Choppy landing for soft lending: Regulatory concerns on quality of lending

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– Vinod Kothari, finserv@vinodkothari.com

Some of the RBI’s recent stringent actions, with stop-business directions, raise an alarm amongst financial sector entities. Are these concerns limited to a particular type of lending, or can they lead to any general observations on the quality of lending? One shouldn’t be tunnel-visioned and believe that these regulatory objections are limited to specific types of collateral – gold lending, IPO funding or loans against share trading. In fact, underlying these concerns is a general philosophy – lenders must do a close introspection of their lending practices.

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Streamlined Regulatory Reporting Across Specified Entities

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– Archisman Bhattacharjee & Kaushal Shah | finserv@vinodkothari.com

What is the circular about?

In order to harmonise the procedure of filing of regulatory returns across Supervised Entities (SEs) and create a single reference point, the RBI has issued Master Directions RBI (Filing of Supervisory Returns) Directions, 2024 (‘Returns Master Directions’) on February 27, 2024. As stated in the Statement on Developmental and Regulatory Policies dated August 10, 2023, these directions consolidate and harmonize instructions for filing supervisory/ regulatory returns.  

Who is it applicable on?

The Returns Master Directions cover the following entities, collectively referred to as Supervised Entities (‘SEs’):  

  • All Commercial Banks including:
    • Public Sector Banks,  
    • Private Sector Banks,  
    • Small Finance Banks,  
    • Payments Bank,  
    • Local Area Banks, and 
    • Foreign Banks.
    • (excluding Regional Rural Banks)
  • Primary (Urban) Co-operative Banks. 
  • All India Financial Institutions (including Exim Bank, NABARD, NHB, SIDBI, and NABFID)
  • All NBFCs (excluding HFCs)
    • HFCs are excluded as their supervisory role is undertaken by NHB
  • All Asset Reconstruction Companies

From when are the new Returns Master Directions effective?

These Master Directions are effective immediately as on the date of notification (i.e. February 27, 2024). 

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The Promise of Predictability: Regulation and Taxation of Future Flow Securitization

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Dayita Kanodia | Executive | finserv@vinodkothari.com

The most reliable way to predict the future is to create it

– Abraham Lincoln

Surely, Lincoln did not have either  securitisation  or predictability in mind when he wrote this motivational piece; however, there is an interesting and creative use of securitisation methodology, to raise funding based on cashflows which have some degree of predictability.  In many businesses, once an initial framework has been created, cashflows trickle over time without much performance over time. These situations become ideal to use securitisation, by pledging this stream of cashflows to raise funding upfront. Surely, traditional methods of on-balance-sheet funding fail here, as there is very little assets on the balance sheet.

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