Asset reconstruction companies, formed under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (‘SARFAESI Act’/‘the Act’) are an important part of the country’s ecosystem to tackle non-performing loans. ARCs buy and resolve non-performing loans by acquiring them from the financial system.
ARCs were traditionally focusing on acquiring large corporate loan exposures. However, recently, there is increasing participation of the ARCs in retail loans. When ARCs buy retail loans, it is quite likely that the lender or the loan does not qualify for SARFAESI right when the loan was with the lender. This may be either because of the nature of the lender (NBFCs having assets of less than Rs 100 crores) or the size of outstanding (less than Rs 20 lakhs). In such cases, once the ARC acquires the loans, will it have the rights under the SARFAESI Act?
The question becomes important, because in case of corporate loans, the advantage that ARCs had over the original lender was one of aggregation, that is, ARCs acquiring loans given to the same borrower by various lenders, and thus getting significant strength in relation to the borrower. This cannot be the case, obviously, with retail loans. Hence, if the acquiring ARC is no better than the outgoing NBFC, in what way does the transfer of the loans help to accelerate the recovery?
In this article, we discuss this important question.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2023-11-09 17:54:582023-11-09 18:17:13ARC rights to use SARFAESI for debts assigned by non-SARFAESI entities
Financial institutions are increasingly turning to outsourcing for cost efficiency and achievement of strategic objectives. The need and economics of outsourcing are quite clear as there is increasing specialisation in several functions in the lending journey , particularly, cloud-sourcing, use of shared technology, software and applications, etc. However, this reliance on third-party providers introduces challenges and risks like data protection, security, operational resilience, service continuity, shifting of risks and compliance responsibilities to unregulated entities, raising concerns about maintaining control, risk management, and regulatory compliance. This necessitates regulatory guidelines for regulated institutions, especially when service providers have concentrated functions or engage in regulated activities.
Currently, RBI has different guidelines for outsourcing by different financial institutions. In this article, the author examines the RBI’s recently released Draft Master Direction on Managing Risks and Code of Conduct in Outsourcing of Financial Services (“Proposed Master Direction”/”Draft Master Directions”), intended to repeal the existing guidelines and cover all financial institutions under its gamut, particularly focusing on the major changes, that these Proposed Directions bring with them.. .
The International Financial Services Centre, from Gift City, was intended to enable leasing of aircrafts as well as ships. Such leases have traditionally been done from offshore jurisdictions, and the admitted intent of IFSC was to bring these businesses to IFSC.
Ship financing business in India and the world
India is a very important player in the global shipping market, and is ranked no 17 in terms of shipping volume. It has a coastline of about 7,517 km, with 12 major and 205 minor ports. Additionally, it is estimated that about 95% of India’s goods trade by volume and 70% by value is done through maritime transport.
Ship financing volume globally is about USD 500 billion, largely consisting of bank finance. There are two types of leases against ships: bare board charter, and voyage or time charter. In case of the former, the lessor merely provides the vessel, with neither the crew or any other services, whereas in case of the latter, the ship is provided on time basis, with all services.
India is a substantial importer of shipping freight. It is estimated that annually, Indian companies pay about $75 billion for seaborne freight to foreign shipping companies.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinod Kothari Consultantshttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinod Kothari Consultants2023-11-02 16:24:082023-11-02 16:25:49Ship leasing from IFSC: A new business takes shape
In a world where information is power and financial well-being is paramount, credit plays a pivotal role in shaping our opportunities and choices. Your credit history is a mirror reflecting your financial trustworthiness, and it’s closely monitored by Credit Information Companies (CICs) and Credit Institutions (CIs). RBI in its Statement on Developments and Regulatory Policies released with the Bi-monthly Monetary Policy Statement 2023-24 on April 6, 2023 announced that a comprehensive framework will be put in place for strengthening and improving the efficacy of the grievance redress mechanism and customer service provided by the CICs and CIs. Additionally, it was announced that a compensation mechanism will be put in place for delayed updation/rectification of credit information by the CICs and CIs . Accordingly, RBI have introduced two comprehensive frameworks on October 27, 2023 titled “Strengthening of customer service rendered by Credit Information Companies and Credit Institutions” and “Framework for compensation to customers for delayed updation/ rectification of credit information”
While the first circular deals with strengthening of customer services provided by the CICs and CIs in relation to access and use of credit information, the other one provides for a comprehensive compensation framework where the CICs or CIs fail to address the customer requests/ complaints within a specified period of time.
The objective of this article is to underscore the key provisions of the circular and identify actionable steps that CIs should take in response.
The Reserve Bank of India (“RBI” or “Regulator”) plays a pivotal role in India meeting its anti-money laundering (AML) and combating financing of terrorism (CFT) obligations as part of its membership with the Financial Actions Task Force (FATF). As the Regulator of the credit sector and payment systems it does so by ensuring the implementation of robust and up-to-date Know Your Customer (KYC) norms vide its Master Direction – Know Your Customer (KYC) Direction, 2016 (“KYC Directions”). With a possible FATF evaluation around the corner, on October 17, 2023, the RBI introduced significant amendments to these KYC directives through its notification titled – Amendment to the Master Direction on KYC (“Amendment”), impacting various regulated entities, including Non-Banking Financial Companies (NBFCs).
The Reserve Bank of India (RBI) has issued a notification outlining a new regulatory framework for Non-Banking Financial Companies (NBFCs) on October 19, 2023 (‘SBR Framework’). The RBI has played a crucial role in regulating the NBFC sector over the years. With the sector’s evolution and changing dynamics, the regulator has been proactive in amending regulations. Previously, NBFCs were classified into two categories: systemically important and non-systemically important. However, starting from October 2022, the RBI introduced a new classification system based on layers: base, middle, upper, and top.
The reclassification introduced some progressive changes but also created certain ambiguities in the applicability of regulatory rules. Specifically, the terms “base layer” and “middle layer” were related with non-systemically important (non-SI) and systemically important (SI) NBFCs. When classifying NBFCs based on asset size, those with assets under Rs. 500 crores were considered non-SIs, while those with assets over Rs. 500 crores were classified as SIs.
However, the SBR Framework introduced a different set of criteria. According to this framework, NBFCs with assets less than Rs. 1000 crores are categorized as Base Layer entities, while those with assets exceeding Rs. 1000 crores are classified as Middle Layer entities. This creates a gray area for NBFCs with assets falling between Rs. 500 crores and Rs. 1000 crores.
The SBR Master Direction, effective immediately, intends to consolidate the various regulations for NBFCs of different scales and functions in one place. The consolidation has streamlined various regulations issued under the SBR Framework governing the different layers of NBFCs. It brings clarity to compliance requirements and ensures that all NBFCs operate within a framework that is consistent and transparent. The SBR Master Directions is divided into sections for different categories of NBFCs, based on size as well as function:
Regulations for Base Layer;
Regulations for Middle Layer (this would be in addition to the regulations for BL);
Regulations for Upper Layer (this would be in addition to the regulations for BL and ML);
Regulations for Top Layer (to be specifically communicated upon classification in TL);
Specific Directions for MFIs this is in addition to the regulations based on layers);
Specific Directions for Factors and NBFCs registered under Factoring Act (this is in addition to the regulations based on layers);
Specific Directions for IDFs (this is in addition to the regulations based on layers).
Further, the specific regulations issued by the RBI would still be relevant and continue to be applicable for Housing Finance Companies, Core Investment Companies, NBFC-P2P, NBFC-Account Aggegator, deposit taking NBFCs, Residuary Non-Banking Companies, Mortgage Guarantee Companies and Asset Reconstruction Companies. Additionally, based on the classification under the SBR Framework (BL or ML), the relevant provisions of the SBR Master Directions shall be applicable.
Previously, under the SBR notification dated October 22, 2021, the RBI clarified that all references to NBFC-ND (non-systemically important non-deposit taking NBFC) would now be referred to as NBFC-BL, and all references to NBFC-D (deposit-taking NBFC) and NBFC-ND-SI (systemically important non-deposit taking NBFC) would be known as NBFC-ML or NBFC-UL, depending on the case.
Furthermore, it specified that existing NBFC-ND-SI with asset sizes of ₹ 500 crore and above but below ₹1000 crore (except those necessarily categorized as Middle Layer) would be reclassified as NBFC-BL.
However, upon an initial review of the SBR Master Directions, it appears that certain guidelines that were typically applicable to NBFC-SI and should logically apply to NBFC-ML are explicitly retained for NBFCs with asset sizes exceeding ₹ 500 crores. Here is a list of such guidelines:
Prudential Framework for Resolution of Stressed Assets dated June 07, 2019, as amended from time to time would be applicable on all NBFCs-D and non-deposit taking NBFCs of asset size of ₹500 crore and above. It may be noted that there are specific norms for restructuring of advances by non-deposit taking NBFCs with asset size less than ₹500 crore
Non-Cooperative Borrowers identification shall be done by all NBFC-Factors, NBFCs-D and non-deposit taking NBFCs of asset s.ize of ₹500 crore and above.
Refinancing of Project Loans to any existing infrastructure and other project loans by non-deposit taking NBFCs with asset size less than ₹500 crore.
Framework for Revitalizing Distressed Assets in the Economy shall apply to non-deposit taking NBFCs with asset size less than ₹500 crore.
Early Recognition of Stress and Reporting to Central Repository of Information on Large Credits (CRILC) reporting by all NBFC-Factors, NBFC-D and non-deposit taking NBFCs of asset size of ₹500 crore and above.
As the financial landscape continues to evolve, the RBI’s proactive approach ensures that the NBFC sector remains well-updated.
Upon further perusal of the SBR Master Directions, it can be noticed that there are certain regulations that were issued under the SBR Framework that have not been consolidated, such as follows:
Further, there are specific master directions on information technology framework, fraud reporting, etc. that have not been consolidated. It may also be noted that para 4.2 clarifies that the SBR Master Directions consolidate the regulations as issued by Department of Regulation (DoR); any other directions/guidelines issued by any other Department of the RBI, as applicable to an NBFC shall continue to be adhered to. Accordingly, the aforesaid regulations that were issued by the Department of Supervision (DoS) or Department of Non-Banking Supervision (DNBS) have not been consolidated and are neither listed in the Repeal Section of the SBR Master Directions. There does not seem to be any reason for the aforesaid regulations to be repealed, and hence, it seems that only those circulars and notifications that are issued by the DoR have been considered while compiling the regulations, including those introduced under the SBR Framework. Considering that there are standalone notifications on the aforesaid issued by the DoS or DNBS, therefore, the said regulations should also continue to be applicable.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Anita Baidhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngAnita Baid2023-10-20 12:09:012023-11-09 14:09:10Consolidated NBFC Regulations for all Scales and Functions
The data for securitisation transactions in India for the first half of FY24 are just out, and some remarkable features are:
Sharp growth – nearly 40% on YoY basis, to cross Rs 100000 crores H1FY24.
Proper securitisations, that is, PTC transactions, register almost 90% growth
Direct assignment volumes may further reduce relatively, post the merger of HDFC into HDFC Bank
Asset-backed securities as an asset class increased share from 45% in FY 23 to 53% in FY 24.
With this, securitisation markets in India have truly started moving towards maturity. The so-called direct assignment/DA (now under regulations termed as Transfer of Loan Exposures) was a market aberration and was a convenient way for lenders to shift priority sector loan exposures. During the half year, the impact of the HDFC Ltd-HDFC Bank merger might have had some impact; it will see more impact going forward, as the bulk of the DA business was accounted for by the erstwhile duo. Further, co-lending has emerged as a very convenient alternative to direct assignments.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinod Kotharihttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinod Kothari2023-10-09 18:38:352023-10-09 18:56:13Decoupling from direct assignments, Indian securitisation moves the global way
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