Ombudsman Scheme for PPI issuers

By Simran Jalan (simran@vinodkothari.com)

Introduction

The payment technology has evolved and the number of digital transactions is increasing enormously. With this rapid adoption of digital mode of transactions, there was an emerging need for an expeditious grievance redressal mechanism for strengthening the consumer confidence in this channel. Consequently, the Reserve Bank of India (RBI) has issued an Ombudsman Scheme for Digital Transactions, 2019[1] (Ombudsman Scheme) to provide a mechanism for redressal of complaints against deficiency in services related to digital transactions.

In this article we shall discuss the important provisions of the scheme and their impact on Prepaid Payment Instrument (PPI) issuers.

Read more

LIABILITY OF GUARANTOR AND PRINCIPAL DEBTOR IS CO-EXTENSIVE AND NOT IN ALTERNATIVE

By Richa Saraf (legal@vinodkothari.com)

In the case of Sanjeev Shriya v. State Bank of India & Ors.[1], the Hon’ble Allahabad High Court has barred parallel proceedings in Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT). Below we discuss the implications and analyse the judgment:

Read more

RBI Bi-monthly Credit Policy: NBFCs moved to a ratings-based risk weight regime

By Finacial Services Division (finserv@vinodkothari.com)

The RBI’s Statement on Developmental and Regulatory Policies dated February 1, 2019 proposes that henceforth, bank lending to NBFCs will be risk-weighted based on the Basel II risk weights, based on the rating of the NBFC in question. This facility was earlier available only to asset finance companies, and has now been proposed to be extended to all NBFCs, excluding core investment companies (CICs). The likely impact of this new dispensation may be to encourage banks  to lend to NBFCs other than the asset finance companies, such as those focusing on loans against properties, personal loans, or loans other than to productive assets. This measure may be aimed at easing the present liquidity strain affecting the NBFC sector, though, it is not sure whether the lower risk weight itself will be a strong motivator for banks to consider lending to NBFCs. Read more

SEBI proposes to liberalise norms for REITs & InvITs

By Simran Jalan (simran@vinodkothari.com)

Introduction

Infrastructure Investment Trusts (InvITs) is an innovative vehicle that allows investors to invest in infrastructure assets. It was established with an objective of easing out the liquidity crunch in the infrastructure space. Real Estate Investment Trusts (REITs) has been one of the most important vehicles for making collective investments in commercial real estate. Emanating in the USA in 1960s as a tax transparent collective investment vehicle, REITs subsequently have been used by several other countries, and have done remarkably well.

The Securities Exchange Board of India (SEBI) had notified the SEBI (Infrastructure Investment Trusts) Regulations, 2014[1] (InvITs Regulations) and SEBI (Real Estate Investment Trusts) Regulations, 2014[2] (REITs Regulations) on September 26, 2014. With the introduction of these regulations and fast-growing cities needing more investments in commercial properties and infrastructures, it was expected that there will be a surge in these collective investment vehicles in India. However, the current scenario depicts a different story. Till date, only 3 InvITs have issued and listed their units raising approximately Rs. 10,000 crores and 1 REIT is in the process of making a public offer. Despite various relaxations given by the market regulator to these investment vehicles, they failed to attract investors.

Therefore, to gear up the market for REITs and InvITs and to increase the participants in this sector, SEBI has issued a consultation paper[3] with a proposal to amend regulations pertaining to REITs and InvITs. In this write up we intend to discuss the amendments proposed by SEBI.

Read more

Year of Direct Assignments: Volumes surge as NBFCs loan-sell as the way

By Vineet Ojha (finserv@vinodkothari.com)

Financial year ending 2019 saw a sharp surge and a life time high in the volume of securitisation/ direct assignment transactions in the economy. Consequent to the funding problems that the NBFC and HFCs have been facing over the last few months, direct assignment of retail portfolios have picked up considerable pace, with volumes touching an all-time high of Rs 1.44 lakh crore during the nine-month period (April-December) of FY2019. Of this, around Rs 73,000 crore was raised by NBFCs and HFCs through sell-down of their retail and SME loan portfolio to various investors (primarily banks). Investor appetite, particularly from public sector banks and private banks, is high at present, considering investors are not exposed to entity level credit risk, and are seen taking exposure to the underlying pool of retail and SME borrowers. Yields have gone up significantly with the changing market dynamics. The momentum in the securitisation market is likely to remain strong in the current fiscal as it is emerging as an important tool for retail focussed NBFCs for raising funds at reasonable costs while simultaneously providing a hedge against Asset-Liability mismatches. A visual trend of the market over the years can be seen below:

Why the sudden surge?

Looking at the figure above, we can see a sharp surge in the DA volumes in FY19. Majority of the issuance comes from Q3 in the year with around Rs. 73,000 crores. Although the major driver is the IL&FS imbroglio, it is not the only reason for this development.

IL&FS crisis:

Following the IL&FS crisis, the RBI has time and again prompted banks to assist NBFCs to recover from the cash crunch. However, wary of the credit quality of the NBFCs/ HFCs, the banks have shown more interest on the underlying loan portfolios than on the originator itself. Through direct assignment and securitization, these institutions get upfront cash payments against selling their loan assets. This helps these institutions during the cash crunch. Funds raised by NBFCs and HFCs through this route helped the financiers meet sizeable repayment obligations of the sector in an otherwise difficult market

RBI relaxes MHP norms for long tenure loans:

Another reason that explains this sudden surge in the volume of direct assignment or securitization volumes was the relaxation of the minimum holding period (MHP) criteria for long-tenure loans by the RBI. This increased the quantum of assets eligible for securitisation in the system. The motivation was the same, to encourage NBFCs and HFCs to securitise their assets to meet their liquidity requirements. You can read more about the same in our article here.

Effects of Securitisation

Primarily, PLS requirements were the primary drivers for securtisation. The number of financial institutions participating in securitization were quite low. Now, for liquidity concerns, NBFCs and HFCs were forced to rely on securitization to meet their liquidity needs. This, not only made them explore a new mode of funding, but also solved other problems like asset liability mismatches. In the nine months of FY19 and FY18, the share of non- PSL transactions has increased to 35 per cent compared to 24 per cent in FY17 and less than 20 per cent in the periods prior to that.

However, it’s not a rosy picture allover. Due to the implementation of IFRS, upon derecognized of a loan portfolio from the financial statements of the company, the seller shall have to recognize a gain on sale on the transaction. These gains disturb the stability of the profit trend in these financial institutions which would result in volatile earnings in their statements. The NBFCs have been trying to figure out solutions which would allow them to spread the gain on transfer over the life of the assets instead of booking it upfront.

Conclusion

The securitisation market remained buoyant in the third quarter driven by the prevailing liquidity crisis, following defaults by IL&FS and its subsidiaries. This surge is good for the Indian securitization market as India’s contribution to global securitization market, at about USD 12 billion, is barely recognized, for 2 reasons – one, India’s market has so far been largely irrelevant for the global investors, and secondly, bulk of the market has still been driven by priority sector lending (PSL) requirements. PSL-based securitisations obviously take place at rates which do not make independent economic sense. Now due to the surge in non-PSL based securitization, the rates at which the portfolios are sold are attractive to investors. This could attract global investors to the market.

Now that financial institutions have gained exposure to the securitization markets, they find that the transactions are attractive for sellers as well as investors. Our interaction with leading NBFCs reveals that there are immediate liquidity concerns . Banks are not willing to take on-balance sheet exposure on NBFCs; rather they are willing to take exposure on pools. Capital relief and portfolio liquidity are additional motivations for the originiators (and other potential investors) to enter into securitization transactions.

The arrival of digital empowerment

By Rajeev Jhawar (finserv@vinodkothari.com)

During the past five years, the Government of India has been working stalwartly towards achieving the vision of Digital India, that aims to transform India through the power of technology and bridge the digital divide. Other programs like Start-up India, Stand-up India and Skill India were designed to become a significant adjunct to this larger narrative.

The Reserve Bank of India (RBI) has been playing a catalytic role in permeation of FinTech into the economy, propelled by its Payment and Settlement System Vision – 2018. FinTech or digital innovations have emerged as a potentially transformative force in the financial markets. With the rapid adoption of digital payments across the country, aided by the introduction of innovative products in the payment space, RBI is focused on strengthening infrastructure and ensuring safety and security of digital transactions.

Further to accentuate digitization of payments and enhance financial inclusion through digitization,RBI has decided to constitute a high level committee, appointing Infosys co-founder and former Chairman of Unique Identification Authority of India(UIDAI), Nandan Nilekani as the Chairman of five-member committee, which inter alia shall:

  • review the existing status of digitization of payments in the country, identify the current gaps in the ecosystem and suggest ways to bridge them;
  • assess the current levels of digital payments in financial inclusion;
  • undertake cross country analyses with a view to identify best practices that can be adopted in our country to accelerate digitization of the economy and financial inclusion through greater use of digital payments;
  • Suggest measures to strengthen the safety and security of digital payments;
  • provide a road map for increasing customer confidence and trust while accessing financial services through digital modes;
  • suggest a medium-term strategy for deepening of digital payments;

Lastly, the committee shall submit its report within a period of 90 days from its first meeting.

The road to digitization of payments

As per RBI’s annual report 2017-2018, the payment and settlement systems recorded robust growth in 2017-18, with volume and value growing at 44.6 per cent and 11.9 per cent, respectively, on top of an increase of 56.0 per cent and 24.8 per cent, respectively, in 2016-17. The share of electronic transactions in the total volume of retail payments increased to 92.6 per cent in 2017-18, up from 88.9 per cent in the previous year with a corresponding reduction in the share of paper based clearing instruments from 11.1 per cent in 2016-17 to 7.4 per cent in 2017-18[1].

Multiple factors and official & behavioral trends are fueling this shift towards economy. Improved internet connectivity and high rate of permeation of smartphones in the Indian market has altogether shaped India’s payments landscape in favor of digital payment.

Furthermore, flagship government initiatives such as ‘Digital India’ would act as key catalysts for this change.


[1] https://rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2018