Ind AS vs Qualifying Criteria for NBFCs-Accounting requirements resulting in regulatory mismatch?

-Financial Services Division and IFRS Division,  (finserv@vinodkothari.com  ifrs@vinodkothari.com)

The transition of accounting policies for the non-banking financial companies (NBFCs) is on the verge of being completed. As was laid down in the implementation guide issued by the Ministry of Corporate Affairs, the Indian Accounting Standard (Ind AS) was to be implemented in the following manner:

Non-Banking Financial Companies (NBFCs)
Phase I

 

 From 1st April, 2018 (with comparatives for the periods ending on 31st  March, 2018)
·         NBFCs having net worth of rupees five hundred crore or more (whether listed or unlisted)
·         holding, subsidiary, joint venture and associates companies of above NBFC other than those already covered under corporate roadmap shall also apply from said date
Phase II From 1st April, 2019 (with comparatives for the periods ending on 31st March, 2019)
·         NBFCs whose equity and/or debt securities are listed or in the process of listing on any stock exchange in India or outside India and having net worth less than rupees five hundred crore

 

·         NBFCs that are unlisted companies, having net worth of rupees two-hundred and fifty crore  or more but less than rupees five hundred crore
·         holding, subsidiary, joint venture and associate companies of above other than those already covered under the corporate roadmap
· Unlisted NBFCs having net worth below two-hundred and fifty crore shall not apply Ind AS.

· Voluntary adoption of Ind AS is not allowed (allowed only when required as per roadmap)

· Applicable for both Consolidated and Individual Financial Statements

As may be noted, the NBFCs have been classified into three major categories – a) Large NBFCs (those with net worth of ₹ 500 crores or more), b) Mid-sized NBFCs (those with net worth of ₹ 250 crores – ₹ 500 crores) and c) Small NBFCs (unlisted NBFCs with net worth of less than ₹ 250 crores).

The implementation of Ind AS for Large NBFCs has already been completed, and those for Mid-sized NBFCs is in process; the Small NBFCs are anyways not required implementation.

The NBFCs are facing several implementation challenges, more so because the regulatory framework for NBFCs have not undergone any change, despite the same being closely related to accounting framework. Several compliance requirements under the prudential norms are correlated with the financial statements of the NBFCs, however, several principles in Ind AS are contradictory in nature.

One such issue of contradiction relates to determination of qualifying assets for the purpose of NBFC classification. RBI classifies NBFCs into different classes depending on the nature of the business they carry on like Infrastructure Finance Companies, Factoring Companies, Micro Finance Companies and so on. In addition to the principal business criteria which is applicable to all NBFCs, RBI has also laid down special conditions specific to the business carried on by the different classes of NBFCs. For instance, the additional qualifying criteria for NBFC-IFCs are:

(a) a minimum of 75 per cent of its total assets deployed in “infrastructure loans”;

(b) Net owned funds of Rs.300 crore or above;

(c) minimum credit rating ‘A’ or equivalent of CRISIL, FITCH, CARE, ICRA, Brickwork Rating India Pvt. Ltd. (Brickwork) or equivalent rating by any other credit rating agency accredited by RBI;

(d) CRAR of 15 percent (with a minimum Tier I capital of 10 percent)

Similarly, there are conditions laid down for other classes of NBFCs as well. The theme of this article revolves the impact of the Ind AS implementation of the conditions such as these, especially the ones dealing with sectoral deployment of assets or qualifying assets. But before we examine the specific impact of Ind AS on the compliance, let us first understand the implications of the requirement.

Relevance of sectoral deployment of funds/ qualifying assets for NBFCs

The requirement, such as the one discussed above, that is, of having 75% of the total assets deployed in infrastructure loans by the company happens to be a qualifying criteria. IFCs are registered with the understanding that they will operate predominantly to cater the requirements of the infrastructure sector and therefore, their assets should also be deployed in the infrastructure sector. However, once the thresholds are satisfied, the remaining part of the assets can be deployed elsewhere, as per the discretion of the NBFC.

The above requirement, in its simplest form, means to have intentional and substantial amount of the total assets of the NBFC in question to be deployed in the infrastructure area, both, at the time of registration, as well as a regulatory requirement, which has to be met over time. Breaching the same would result in non-fulfilment of the RBI regulations.

Impact of Ind AS on the qualifying criteria

The above requirement might seem simple, however, with the implementation of Ind AS on NBFC, there can be important issues which might result in the breach of the above requirement.

With the overall slogan of “Substance over Form”, and promoting “Fair Value Accounting” and an aim to make the financial statements more transparent and just, Ind AS have been implemented. However, the same fair value accounting can result in a mismatch of regulatory requirement, to such an extent that the repercussion may have a serious impact on the existence of being an NBFC.

As already stated above, once an NBFC satisfies the qualifying criteria, it can deploy the remaining assets anywhere as per its discretion. Let us assume a case, where the remaining assets are deployed in equity instruments of other companies. All this while, under the Indian GAAP, investments in equity shares were recorded in the books of accounts as per their book value, but with the advent of Ind AS, most of these investments are now required to be recorded on fair values. This logic not only applies in case of equity instruments, but in other classes of financial instruments, other than those eligible for classification as per amortised cost method.

The problem arises when the fair value of the financial instruments, other than the NBFC category specific loans like infrastructure loans, exceed the permitted level of diversification (in case of IFC – 25% of the total assets). Such a situation leads to a question whether this will breach the qualifying criteria for the NBFC. A numeric illustration to understand the situation better has been provided below:

Say, an NBFC-IFC, having a total asset size of Rs. 1,000 crores would be required to have 75% of the total assets deployed in infrastructure loans i.e. Rs. 750 crores. The remaining Rs. 250 crores is free for discretionary deployments. Let us assume that the entire Rs. 250 crores have been deployed in other financial assets.

Now, say, after fair valuation of such other financial assets, the value of such assets increases to ₹ 500 crores, this will lead to the following:

Under Indian GAAP Under Ind AS
Amount

(in ₹ crores)

As per a % of total assets Amount

(in ₹ crores)

As per a % of total assets
Infrastructure Loans 750 75% 750 60%
Other financial assets 250 25% 500 40%
Total assets 1000 100% 1250 100%

 

Therefore, if one goes by the face of the balance sheet of the NBFC, there is a clear breach as per the Ind AS accounting, as the qualifying asset comes down to 60% as against the required level of 75%. However, is it justified to take such a view?

The above interpretation is counter-intuitive.

It may be noted that the stress is on “deployment” of its assets by an IFC. Merely because the value of the equity has appreciated due to fair valuation, it cannot be argued that the IFC has breached its maximum discretionary investment limits. The deployment was only limited to 25% or so to say that even though the fair value of the exposure has gone up but the real exposure of the NBFC is only to the extent of 25%. Under Ind AS, the fair value of an exposure may vary but the real exposure will remain unchanged.

Taking any other interpretation will be counter-intuitive. If the equity in question appreciates in value, and if the fair value is captured as the value of the asset in the balance sheet, the IFC will be required to increase its exposure on infrastructure loans. But the IFC in question may be already fully invested, and may not have any funding capability to extend any further infrastructure loans. Under circumstances, one cannot argue that the IFC must be forced to disinvest its equities to bring down its investment in equities, particularly as the same had nothing to do with “deployment” of funds.

This is further fortified by Para 10. Accounting of Investments, Chapter V- Prudential Regulations of the Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 about valuation of equities:

“Quoted current investments for each category shall be valued at cost or market value whichever is lower”.

Hence, the RBI Regulations have been framed keeping in view the historical cost accounting. There is no question of taking into consideration any increase in fair value of investments.

Conclusion

Therefore, it is safe to say that while determining the compliance with qualifying criteria, one must consider real exposures and not fair value of exposures as the same is neither in spirit of the regulations nor seems logical. This will however be tested over time as we are sure the regulator will have its own say in this, however, until anything contrary is issued in this regard, the above notion seems logical.

Union Budget 2019-20: Impact on Corporate and Financial sector

RBI to strengthen corporate governance for Core Investment Companies.

Vinod Kothari

As a part of the Bi-monthly Monetary Policy on 6th June, 2019, the RBI’s review of Development and Regulatory Policies [https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=47226] proposed to set up a working group to strengthen the regulatory framework for core investment companies (CICs). The RBI states: “Over the years, corporate group structures have become more complex involving multiple layering and leveraging, which has led to greater inter-connectedness to the financial system through their access to public funds. Further, in light of recent developments, there is a need to strengthen the corporate governance framework of CICs. Accordingly, it has been decided to set up a Working Group to review the regulatory guidelines and supervisory framework applicable to CICs.”

Core investment companies are group holding vehicles, which hold equities of operating or financial companies in a business group. These companies also give financial support in form of loans to group companies. However, CICs are barred from dealing with companies outside the group or engaging in any other business operation.

Currently as per the data as on 30th April, 2019, there are only 58 registered CICs in the country. There may be some unregistered CICs as well, since those not having “public funds” do not require registration.

If a CIC is not holding “public funds” (a broad term that includes bank loans, inter-corporate deposits, NCDs, CP, etc.), the CIC is exempt from registration requirement. Presumably such CICs are also excluded from any regulatory sanctions of the RBI as well. However, it is quite common for CICs to access bank loans or have other forms of debt for funding their investments. Such CICs require registration and come under the regulatory framework of the RBI, if their assets are worth Rs 100 crores or more.

Corporate governance norms applicable to systemically important NBFCs are currently not applicable to CICs.

The RBI has observed that CICs are engaged in layering of leverage. This observation is correct, as very often, banks and other lenders might have lent to CICs. The CICs, with borrowed money, use the same for infusing capital at the operating level below, which, once again, becomes the basis for leveraging. Thus, leveraged funds become basis for leverage, thereby creating multiple layers of leverage.

While agreeing with the contention of the RBI, one would like to mention that currently, the regulatory definition of CICs is so stringent that many of the group holding companies qualify as “investment companies” (now, credit and investment companies) and not CICs. There is a need to reduce the qualifying criteria for definition of CICs to 50% of investments in equities of group companies. This would ensure that a large number of “investment companies” will qualify as CICs, based on predominance of their investments, and would be viewed and regulated as such.

Prominent among the registered CICs are entities like Tata Sons, L&T Finance Holdings, JSW Investments, etc. The extension of corporate governance norms to CICs is unlikely to benefit any, but impact all.

The Reserve Bank has accordingly constituted the Working Group to Review Regulatory and Supervisory Framework for Core Investment Companies on 3rd July, 2019 [https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR43DDEE37027375423E989F2C08B3491F4F.PDF]. The Terms of Reference (ToR) of the Working Group are given below:

  • To examine the current regulatory framework for CICs in terms of adequacy, efficacy and effectiveness of every component thereof and suggest changes therein.
  • To assess the appropriateness of and suggest changes to the current approach of the Reserve Bank of India towards registration of CICs including the practice of multiple CICs being allowed within a group.
  • To suggest measures to strengthen corporate governance and disclosure requirements for CICs
  • To assess the adequacy of supervisory returns submitted by CICs and suggest changes therein
  • To suggest appropriate measures to enhance RBI’s off-sight surveillance and on-site supervision over CICs.
  • Any other matter incidental to the above.

As per the press release, the Working Group shall submit its report by October 31, 2019.

Project Rupee Raftaar: An Analysis

-Kanakprabha Jethani | Executive

Vinod Kothari Consultants Pvt. Ltd.

kanak@vinodkothari.com, finserv@vinodkothari.com

BACKGROUND

The Working Group on Developing Avenues for Aircraft Financing and Leasing Activities in India, constituted by Ministry of Civil Aviation submitted its report[1] on measures for developing this industry in the country. The Working Group was formed to examine the regulatory framework relating to financing and leasing of aircrafts. The idea was derived from the Cape Town convention and it has also been proposed to enact a bill in order to fully implement the convention. This project is based on the theme “Flying for All”. The Indian civil aviation market has been exhibiting tremendous growth for past years. There is an overwhelming increase in demand for passenger transportation for which airlines in India have placed orders for more than 1000 aircrafts. Moreover, Indian airlines have been relying on other countries for financing acquisition of aircrafts on export credit, loan or lease basis. This hair-triggers the need for India to have in place its own systems for financing of such acquisitions.

One of the motivations of the project is to ensure that the dependence of Indian aviation industry on import leases is reduced. Currently more than 90% of the aircrafts operating in the country are on import lease basis, and there is a huge monthly outflow of foreign exchange by way of lease rentals, which is not reported as ECB, since it is an operating expense.

GLOBAL PERSPECTIVE TO AIRCRAFT FINANCING AND LEASING

The key players in global aircraft financing and leasing market are Ireland and the US. Countries like China, Singapore, Hong Kong and Japan are emerging competitors in the market. The structures of aircraft financing, however, differ largely in all of these countries. The overall trends in the global arena can be evaluated on following bases:

Regional Outlook: through a research conducted for the Aviation Industry Leaders Report[2], it was concluded that North America is viewed as the most optimistic market player. Europe shows mixed signals due to market being strong and simultaneous slowing down of economy and other political issues. The Middle Eastern countries show a slow pace of growth and their models exhibit signs of stress. African airline market still has a lot of unrealised potential.

Financing Trends: sale and lease back transactions have become the most frequently used medium of aircraft finance over the world. Other forms of financing such as commercial bank debt, pre-delivering payment financing etc. have picked up pace. Also, traditional forms of financing such as export credit continue to be in operation but with reducing levels. Overall, the capital market remains very active and innovative in the aircraft finance sector.

Technology: new technology in aircrafts is being introduced frequently. However, implementation and commercialisation of the same continues to be a challenge. The Aviation Working Group’s Global Aircraft Trading System (GATS) proposed digitisation of transfer of lease deed ownership system which shall be expected to be activated by end of the year 2019.

CURRENT SCENARIO OF AIRCRAFT FINANCING IN INDIA

In terms of growth and advancement, India is far behind other Asian economies such as China, Singapore and Hong Kong. However, the Indian Aviation market has shown exponential rise in the past few years with an annual growth rate of 18.86% in 2017-18 and overall growth of 16.08% in passenger traffic. From 74 operational airports in 2013, it has reached a height of 101 operational airports in 2016. Expectations of having 190-200 operational airports by the end of 2040 are pointed out through various studies.

Currently, India has large aircraft order books, virtually all of which are leased through leasing companies located offshore. Under the regional connectivity scheme Ude Desh ka Aam Nagrik (UDAN), the government has decide to lease out operations, maintenance, and development of certain airports under Public private Partnership (PPP) model.

Overall, India has immense potential for growth in aviation sector but little means to aid the growth. It is in need of systems that aid the growth in a cost-effective and sustainable manner.

AIRCRAFT FINANCING STRUCTURE

Why is it needed?

In the view of increasing demand and non-availability of own sources of aircraft financing, it is essential for India to set up its own structures for the same. Moreover, civil aviation sector is an important sector for development of the economy. In the civil aviation industry, aircraft financing is the most profitable segment and there are no entities in the country exploring this line of business. All the benefits from this gap are being enjoyed by foreign entities.

What will be the structure?

For this structure, GIFT-CITY in Gujarat has been identified as preferred destination for initiation of operations in this industry as it offers a tax regime competitive to that of leasing companies all over the world.

Barriers in the structure

The aforementioned structure will face following barriers:

  • GAAR prevents Indian financers from taking advantage of other jurisdictions.
  • Aircraft financing is not a specifically permitted activity for banks.
  • Units operating in GIFT-CITY not permitted to undertake aircraft financing.
  • Framework for setting-up of NBFCs in GIFT-CITY and provisions as to treatment of income from operating lease is not provided.
  • Taxes and duties:
  • GST of 5% on import of aircraft
  • GST on lease rentals
  • Interest amount which forms part of lease rentals in case of financial lease is not eligible for any tax benefit.
  • No exemptions from withholding taxes
  • Stamp duty on instruments and documents executed.

The working group has proposed corresponding changes and amendments to be made to overcome these barriers. The response of relevant authorities is awaited.

Tax implications of the structure

Particulars

Tax rates

IFSC-GIFT CITY (proposed structure) INDIA (not following the structure)
INCOME TAX
Corporate Tax Rate: 34.94

o   Year 1 to 5

0.00

o   Year 6 to 10

17.47

o   Year 11 onwards

34.94
Minimum Alternate Tax 10.48 21.55
Capital gains on sale of aircraft 0.00 34.94
Withholding tax

o   Operating lease rentals

0.00 2.00

o   Interest payment (USD debt)

0.00 5.46

o   Interest payment (INR debt)

0.00 0.00

o   Other payments

0.00 10.00
Dividend Distribution Tax nil 20.56
GOODS AND SERVICES TAX
Purchase of aircraft 0.00 0.00
Operating lease rentals 0.00 5.00
Underfinance lease(interest portion) 0.00 5.00
Other services nil 18.00
Stamp duty on lease related documents 0.00 3.00

ANALYSIS OF TAX IMPLICATIONS UNDER VARIOUS MODELS OF FINANCING

Following table shows an analysis of indirect tax implications from the point of view of lessee and compares the proposed structure with the existing practice of financing as well as situation if financing is done outside the proposed structure but in India.

This table is based on following assumptions:

  • Value of aircraft- Rs.3500 crores
  • Residual value- Rs.500 crores
  • Rate of interest- 7.5%
  • Lease tenure- 25 years
  • Processing fee- 2%

On the aforesaid assumptions, lease rental per annum would amount to Rs.306.63 crores

Amount (in Rs. crores)

Tax expenditure Ireland IFSC-GIFT CITY Rest of India
GST on lease rentals 15.3315 0.00 15.3315
Stamp duty 0.00 0.00 105
GST on other services 0.00 nil 12.6
Overall indirect tax expenditure 15.3315 0.00 27.9315

OVERCOMING THE BARRIERS

Recommendations have been made by the Working Group to various regulatory authorities in order to overcome various barriers that are a hindrance to establishment of India’s own structure of aircraft financing and leasing. Following table shows some of the major recommendations:

Authority Recommendations
RBI Confirm that the term “equipment” includes aircrafts or notify aircraft financing and leasing as permitted activity for banks or subsidiaries of banks.
Amend IBU circular to include equipment leasing and investment in capital of leasing entities in scope of activities of banks
Confirm that equipment leasing entities shall be eligible to register as NBFC in IFSC
Issue specific directions in regard to investment in or by foreign entities engaged in aircraft financing and leasing activities.
Tax authorities Capital gains on sale of leased aircrafts should be fully exempted.
GST on leasing aircraft should be made zero-rated.
Nil withholding tax should be specified for airline companies.
Transfer/novation of aircraft financing / leasing contracts to units in an IFSC should not be under the purview of GAAR, for both the lessee and lessor
SEBI Amend SEBI (AIF) Regulations to create a separate category of AIFs for investment in aircraft financing/leasing activities or permit greater concentration of investment in aircraft financing/leasing entities.
Clarify whether 25% investment cap by AIFs applies on investment in equipment and grant additional relaxations to AIFs investing in aircraft financing activities.
Create separate category of mutual funds of investment in entities engaged in aircraft financing and leasing activities.
Clarify which institution can invest in entities registered in IFSC.
IRDAI Amend IRDAI regulations permitting companies set up in IFSC to invest in entities engaged in aircraft financing and leasing activities.
Clarify whether investment of funds of policyholders’ in entities registered in IFSC be considered as funds invested in India only.
Others Clarify under aircraft rules that aircrafts of lessors cannot be detained against any statutory or other outstanding dues.
Entities like pension funds, insurance companies, employee provident fund organisations be allowed to invest directly or indirectly in aircraft financing and leasing activities.
SARFAESI Act not be applicable to aircrafts.
Gujarat Stamp Act to exempt aircraft financing and leasing from its purview.
Permit airlines to set up branch in IFSC.

CONCLUSION

It is absolutely evident that aircraft industry is on upsurge and will continue to be rising globally in the coming years. To meet the rising demand and expand the country’s hold in the aviation market the proposed structure provides a well-established groundwork through the proposed structure. All recommendations, if accepted and implemented in a proper manner, will enable India to pioneer a very profitable and growth-oriented aviation market.

 

[1] https://www.globalaviationsummit.in/documents/PROJECTRUPEERAFTAAR.pdf

[2] https://assets.kpmg/content/dam/kpmg/ie/pdf/2019/01/ie-aviation-industry-leaders-report-2019.pdf

 

RBI issues draft framework to strengthen liquidity of NBFCs

Abhirup Ghosh

abhirup@vinodkothari.com

Financial year 2019 has been a year to remember, as the NBFC sector, which caters to a significant portion of the financial needs in the economy, almost choked due to lack of liquidity. While there was an undercurrent already, but the fall of the mammoth ILFS group, ignited the crisis. Resultantly, the banks stopped taking fresh exposures on the NBFCs, the mutual funds pulled out plug, and other investors also became wary of the financial services sector. Businesses of all almost of all the NBFCs came to a standstill.

Considering the sensitivity of the situation, the RBI had to step in and take initiatives to address the concerns. Relaxations with respect to minimum holding period, for direct assignments and securitisation transactions, was one of them. This measure was however, temporary in nature.

In order to address the issues that pop up in the longer run, the RBI has framed a draft framework, which is now open for comments, to deal with liquidity risk. The draft framework was placed on the RBI’s website on 24th May, 2019[1] and is open for comments till 14th June, 2019.

The framework is divided into two parts – a) liquidity risk management framework; and b) liquidity coverage ratio. While the first part is a mix of new and existing provisions of asset liability management; the latter is a new requirement altogether.

In this write-up we intend to discuss about this framework.

Applicability

The first part of the framework, that is the liquidity risk management framework, shall be applicable to the following classes of NBFCs:

  1. Non-deposit taking NBFCs with asset size of ₹ 1 billion or above (₹ 100 crores or above);
  2. Systemically important core investment companies (CICs with asset size of more than ₹ 100 crores and having public funds)
  3. Deposit taking NBFCs

The second part of the framework, which introduces the concept of liquidity coverage ratio among NBFCs shall be applicable to the following classes of NBFCs:

  1. Non-deposit taking NBFCs with asset size of ₹ 50 billion or above (₹ 5000 crores or above);
  2. Deposit taking NBFCs

Liquidity risk management framework

The liquidity risk management framework is divided into the following parts –

a. Liquidity risk management policy, strategies and practices:

This requires formulation of risk management framework, which should be much more comprehensive than the existing one, and should address the following:

  1. Governance related issues –
  • The Board of Directors of the NBFC must retain the overall responsibility of liquidity risk management and the same shall also be responsible of laying down policies, strategies and practices to be followed by the company.
  • The Risk Management Committee shall report to the Board of Directors of the Company. The Committee must be constituted with CEO/ MD and the heads of the various risk verticals of the company. The existing Corporate Governance framework requires formation of RMC, however, the same does not specify desired constitution of the Committee. In fact, companies which have Chief Risk Officer, should also appoint CROs as a part of the RMC[2].
  • Asset Liability Management Committee – There is a slight change in the composition proposed under this framework against the existing provisions relating to formation of ALCO. As per the existing regulations, the ALCO must consist of senior management including CEO. However, this framework states that the committee must be headed by CEO/ MD or Executive Director and may have the Chiefs of Investment, Credit, Resource Management or Planning, Funds Management / Treasury (forex and domestic), International Banking and Economic Research as members. Also, the scope of ALCO has also been modified to include – taking decisions on desired maturity profile and mix of incremental assets and liabilities, sale of assets as a source of funding, the structure, responsibilities and controls for managing liquidity risk, and overseeing the liquidity positions of all branches.
  • Asset Liability Management Support Group – Formation of this group is a new requirement. The group should be consisted of operating staff of the organisation and shall be responsible for analysing, monitoring and reporting the liquidity risk profile to the ALCO.2. Off balance sheet exposures and contingent liabilities must be given desired level of attention so that risks arising from all off-balance sheet exposures, be it securitisation, financial derivatives, guarantees or other commitments. The focus should be on assessment of inherent risks that can cause problems at times of stress.

    3. Diversification of funding sources must be achieved by the NBFCs. This is a qualitative requirement where RBI has urged the NBFCs to establish strong connection with each of its funding sources and to keep itself active in the funding market. Over reliance on a particular source has been condemned.

    4. The NBFCs must have a proper collateral management system where it should be in a position to distinguish between encumbered and unencumbered assets.

    5.Stress testing must be inculcated as an important exercise in the overall governance and risk management culture in the NBFC. Stress testing must be conducted on a regular basis for a variety of short term, entity specific and market specific situations. The various activities of the business and their vulnerabilities must be taken into consideration so that the stress testing scenarios can cover every aspect of market risk and major funding risks that the NBFC is exposed to.

    6. A contingency funding plan must be formulated which can be followed while responding to severe disruptions in the funding abilities of the NBFCs. It should contain the available r potential contingency funding sources and the estimated amount which can be drawn from these sources, clear escalation or prioritisation procedures detailing when and how each of the actions can and should be activated, and the lead time needed to tap funds from each of these sources.

    7. Intra group transactions and exposures must be under special supervision and the Group CFO should develop and maintain liquidity management process and funding programs that are consistent with the activities of the group.

    8. Other issues like liquidity risk tolerance, liquidity costs, internal pricing must be properly framed by the senior management.

    9. Public disclosure on liquidity risk, the NBFC is exposed has to be made on regular basis. The disclosure should include –

    • Funding concentration based on significant counterparty,
    • Top 20 large deposits,
    • Top 10 borrowings,
    • Funding concentration based on significant products/ instruments,
    • Stock ratios with respect to commercials, NCDs and other short term liabilities each as a percentage of total assets, total liabilities and total public funds
    • State of the institutional setup for liquidity risk management

b. The Management Information System (MIS) should be structured in a manner that is capable of generating information both in normal and stress scenarios.

c. Internal controls of the NBFCs must be strong enough which can ensure adherence to policies and procedures with respect to liquidity risk management. The internal controls must be independently reviewed on a regular basis.

d. The assets and liabilities must be monitored based on the time buckets they fall in. As against the existing framework, the framework requires micro monitoring, that is, the time brackets have been broken further. The proposed time brackets as well as the current set of time brackets have been provided below:

 

Time brackets as provided in the existing guidelines Time brackets proposed in the framework
1 day to 30/ 31 days  1 day to 7 days
Over one month and upto 2 months  8 day to 14 days
Over two months and upto 3 months 15 days to 30/31 days (One month)
Over 3 months and upto 6 months  Over one month and upto 2 months
Over 6 months and upto 1 year  Over two months and upto 3 months
Over 1 year and upto 3 years  Over 3 months and upto 6 months
Over 3 years and upto 5 years  Over 1 year and upto 3 years
Over 5 years  Over 3 years and upto 5 years
 Over 6 months and upto 1 year
 Over 1 year and upto 3 years
Over 3 years and upto 5 years
Over 5 years

 

The maximum mismatches allowed in the 1-7 days, 8-14 days and 15-30/31 days bracket are 10%, 10% and 20% of the cumulative cash flows in the respective time brackets.

 

The investments in securities must be classified into “mandatory” and “non-mandatory” categories. Mandatory category is that where the securities acquired under legal obligation must be classified and anything apart from these must be classified under non-mandatory category.

 e. Stock approach must be adopted in the NBFCs’ liquidity risk management. Certain critical ratios must be monitored in this regard by putting in place internally defined limits as approved by their Board. The ratios and the internal limits shall be based on an NBFC’s liquidity risk management capabilities, experience and profile.
f. Liquidity risks arising out of other risks like currency risk and interest rate risk must also be managed.
g. Monitory tools like statement of structural liquidity and others, prescribed by the RBI should be used.

Liquidity coverage ratio

The concept of liquidity coverage ratio adopted here is similar to this concept under Basel III: International framework for liquidity risk measurement, standards and monitoring[3]. This requires NBFCs with specified asset size, to maintain specified level of LCR. The framework currently proposes following levels of LCR:

From 01.04.2020 01.04.2021 01.04.2022 01.04.2023 01.04.2024
Minimum LCR 60% 70% 80% 90% 100%
 

The formula of LCR has been defined in the framework to mean:

Stock of High Quality Liquid Assets(HQLAs) / Total Net Cash Outflows over the next 30 calendar years

In simple terms, LCR represents the readily available cashflows/ cash equivalents as a proportion of the total net cash outflows over the next 30 calendar days. Ideally, the LCR should be more than 100%. The manner of computation of each of these have been elaborately discussed in the framework.

While calculating the stock of HQLA, certain items like cash, government securities and certain specified marketable securities without any haircut. However, other assets, including corporate bonds, equity shares etc. are to be considered after considering haircuts ranging from 15% – 50%.

In the denominator, the net of cash outflows are to be considered, that is total cash outflows minus the specified cash inflows.

As per the RBI framework, “Liquidity Coverage Ratio (LCR) which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days”.

Conclusion

This framework was a much awaited piece of legislation and the industry felt the dire need of such a guided document on the liquidity risk management. With the growing importance of this industry and amount of exposure they have on the economy, a strong liquidity management is the need of the hour. The nation certainly doesn’t want another ILFS or a similar crisis to happen.

[1] https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3678

[2] The RBI on 16th May, 209 required mandatory appointment of CRO by NBFCs having assets of ₹ 50 billion or above.

[3] https://www.bis.org/publ/bcbs188.pdf


NBFCs in troubled waters as Madras Court Bench rules in favour of RBI

The latest judgement by the Madras HC as on 22nd April, 2019 has set aside an earlier single judge order in January this year, and ruled in favour of RBI. RBI argued that there was an appeal remedy available and the companies instead of filing writ petitions with the court could have approached the appellate authority.

However before citing the details of the present judgement, this writer believes a firm background is required to grasp the gravity of the present situation. The reader may feel free to scroll further down, if acquainted with the January single-judge decision beforehand.

Background

Since the Sarada scam in 2015, the Reserve Bank of India (RBI) had been on high alert and had been subsequently tightening regulations for NBFCs, micro-finance firms and such other companies which provide informal banking services. As of December 2015, over 56 NBFC licenses were cancelled[1]. However, recently in light of the uncertain credit environment (recall DHFL and IF&LS) among other reasons, RBI has cancelled around 400 licenses [2]in 2018 primarily due to a shortfall in Net Owned Funds (NOF)[3] among other reasons. The joint entry of the Central Govt. regulators and RBI to calm the volatility in the markets on September 21st, 2018 after an intra-day fall of over 1000 points amid default concerns of DHFL, warranted concern. Had it been two isolated incidents the regulators and Union government would have been unlikely to step in. The RBI & SEBI issued a joint statement on September saying they were prepared to step in if market volatility demanded such a situation. This suggests a situation which is more than what meets the eye.

Coming back to NBFCs, over half of the cancelled NBFC licenses in 2018 could be attributed to shortfall in NOFs. NOF is described in Section 45 IA of the RBI Act, 1934. It defines NOF as:

1) “Net owned fund” means–
(a) The aggregate of the paid-up equity capital and free reserves as disclosed in the latest
Balance sheet of the company after deducting therefrom–
(i) Accumulated balance of loss;
(ii) Deferred revenue expenditure; and

(iii) Other intangible assets; and
(b) Further reduced by the amounts representing–
(1) Investments of such company in shares of–
(i) Its subsidiaries;
(ii) Companies in the same group;
(iii) All other non-banking financial companies; and
(2) The book value of debentures, bonds, outstanding loans and advances
(including hire-purchase and lease finance) made to, and deposits with,–
(i) Subsidiaries of such company; and
(ii) Companies in the same group, to the extent such amount exceeds ten per cent of (a) above.

At present, the threshold amount that has to be maintained is stipulated at 2 crore, from the previous minimum of 25 lakhs. Previously, to meet this requirement of Rs. 25 lakh a time period of three years was given. During this tenure, NBFCs were allowed to carry on business irrespective of them not meeting business conditions. Moreover, this period could be extended by a further 3 years, which should not exceed 6 years in aggregate. However, this can only be done after stating the reason in writing and this extension is in complete discretion of the RBI. The failure to maintain this threshold amount within the stipulated time had led to this spurge of license cancellations in 2018.

However, the Madras High Court judgement dated 29-1-2019 came as a big relief to over 2000 NBFCs whose license had been cancelled due a delay in fulfilling the shortfall.

 

THE JUDGEMENT

The regulations

On 27-3-2015 the RBI by notification No. DNBR.007/CGM(CDS)-2015 specified two hundred lakhs rupees as the NOF required for an NBFC to commence or carry on the business. It further stated that an NBFC holding a CoR and having less than two hundred lakh rupees may continue to carry on the business, if such a company achieves the NOF of one hundred lakh rupees before 1-04-2016 and two hundred lakhs of rupees before 1-04-2017.

The Petitioner’s claim

The petition was filed by 4 NBFCs namely Nahar Finance & Leasing Ltd., Lodha Finance India Ltd., Valluvar Development Finance Pvt. Ltd. and Senthil Finance Pvt. Ltd. for the cancellation of Certificate of Registration (CoR) against the RBI. The petitioners claim that they had been complying with all the statutory regulations and regularly filing various returns and furnishing the required information to the Registrar of Companies. These petitions were in response to the RBI issued Show Cause Notices to the petitioners proposing to cancel the CoR and initiate penal action. The said SCNs were responded to by the petitioners contending that they had NOF of Rs.104.50 lakhs, Rs.34.19 lakhs, Rs.79.50 lakhs and Rs.135 lakhs respectively, as on 31.03.2017.

Valluvar Development Finance also sent a reply stating that they had achieved the required NOF on 23-10-2017, attaching a certificate from the Statutory Auditor to support its claim. The other petitioners however submitted that due to significant change in the economy including the policies of the Govt. of India during the fiscal years 2016-17 and 2017-18 like de-monetization and implementation of Goods & Services Tax, the entire working of the finance sector was impaired and as such sought extension of time till 31-03-2019 to comply with the requirements.

Now despite seeking extension of time, having given explanations to the SCNs, the CoRs were cancelled without an opportunity for the NBFCs to be heard.

 

The Decision

It was argued that there is a remedy provided against the cancellation of the CoRs, the petitioners had chosen to invoke Article 226 contending violation of the principles of justice. The proviso to Section 45-IA(6) relates to the contentions in regards to cancellation of the CoRs.

“45-IA. Requirement of registration and net owned fund –

(3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twenty five lakh rupees may, for the purpose of enabling such company to fulfil the requirement of the net owned fund, continue to carry on the business of a nonbanking financial institution–

(i) for a period of three years from such commencement; or

(ii) for such further period as the Bank may, after recording the reasons in writing for so doing, extend,

subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fund, inform the Bank about such fulfilment:

Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.

(7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final:

Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard.

The decision was taken on two grounds. First, the statute specifically provides for an opportunity of personal hearing besides calling for an explanation. The amended provision is very particular that opportunity of being personally heard is mandatory, as the very amendment relates to finance companies, which are already carrying on business also. Not affording this opportunity would cripple the business of the petitioners.

Second, the amended section provides NBFCs sufficient time to enhance their NOF by carrying on business and comply with the notifications. For the aforesaid reasons, the orders by the RBI requires interference. Resultantly, the respondents (RBI authorities) are directed to restore the CoR of the petitioners and also extend the time given to the petitioners.

 

The Latest Judgement

The judgement pronounced as on 22nd April, 2019 was an appeal by the RBI to the aforementioned writ petitions. This latest decision which ruled in favour of the RBI had contentions on several grounds. However, all of them stem (invocation of sub-clauses) from the following four.

First, the RBI against the order in the writ petitions submitted that there is an appeal remedy available and the petitioners without availing such remedy have filed the petitions and as such petitions ought not to have been entertained.

Second that there were only four such companies (the ones above) who sought writ petitions and the remaining numbering more than 40 Non-Banking Financial Companies (NBFCs) have filed statutory appeals and therefore, the petitioners should be relegated to avail the appeal remedy.

Third, the present cancellation is owed to the petitioners’ failure to comply with the NOF conditions issued by the RBI. The notification dated 27.03.2015 specifying 200 lakhs as NOF for NBFCs to carry or commence operations has not been challenged by the petitioners. Therefore, if they do not achieved the said conditions, they cannot to continue to remain in business.

Fourth, it was submitted that the reasons assigned by the petitioners in the reply to the show cause notice were considered and the reasons not being sustainable were thus rejected.

 

Conclusion

This was a landmark hearing in the case of NBFCs with increasing pressure as of recent times. Many NBFCs may now apply for restoration of their licenses as per the present laws or file for statutory appeals. The case stands as an indication of the firm regulatory policies of the RBI amidst the environment of credit uncertainty. The last statement of the judgement also stands apt here. The brief sentence read, “Consequently connected miscellaneous petitions are closed.”

[1] https://economictimes.indiatimes.com/news/economy/finance/rbi-cancels-license-of-56-nbfcs-bajaj-finserv-gives-away-license/articleshow/50045835.cms?from=mdr

[2] https://www.businessinsider.in/indias-central-bank-has-scrapped-the-licenses-of-nearly-400-nbfcs-so-far-this-year/articleshow/65698193.cms

[3] https://www.firstpost.com/business/ilfs-dhfl-shocks-may-be-temporary-triggers-but-the-bad-news-for-indian-financial-markets-do-not-end-there-5248071.html

[4] https://enterslice.com/learning/wp-content/uploads/2019/02/Madras-high-court-Judgement-on-NBFC-License-Cancellation.pdf

[5] https://indiankanoon.org/doc/91785347/

NBFCs get another chance to reinstate NOF

By Falak Dutta, (finserv@vinodkothari.com)

Since the Sarada scam in 2015, the Reserve Bank of India (RBI) had been on high alert and had been subsequently tightening regulations for NBFCs, micro-finance firms and such other companies which provide informal banking services. As of December 2015, over 56 NBFC licenses were cancelled[1]. However, recently in light of the uncertain credit environment (recall DHFL and IF&LS) among other reasons, RBI has cancelled around 400 licenses [2]in 2018 primarily due to a shortfall in Net Owned Funds (NOF)[3] among other reasons. The joint entry of the Central Govt. regulators and RBI to calm the volatility in the markets on September 21st, 2018 after an intra-day fall of over 1000 points amid default concerns of DHFL warrants concern. Had it been two isolated incidents the regulators and Union government would have been unlikely to step in. The RBI & SEBI issued a joint statement on September saying they were prepared to step in if market volatility warrants such a situation. This suggests a situation which is more than what meets the eye.

Coming back to NBFCs, over half of the cancelled NBFC licenses in 2018 could be attributed to shortfall in NOFs. NOF is described in Section 45 IA of the RBI Act, 1934. It defines NOF as:

1) “Net owned fund” means–

(a) The aggregate of the paid-up equity capital and free reserves as disclosed in the latest

Balance sheet of the company after deducting therefrom–

(i) Accumulated balance of loss;

(ii) Deferred revenue expenditure; and

(iii) Other intangible assets; and

(b) Further reduced by the amounts representing–

(1) Investments of such company in shares of–

(i) Its subsidiaries;

(ii) Companies in the same group;

(iii) All other non-banking financial companies; and

(2) The book value of debentures, bonds, outstanding loans and advances

(including hire-purchase and lease finance) made to, and deposits with,–

(i) Subsidiaries of such company; and

(ii) Companies in the same group, to the extent such amount exceeds ten per cent of (a) above.

At present, the threshold amount that has to be maintained is stipulated at 2 crore, from the previous minimum of 25 lakhs. Previously, to meet this requirement of Rs. 25 lakh a time period of three years was given. During this tenure, NBFCs were allowed to carry on business irrespective of them not meeting business conditions. Moreover, this period could be extended by a further 3 years, which should not exceed 6 years in aggregate. However, this can only be done after stating the reason in writing and this extension is in complete discretion of the RBI. The failure to maintain this threshold amount within the stipulated time had led to this spurge of license cancellations in 2018.

However, the Madras High Court judgement dated 29-1-2019 came as a big relief to over 2000 NBFCs whose license had been cancelled due a delay in fulfilling the shortfall.

 

THE JUDGEMENT[4]

The regulations

On 27-3-2015 the RBI by notification No. DNBR.007/CGM(CDS)-2015 specified two hundred lakhs rupees as the NOF required for an NBFC to commence or carry on the business. It further stated that an NBFC holding a CoR and having less than two hundred lakh rupees may continue to carry on the business, if such a company achieves the NOF of one hundred lakh rupees before 1-04-2016 and two hundred lakhs of rupees before 1-04-2017.

The Petitioner’s claim

The petition was filed by 4 NBFCs namely Nahar Finance & Leasing Ltd., Lodha Finance India Ltd., Valluvar Development Finance Pvt. Ltd. and Senthil Finance Pvt. Ltd. for the cancellation of CoR[5] against the RBI. The petitioners claim that they had been complying with all the statutory regulations and regularly filing various returns and furnishing the required information to the Registrar of Companies. These petitions were in response to the RBI issued Show Cause Notices to the petitioners proposing to cancel the CoR and initiate penal action. The said SCNs were responded to by the petitioners contending that they had NOF of Rs.104.50 lakhs, Rs.34.19 lakhs, Rs.79.50 lakhs and Rs.135 lakhs respectively, as on 31.03.2017.

Valluvar Development Finance also sent a reply stating that they had achieved the required NOF on 23-10-2017, attaching a certificate from the Statutory Auditor to support its claim. The other petitioners however submitted that due to significant change in the economy including the policies of the Govt. of India during the fiscal years 2016-17 and 2017-18 like de-monetization and implementation of Goods & Services Tax, the entire working of the finance sector was impaired and as such sought extension of time till 31-03-2019 to comply with the requirements.

Now despite seeking extension of time, having given explanations to the SCNs, the CoRs were cancelled without an opportunity for the NBFCs to be heard.

 

The Decision

It was argued that there is a remedy provided against the cancellation of the CoRs, the petitioners had chosen to invoke Article 226 contending violation of the principles of justice. The proviso to Section 45-IA(6) relates to the contentions in regards to cancellation of the CoRs.

“45-IA. Requirement of registration and net owned fund –

(3) Notwithstanding anything contained in sub-section (1), a non-banking financial company in existence on the commencement of the Reserve Bank of India (Amendment) Act, 1997 and having a net owned fund of less than twenty five lakhs rupees may, for the purpose of enabling such company to fulfill the requirement of the net owned fund, continue to carry on the business of a non-banking financial institution–

(i) for a period of three years from such commencement; or

(ii) for such further period as the Bank may, after recording the reasons in writing for so doing, extend,

subject to the condition that such company shall, within three months of fulfilling the requirement of the net owned fund, inform the Bank about such fulfillment:

Provided further that before making any order of cancellation of certificate of registration, such company shall be given a reasonable opportunity of being heard.

(7) A company aggrieved by the order of rejection of application for registration or cancellation of certificate of registration may prefer an appeal, within a period of thirty days from the date on which such order of rejection or cancellation is communicated to it, to the Central Government and the decision of the Central Government where an appeal has been preferred to it, or of the Bank where no appeal has been preferred, shall be final:

Provided that before making any order of rejection of appeal, such company shall be given a reasonable opportunity of being heard.

The decision was taken on two grounds. First, the statute specifically provides for an opportunity of personal hearing besides calling for an explanation. The amended provision is very particular that opportunity of being personally heard is mandatory, as the very amendment relates to finance companies, which are already carrying on business also. Not affording this opportunity would cripple the business of the petitioners.

Second, the amended section provides NBFCs sufficient time to enhance their NOF by carrying on business and comply with the notifications. For the aforesaid reasons, the orders by the RBI requires interference. Resultantly, the respondents (RBI authorities) are directed to restore the CoR of the petitioners and also extend the time given to the petitioners.

 

CONCLUSION

This was a landmark hearing in the case of NBFCs as they had been under increasing pressure as of recent times. Many NBFCs can now apply for restoration of their licenses and might already have. The case doesn’t just stand the case for NOF conflicts but will also ring in the minds of regulators in the future, compelling greater caution and concern. The last statement of the judgement stands apt here. The brief sentence read,” Consequently connected miscellaneous petitions are closed.”

[1] https://economictimes.indiatimes.com/news/economy/finance/rbi-cancels-license-of-56-nbfcs-bajaj-finserv-gives-away-license/articleshow/50045835.cms?from=mdr

[2] https://www.businessinsider.in/indias-central-bank-has-scrapped-the-licenses-of-nearly-400-nbfcs-so-far-this-year/articleshow/65698193.cms

[3] https://www.firstpost.com/business/ilfs-dhfl-shocks-may-be-temporary-triggers-but-the-bad-news-for-indian-financial-markets-do-not-end-there-5248071.html

[4] https://enterslice.com/learning/wp-content/uploads/2019/02/Madras-high-court-Judgement-on-NBFC-License-Cancellation.pdf

[5] Certificate of Registration

Extension of Ombudsman Scheme to remaining class of notified NBFCs

By Dibisha Mishra (dibisha@vinodkothari.com)

Updated as on April 26, 2019

Introduction

Reserve Bank of India (RBI), in its Statement on Development and Regulatory Policies[1] dated April 04, 2019, stated its intention to extend the same to the remaining notified classes of NBFCs as well, by the end of April, 2019.

Ombudsman Scheme for Non-Banking Financial Companies, 2018 (Scheme) on 23rd February, 2018[2] was introduced with the intent of curbing down the time, costs and complexities involved in complaint redressal mechanism for certain services rendered by non-banking financial companies (NBFC). The salient features of the Scheme worth taking note of has been explained in our previous article.[3] The Scheme covered within its ambit, all NBFCs registered with RBI, who are:

  • authorized to accept deposits; or
  • having customer interface, with assets size of Rs. 100 Crores or above, as on the date of the audited balance sheet of the previous financial year,

(hereinafter referred to as “notified classes of NBFCs”)

However, to start with, the Scheme was made applicable to deposit taking NBFCs only and the idea was to make it applicable on the other notified classes of NBFCs, once the same could gather some traction.

Subsequently, as per RBI’s recent statement in regard to increased applicability, a formal notification in this regard was expected to follow. The aforesaid has finally been notified vide. RBI’s notification dated April 26, 2019[4].

Considering the importance of the matter, in this article we will discuss all that the remaining notified classes of NBFCs must prepare for.

Applicability

As already stated the Scheme is applicable to all notified classes of NBFCs, however, the following classes of companies are excluded from its purview:

  • Non-banking Financial Company – Infrastructure Finance Company (NBFC-IFC);
  • Core Investment Company (CIC);
  • Infrastructure Debt Fund – Non-banking Financial Company (IDF-NBFC); and
  • A company under liquidation.

To do list for newly included entities

Upon notification of Scheme, the newly notified NBFCs will have to immediately take care of the following:

  1. Make the copy of the Scheme available on the website and also with the designated officer of the company for perusal in the office premises.
  2. Display prominently in all its offices and branches:
  • the purpose of the Scheme;
  • the contact details of the Ombudsman to whom the complaint is to be made by the aggrieved customer;
  • notice about the availability of the copy of Scheme with such designated officer.
  1.  Appoint Nodal Officers at Head/ Registered/ Regional/ Zonal Offices and inform all the Offices of the Ombudsman about the same.
  2. Nodal Officers so appointed must be responsible for representing the company and furnishing information to the Ombudsman in respect of complaints filed against the NBFC.
  3. Wherever more than one zone/ region of a NBFC is falling within the jurisdiction of an Ombudsman, designate one of the Nodal Officers as the ‘Principal Nodal Officer’ for such zones or regions

Pre-Conditions for availing the Scheme by an aggrieved customer

A customer aggrieved by the acts of the company or its representatives can make an application under the Scheme, however, the following pre-conditions must be satisfied before making an application:

  1. Complaint must refer to any of the grounds mentioned under Clause 8 of the Scheme.
  2. Customer must have filed a written representation to the respective NBFC regarding the grievance
  3. Concerned NBFC must have rejected the complaint or the complainant must not have received any reply within one month of NBFC receiving the representation or the complainant must not have been satisfied with the reply given to him by the NBFC.
  4. Not more than one year must have elapsed after the complainant received the unsatisfactory reply or where no reply was received, not later than one year and one month have elapsed after the date of representation to NBFC.
  5. The complaint must not be in respect of the same cause of action which was settled or dealt with on merits by the Ombudsman in any previous proceedings whether or not received from the same complainant or along with one or more complainants or one or more of the parties concerned with the cause of action;
  6. The complaint must not pertain to the same cause of action, for which any proceedings before any court, tribunal or arbitrator or any other forum is pending or a decree or Award or order has been passed by any such court, tribunal, arbitrator or forum;
  7. The complaint must not be frivolous or vexatious in nature;
  8. The complaint must fall under the period of limitation prescribed under the Indian Limitation Act, 1963 for such claims; and
  9. The complainant must have filed along with the complaint, copies of the documents, if any, which he intends to rely upon, and a declaration that the complaint is maintainable under Clause 9-A.

Roadmap while availing the Scheme

Once the complainant is satisfied that the aforesaid conditions are satisfied, it will have to take the following route to make the application:

  1. Make a complaint, as per Annex II of the Scheme, to the Ombudsman under whose jurisdiction the concerned NBFC falls. The complaint can be made either by the aggrieved customer himself or by his authorized representative;
  2. Where extra clarification or documents is required from the customer, the same is to be provided;
  3. Ombudsman shall send a copy of the complaint to the branch or registered office of the NBFC named in the complaint, under advice to the designated Nodal Officer (NO);
  4. Ombudsman may require NBFC to provide information or furnish certified copies of any document relating to the complaint which is or is alleged to be in its possession;
  5. Endeavour should be made to promote a settlement of the complaint by agreement between the complainant and the NBFC through conciliation or mediation. He/ she may convene a meeting of NBFC and the complainant together to promote an amicable resolution;
  6. If complaint is still not settled by agreement, Ombudsman shall pass an award of either allowing or rejecting the case after giving both parties an opportunity of being heard;
  7. The Ombudsman shall take into account the evidence being placed, the underlying principles on which the practices, directions, instructions and guidelines issued by the Reserve Bank from time to time and such other factors which in his opinion are relevant to the complaint;
  8. A copy of the Award shall be sent to the complainant and the NBFC free of cost;
  9. An Award shall take effect only when the complainant furnishes to the NBFC and the Ombudsman concerned within a period of 30 days from the date of receipt of copy of the Award, a letter of acceptance of the Award in full and final settlement of his claim;
  10. Unless an appeal is filed, the NBFC shall then comply with the Award and intimate compliance of the same to the complainant and the Ombudsman;
  11. Award or appeal rejection can be appealed against within 30 days of receipt of such communication.

Conclusion

The Ombudsman scheme plays a very important role in the banking system. Considering the growing importance of NBFCs in the country, introduction of this became essential. However, effectiveness of any initiative depends on how well the beneficiaries of the same are informed; same will be the case with this Scheme as well. This Scheme will turn out to be fruitful only if the same borrowers are educated about this. RBI must also take some initiative to achieve that as well

[1] https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR23654E42140EAC6347D1A9D08AF62F5BF2E9.PDF

[2] https://rbidocs.rbi.org.in/rdocs/Content/PDFs/NBFC23022018.pdf

[3] http://vinodkothari.com/2018/02/rbis-ombudsman-storm-tough-road-ahead-for-nbfcs/

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11546&Mode=0