RBI – Page 6 – Vinod Kothari Consultants

Liquidity stress testing for NBFCs

February 23, 2023/0 Comments/in Banks, Financial Services, NBFCs, RBI /by Vinod Kothari

– Vinod Kothari

Stress testing is a part of risk management process. Stress testing envisages those plausible, however, low frequency events, which may occur and disrupt the operations. In the context of a financial intermediary – stress may be seen either in the solvency (that is, capital is not sufficient to absorb the risks or losses), or liquidity (that is, the bank is perfectly solvent, and yet, does not have enough liquidity to discharge immediate liability).

The need for stress testing comes from para 15A (para 15 for non-systemically important NBFCs) read with Annex II of the Master Directions for NBFCs[1] which provide as follows:

Read more →

The Dos and Don’ts of Penal Charges

February 16, 2023/0 Comments/in Banks, Banks, Financial Services, NBFCs, RBI /by Tejasvi Thakkar

RBI to release guidelines on penal charges

– Tejasvi Thakkar, Executive | finserv@vinodkothari.com

Introduction

The Reserve Bank of India (‘RBI’) announced various policy measures in its Statement on Developmental and Regulatory Policies dated February 08, 2023, which includes introduction of guidelines for regulating the penal charges levied by financial institutions in case of delay or default in repayment of loans or where there is a non-compliance of ‘material’ terms and conditions. RBI observed that some of the financial institutions were levying unreasonable penal charges. It has time and again been RBI’s concern that financial institutions levy excessive charges under the garb of different names such as penal charges, penal interests, legal charges, notice charges, levy charges etc. A large number of customer grievances with respect to excessive penal charges and divergent practices have influenced the regulator to think on these lines.

Read more →

Ushering the new-age TReDS Platform

February 15, 2023/0 Comments/in Factoring, Financial Services, Payment and Settlement Systems, RBI /by anirudhgrover

– Anirudh Grover, Executive | finserv@vinodkothari.com

Receivables or debtors though from the face of it is considered as a positive thing for businesses, however when you lift the tag of positivity one can assess the true color of trade receivables. This essentially means that despite it being classified as an asset it may not be helping the business when required. For instance, ABC Ltd has 1 lakh recorded as debtors in its financials however these debtors are of no substantial use unless it is converted into liquid forms of funds. This in essence is the reason why TReDS was introduced, RBI vide Guidelines for the Trade Discounting System (TReDS) opined that the scheme for setting up and operating the institutional mechanism for facilitating the financing of trade receivables of MSMEs from Corporate and other buyers, including Government Departments and Public Sector Undertakings (PSUs), through multiple financiers is known as TReDS.

Read more →

National financial information repository: One more or one for all?

February 1, 2023/0 Comments/in Banks, Budgetary Publications, FEMA, Financial Services, RBI, SARFAESI, Securitisation /by Lovish Jain

– Lovish Jain, Executive | lovish@vinodkothari.com

Some days ago, Mr. Vinod Kothari had commented on a LinkedIn post :

“Do we realise how many places does a lender (NBFC, Bank) register information about a loan? There are 4 credit information companies (such as CIBIL) where the credit data, including performance history, is uploaded. If the exposure is Rs 5 crores or above, in the aggregate over the banking system, information goes on CRILC too.

RBI has recently written to NBFCs reminding them of the obligation to register details with NeSL, an information utility under IBC, irrespective of whether the provisions of Code apply (for example in case of individuals), or whether the lender in question is at all contemplating resorting to IBC as a remedy (for example, consumer loans).

If the loan is a secured loan, the details need to be filed with CERSAI. If the secured loan borrower is a company, details need to be filed with RoC too. If the security interest is on immovable property, one needs to file particulars with land registry. If the security interest is on motor vehicles, the hypothecation is registered with Vahan portal too.

Read more →

Securitisation of stressed loans: Opportunities and structures

January 31, 2023/0 Comments/in Financial Services, RBI, Securitisation /by Timothy Lopes

Comments on RBI’s Discussion Paper on Securitisation of Stressed Assets Framework (SSAF) dated January 25, 2023

Timothy Lopes, Manager | Vinod Kothari Consultants Pvt. Ltd.

finserv@vinodkothari.com

Background

At present, in India, there exists a framework for securitisation of standard assets only. in September, 2021 the RBI issued the ‘Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021’ (‘SSA Directions’)^[1], which deals with standard asset securitisation. Under the SSA Directions, the definition of standard assets does not include non-performing loans, i.e., only those assets with a delinquency up to 89 days, would qualify for securitisation under the SSA directions.

For assets that turn non-performing, i.e., 89+ days-past-due (‘DPD’), including those that retain the classification as the borrower has not been able to clear all his past arrears, the same can, at present, be sold under the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’)^[2], which has a framework for sale of stressed assets (which includes non-performing assets). Technically, there is a process of “securitisation” of non-performing loans (‘NPLs’), by issuing “security receipts” (‘SRs’) against the same; however, the framework for issue and investing in SRs is quite different, and is normally not captured as a part of securitisation in the industry parlance^[3].

Assets sold through the TLE route require a complete arm’s length sale, without any credit support from the seller and there is typically no tranching. This results in substantial haircuts on these stressed loan pools. Further, most of the NPLs that face a problem in the current scenario are retail loans or re-performing loans (see discussion on re-performing loans later). These retail pools are not normally sold under the ARC route since ARCs lack the capability in this specific asset class and are more suited towards wholesale transactions.

Read more →

Tweezing out for dormancy: RBI intends to intensify regulatory audits of NBFCs

January 27, 2023/0 Comments/in Financial Services, NBFCs, RBI /by Anita Baid

By CS Anita Baid, Vice President, Vinod Kothari Consultants P. Ltd.

As per reports available on public domain^[1], the RBI intends to intensify regulatory audits of non-banking finance companies, to find dormancy, non-compliance, non clarity of business models, or other risks that the regulator may wish to check. The intent seems to be weed out the truant ones out of the crowd of over 9000 NBFCs that exist. It is a fact that in the recent years, the RBI has been granting lesser new registrations, and canceling more of existing registrations, causing the number to come down. It is also important to note that if the number of NBFCs looks overwhelming, it is not because so many companies are into real operation: it is because the regulations currently define a company investing its owned capital into financial investments, with absolutely no access to either public funds or customer interface, as an NBFC, by imputing the public interest that actually does not exist. The number would have been a lot lesser had the regulator had the realisation that if there are no public funds, no customer interface and investment of owned funds being done, there is no reason for the regulator to interfere, as the intent of the country’s Central Bank cannot be to regulate investment activity that one does with one’s own money.

While this issue remains to be advocated for a potential reform, in the meantime, it is important for NBFCs to brace up for the RBI’s inquisitorial interest.

This article is intended to help NBFCs to be better prepared for such regulatory interface.

Read more →

Compliance Risk Assessment

January 18, 2023/0 Comments/in Financial Services, NBFCs, RBI, scale based regulations /by Subhojit Shome

Guidance for implementation by NBFCs

Subhojit Shome, Assistant Manager | subhojit@vinodkothari.com

Introduction

The RBI published the Compliance Function and Role of Chief Compliance Officer (CCO) – NBFCs^[1] on April 11, 2022 (‘Compliance Circular’) that are applicable on Middle Layer (NBFC-ML) and Upper Layer NBFCs (NBFC-UL) and the deadline to put into place the framework for this function falls due on October 1, 2023 for NBFC-ML and April 1, 2023 for NBFC-UL entities.

The circular brings up the significant aspect of Compliance Risk, a concept that has been for long relevant for Banks^[2] and now becomes applicable for specified NBFCs as well. The Compliance Circular define Compliance Risk as follows:

‘the risk of legal or regulatory sanctions, material financial loss or loss of reputation an NBFC may suffer, as a result of its failure to comply with laws, regulations, rules and codes of conduct, etc., applicable to its activities.’

Hence, Compliance Risk goes beyond mere fines and penalties that may arise as a result of compliance irregularities and the Compliance Function needs to consider the entire gamut of adverse events that a company may be exposed to as a result of compliance failures. These may include events with extreme impact such as suspension of business operation or loss of reputation as a result of enforcement action against senior management.

As a crucial piece of being able to anticipate such risks and to put necessary mitigation measures in place the Circular mandates putting in place an effective compliance risk assessment framework and the senior management to review such assessment annually.

Read more →

India to bring its debutante sovereign green bond

January 10, 2023/0 Comments/in Bond Market, Capital Markets, Financial Services, RBI, Sustainability /by Vinod Kothari

– Vinod Kothari | vinod@vinodkothari.com

This version: 31st January, 2023

Following the Sovereign Green Bond framework issued by the Govt of India, and in accordance with the calendar of events issued by RBI, the first tranche of the sovereign green bonds has been successfully issued by the Govt of India. Remarkably, the bonds achieved a greenium of 6 basis points against the expected 2-3 basis points, with the issue selling at a 5-6 basis points lower yield than the sovereign yield of similar tenure. The issuance was more than four times oversubscribed. The five-year bond was priced at 7.10% and 10-year bond at 7.29%, as per the auction results released by RBI. Indian government bonds with the same maturity period were trading at a yield of 7.16% and 7.35%, respectively, during the relevant period.

After the launch of the Sovereign Green Bond framework in November 2022, India has made its fast move for debuting with a Rs 16,000 crore green bond issuance, in two tranches, in January and February 2023, according to an RBI announcement. The proceeds will be deployed in public sector projects which help in reducing the carbon intensity of the economy. The details of such projects are not immediately available; however, going by settled Green Bond Principles , which has also been adopted by India’s own sovereign framework, these projects will be identified and ascertainable disclosed by the issuer in the offer documents^[1].

The GoI green bonds will qualify as SLR securities. They will also be available for investment by non-residents on automatic route. There are two maturities – 5 years, and 10 years, each with a value of Rs 8000 crores.

Green bonds are a part of a larger category of sustainability finance instruments, including social, sustainability, transition or other various thematic bond issuances. Green bonds constitute the largest components of the so-called GSS+ bonds.

Green bonds are issued by financial sector entities, direct users as also by sovereigns. The issuance by sovereigns, such as the Government of India in the present case, is fair recent – Poland is said to be the first country in 2016 to have issued a green bond.

Read more →