is often dreaded and misunderstood. The confusion simply does not seem to go away. In this article, we are focusing on the impact of GST on creditworthiness for micro, small and medium industries.

Many of us know that our past credit behavior and the resultant credit score is instrumental while availing loan facility from banks. Even though creditworthiness of an individual loan applicant is one of the prime factors gauged by lenders, India has a long way to go when it comes to credit assessment in the business sector. It seems that the banking industry would probably face stress close to Rs 55,000 crore in its MSME exposure as per the recent reports from Transunion CIBIL. Small businesses have always found in procuring business loans due to ‘information asymmetry’, making the lenders hesitant to lend to them. However, this is expected to change post GST implementation.

A key aspect that keeps the enterprises safe from being scrutinized seems to be a myth that creditworthiness is calculated by size (income, net worth, strength of the company, vintage, reputation etc.) rather than sales and revenues. With the advent of GST, irregularity in data keeping and shoddy credit trails along with under-reporting of income and transactions will be a thing of past, which will inevitably pave way for MSEs and SMEs to get more financial backing and enter the organized sector .

The possible impacts of GST on creditworthiness of businesses are summed up in the points below.

i. Process & Resultant Impact of GST on Invoice Tracking:
Invoicing is a crucial part of any transactional execution. Post GST too, it will be considered mandatory for recording the details of a sale or purchase in the GST Network. Here, a streamlined flow of input credit right from the manufacturer to the end user, across the nation, can be ensured. This will force all the parties involved in the chain to record the invoice accurately to get the tax benefits.

For instance, under-invoicing was commonplace in import-businesses so as to avoid customs duty. With GST, all sale prices have to be entered in the GST network, making it literally impossible to under-declare or under-report the items and their prices. With the whole process becoming absolutely transparent, MSEs and SMEs will be deemed more creditworthy by lenders.

ii. Organized Vs Unorganized Lending:
Creditworthiness is not exact mathematics, but currently it is rather subjective (based on size, business performance and profit) when it comes to MSEs and SMEs. This will change post GST, when they will have no other way forward, but to report all their income. Lending market is quite gung-ho about the switch to GST because it means that small enterprises are automatically switched to organized sector with accurate and timely income  declaration.

With all the income and tax documentation in order, banks will have a better picture about a business’ creditworthiness. This can enable the businesses to avail business loans from organized lenders at better and more competitive interest rates compared to the high-interest business loans they usually get from unorganized lenders.

iii. Bad Loans Vs Good Loans of Businesses:
According to a recent CRISILBSE 0.19 % Survey, almost 25 percent of MSEs rated from 1 to 3 churned over an annual revenue of up to Rs. 5 crore in the previous financial year, 2016, with bigger profit margins compared to big companies. As Finance Minister Arun Jaitley reiterated, the core issue of Non-Performing Assets remains with the big corporates, mainly in the textile, steel, power and infrastructure sectors.

In the previous FY, India faced a situation, where a major chunk of MSEs and SMEs failed to get financial support thanks to NPAs by 25-30 corporates. However, with better repayment history and improved transaction trail along with accurate reporting of income, small businesses could be deemed more trustworthy by lenders once the GST is effective, leading to a fair distribution.

iv. All Tax Evasion Loopholes Closed:
On individual level too, Government is going all out to increase tax compliance. One way many people manage to evade taxes is by possessing multiple PAN Cards and filing tax returns using different PAN Cards. Unlike PAN Card, Aadhaar is biometric-authenticated and chances of replication are little to zero.

When Aadhaar and PAN Card is linked, the duplicate PAN Cards become invalid by default once GST comes into effect. Banks have already intimated their customers to link their Aadhaar Card to bank accounts. This interconnection of Aadhaar Card, Bank Account(s) and PAN Card ensures a better tracking system for all transactions. As a result, government can monitor all financial transactions conducted by an enterprise. This creditworthiness and transparency could work favorably when small businesses try for government loans, aids and subsidy.

What it means for banking industry?
Banking is essentially a service sector and hence there is a level of paranoia that financial services and products, especially unsecured loans and business loans are going to be drastically effected. Yet, the industry predicts a dramatic rise in loan booking and decline in bad rates. Changes will always find resistance in one way or the other. But, it is too soon to judge.

(Aditya Kumar is Founder & CEO Qbera.com. Views expressed are his own)

Source : Economic times