Three significant changes in Securitisation Directions

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Loans with less than 1 year to go cannot be securitised; Minimum holding period norms tweaked, may impact home loan securitisation

– Vinod Kothari | finserv@vinodkothari.com

On December 5, 2022, the RBI silently made some significant changes and updated the RBI (Securitisation of Standard Assets) Directions, 2021 (‘SSA Directions’). It is difficult to understand if these amendments are pursuant to some consultation, or feedback gathered from supervisory experience. The three significant changes seem to be mutually disconnected, though some of the amendments are related to the amendments made, on the same date, to the RBI (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’) too.

We deal with the three amendments, and their implications, below:

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Full Day Workshop on Partnering in lending:

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Loan sourcing, co-lending, transfer of loans, securitisation

Register here: https://forms.gle/Nq13Qf58uH3qge9D7

Venue: The Chancery Hotel, 10/6, Lavelle Road, Shanthala Nagar, Ashok Nagar, Bengaluru 560001 (location)

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Our upcoming workshops: https://vinodkothari.com/workshop-training/

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Financial Services- https://vinodkothari.com/category/financial-services

Digital Lending- https://vinodkothari.com/?s=digital+lending

Draft Master Direction on IT Governance, Risk, Controls and Assurance Practices

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An analysis of its impact on NBFCs

– Team Finserv, Vinod Kothari Consultants | finserv@vinodkothari.com

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Our recent write-ups on financial services: https://vinodkothari.com/category/financial-services/

Financial entities in IFSC: A primer

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– Parth Ved, Executive | parth@vinodkothari.com

Table of contents

BackgroundApplicability of Domestic Regulatory framework Regulatory framework in IFSC
What is IFSC?Companies Act, 2013IFSCA (Finance Company) Regulations, 2021
Purpose of setting up an IFSC Foreign Exchange Management Act, 1999Specific Frameworks for Aircraft Leasing and Ship Leasing
Who regulates IFSC?Income tax act, 1961IFSCA (Fund Management) Regulations, 2022
Is IFSC and GIFT City the same? Goods and Services TaxIFSCA (Banking) Regulations, 2020
Permission for setting up an entity in IFSCStamp dutyClosing remarks
Securities lawRelevant Links
Banking law

Background

Flow of funds, just like a river, not only enriches its destination but also benefits all the stops it passes through. Having a financial hub, a stopover which enables routing billions and billions of global funds on a daily basis can definitely prove resourceful. London, New York, Singapore are some of the globally recognised financial centres, and needless to say these locations are at the forefront of financial development. India too has tried to tap into this with the setting up of GIFT-IFSC in Gujarat, and has tried to position itself as the next big global hub for financial transactions.

Through this write-up, the author tries to explain the concept of International Financial Services Centre and the applicability of domestic regulatory framework on entities set up therein.

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Comparison between NBFC-ICC, CIC and AIF

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Our resources on related topics – https://vinodkothari.com/category/financial-services/

Group NBFCs’ assets to be aggregated for middle layer classification: RBI clarification

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– Aanchal Kaur Nagpal, Manager | aanchal@vinodkothari.com

RBI vide notification dated October 11, 2022, has clarified that the assets of NBFCs forming part of a group will be aggregated for determination of the “middle layer” status of NBFCs. This clarification dates back to the 1st of October and therefore, as on the effective date of the SBR framework, NBFCs which, on a consolidated basis, have assets of Rs 1000 crores or above, will have to start adhering to the  SBR framework as applicable to NBFC-ML.

Effective date

The Circular will be effective retrospectively from the date of applicability of the SBR Framework i.e. October 01, 2022.

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Lending Service Providers for digital lenders: Distinguishing agency contracts and principal-to-principal contracts

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– Neha Sinha, Assistant Legal Advisor | finserv@vinodkothari.com

Introduction

Lending Service Providers (LSPs) are engaged by the Regulated Entities (REs) (banks or NBFCs) to carry out some functions of RE in connection with lenders’ functions  on digital platforms. These LSPs may be engaged in customer acquisition, underwriting support, recovery of loan, etc. As the LSPs are acting in association with REs and on behalf of REs, the question arises if LSPs are engaged as “agents” of REs or the arrangement between RE and LSP is that of on a principal to principal basis.

Aspects surrounding agency contracts are dealt with in Indian Contract Act, 1872. Principal-principal relation is not defined specifically in any statute, but the obligations and liability of both the parties is as in case of any usual commercial contract, where each party is acting independently. If it is the latter, the LSP cannot be termed as “agent”. If the LSP is not an agent, then, looking at the definition of LSP in the RBI’s Digital Lending Guidelines (discussed below), it is possible to contend that the activities of the so-called LSP do not bind the RE, as the so-called LSP, acting as a principal, is not to be treated as LSP within the meaning of the RBI Digital Lending Guidelines.

In this article, the defining features of agency contracts, in light of whether the role of LSPs is either a principal or an agent has been discussed, on the basis of the provisions of the contract law and jurisprudence thereunder.

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Outsourcing (Direct Selling Agent) v. Business Correspondent route

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– Aanchal Kaur Nagpal, Manager (finserv@vinodkothari.com)

If everything’s a priority, then nothing’s a priority. Focusing on core activities while leaving non-core functions sub-contracted to specialized experts has been one of the key modus operandi to achieve efficiency. Banks and other financial institutions are increasingly outsourcing various financial activities ranging from onboarding customers to payment recovery. Since these outsourcing agents perform the activities that a Bank is originally supposed to do, they too, come with a set of regulations from RBI, with Banks being ultimately responsible for activities of their outsourcing agents.

Based on the scope of the outsourcing function and the responsibility dawned upon such agents, RBI identifies two outsourcing modes – Business Correspondence and Direct Selling/Marketing Agents (‘DSA/DMA’), with separate guidelines for each of the two.

In this article, the author has attempted to delve into the differences and commonalities between outsourcing of financial services by Banks to business correspondents and DSAs/DMAs.

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16 NBFCs identified as Upper Layer entities for bank-like compliances

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– Anita Baid, Vice-President, VKCPL | finserv@vinodkothari.com

In line with the guidance given in the Scale Based Regulatory Framework of the RBI[1], the new regulatory framework is effective from October 1, 2022. Just one day before D-day, the RBI on September 30, has kickstarted the new regulatory version for NBFCs by identifying 16 of the 9472 odd NBFCs[2], as NBFCs constituting the Upper Layer. These entities have been asked to migrate to a bank-like regulatory system. The first step upon this identification would be to put in place a Board approved policy for the adoption of the enhanced regulatory framework applicable to NBFC-UL. Further, these entities will prepare a glide path of compliance within three months, i.e. by December 30, 2022 and the glide path itself will have two years of adherence time, i.e. by September 30, 2024.

Our resources on the SBR Framework can be read here- https://vinodkothari.com/sbr/

In-house Training on SBR Framework for NBFC-ML/UL –
https://vinodkothari.com/2022/09/in-house-training-on-sbr-framework-for-nbfc-ml-ul/
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Services and Assistance for ICAAP Implementation

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Our resources on the topic:

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