One may call it insecure about unsecured lending; the central bank has taken what in our view is a bold and timely measure, to rein in unsecured lending.
Identifying a notable surge in specific segments of consumer credit, the RBI had recently met senior bankers. The latter had reportedly assured the central bank that things are under control. However, apparently, these assurances have failed to assuage the RBI’s view. Vide its notification dated November 16, 2023, the RBI has taken several mitigating measures.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Vinod Kotharihttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngVinod Kothari2023-11-16 19:32:482023-11-17 14:48:05RBI raises red flag on increasing personal loans
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
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Finservhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Finserv2023-10-06 13:00:542023-10-06 13:47:17Implementation of Compliance Function by NBFC-ML
The Reserve Bank of India on September 21, 2023 has issued the Draft Master Directions on Treatment of Wilful Defaulters and Large Defaulters (‘Proposed Directions’). The Directions, when finalized, will replace the existing Master circulars (referred below). The draft Directions are largely consolidating in nature, with some significant differences. Importantly, NBFCs of middle and upper layer have been brought into the framework, and additionally, as was clear from the recent circular on compromise/settlements, the tag of willful defaulter may be removed if the borrower does a compromise settlement with the lender. However, a mere sale of the loan will not cause removal of the tag, as the tag will pass on to the buyer. The draft Directions also assimilate the provisions about large defaulters, which was earlier a CIC filing requirement, and make it a part of these Directions.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Finservhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Finserv2023-09-26 13:43:092024-03-30 17:36:31Defaulters at will, and defaulters of size: RBI proposes new Directions
Vide a 12th Sept notification, the RBI has brought in Master Directions for Classification, Valuation and Operation of Investment Portfolio of Commercial Banks. The new norms bring the accounting and valuation of investments by banks closer to global accounting standards.
While the apparent focus of these Directions would have been valuation of investment portfolios, however, the Directions may also impact investment policies and investment operations of banks as well.
The recent notification[1] by the RBI permitting banks to provide pre-sanctioned credit facilities to be used by Unified Payment Interface (UPI) is a game changer. The full dimensions of this new mode of extending credit will possibly take some time to develop or demonstrate, but clearly, as UPI itself changed the way the country handles payments, the linking of UPI with pre-sanctioned credit facilities is also a major change.
Currently, UPIs may pull money from the customer’s bank account (current or savings account), overdraft accounts, prepaid wallets or credit cards. Now, UPI may have a linked credit facility as well, and a customer may dip into that credit line while making any payment for which she currently uses UPI.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Finservhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Finserv2023-09-08 17:01:212023-09-08 17:09:54UPIs become virtual credit cards: A game changer in credit delivery
Levying of penal charges or late payment charges are claimed as ‘just’, owing to the underlying breach of contract under the Contract Act, 1972. A breach or a non-performance by one party entitles the other party to receive compensation for any loss or damage suffered due to such breach. Penalties may not only be compensatory; they also have a deterrent element.
In order to ensure compliant behaviour, lenders charge penalties to their borrowers for various ‘events of default’; the predominant ones being penalty for delayed payments (in the form of charges or interest) and prepayment penalties. However, such charges stopped being ‘just’ and ‘reasonable’ when lenders started maneuvering such penalties as revenue enhancement tools, rather than as a deterrent measure and compensation for a breach. Such unreasonable penalties coupled with non-disclosures, compounding of penal interest, etc. were highly prejudicial to consumer interest and accordingly, caught the eye of the regulator.
The RBI introduced guidelines to the lenders to ensure reasonableness and transparency in the disclosure of penal interest vide its Circular on ‘Fair Lending Practice – Penal Charges in Loan Accounts’(RBI Guidelines on penal charges’) dated August 18, 2023. Our article and FAQs[1]on the same may be read here[2].Our YouTube video discussing the guidelines may be viewed here.
However, charging penal interest also raises several practical questions for lenders, mainly indirect taxation and accounting of penal charges, which will be discussed in detail in this article.
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