2022 in retrospect: Regulatory activity in the financial sector

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– Vinod Kothari | finserv@vinodkothari.com

It has been a brisk year in terms of activity – a busy regulator kept  all regulated entities busier. This year marked the initiation of a new SBR framework for NBFCs – hence there was a lot of buzz in terms of understanding the new regulatory framework. The names of 16 Upper layer entities were declared by the RBI – consisting of 5 HFCs, 10 NBFC-ICCs, one CIC[1]. As is the design, UL entities are treated at par with banks in terms of regulatory intensity –hence, there is a LEF (large exposure framework), differential provisioning norms in case of  standard assets, CET-1 capital requirement, mandatory listing etc.

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CERSAI beyond SARFAESI – The multi-faceted effects of security interest registration

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– Sikha Bansal and Anirudh Grover | finserv@vinodkothari.com

Introduction

The rights of secured creditors are spread across various laws: common law, Companies Act, Insolvency and Bankruptcy Code (IBC) and the SARFAESI Act. In equal measure, the preconditions which are requisite to assert these rights are also spread over those very laws. 

It is lamentable that the security interest registration regime in India is fragmented, without any obvious sense of purpose or direction. This was discussed in our previous article Fragmented Framework for Perfection of Security Interest[1].

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The sale of season: Holding period requirements for assignments and securitisation

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– Team Finserv | finserv@vinodkothari.com

Any sale or assignment or transfer, including securitisation, of loans is subject to a minimum seasoning with the originator. Under the extant regulatory provisions, such requirement is referred to as ‘Minimum Holding Period’ (MHP), which means the minimum period for which the originator should have held the loan exposures before the same is transferred to the transferee or Special Purpose Entity (SPE), as the case may be. This serves several purposes: that the loan was not originated for sale, the originator has had some equity in the loans, and that there is a benefit of hindsight of performance.

MHP requirements have always been a part of the regulations in India. However, on December 5, 2022, the Reserve Bank of India (RBI) made certain amendments to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021[1] (‘TLE Directions’) as well as the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021[2] (‘SSA Directions’). Among the other changes, there was a change in the MHP provisions; this change may have a significant impact on future transactions. 

This write-up intends to clarify the position with respect to the computation of MHP for different types of loans under TLE Directions as well as SSA Directions.

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RBI amends TLE Directions

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– Team Finserv | finserv@vinodkothari.com

The Reserve Bank of India (RBI) made certain amendments to the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (‘TLE Directions’) on December 05, 2022. The long-awaited welcome move of allowing ARCs to acquire loans falling in 1-60 DPD as well is being well appreciated. Some of the changes seem to be creating a confusion; say not allowing foreign branches of Indian banks to acquire defaulted loans; while others, seem to be providing more clarity; such as clarifying that registration of security interest for the purpose of computing MHP shall mean registration of security interest with CERSAI only.

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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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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/

Introduction of the Digital Rupee (e₹)

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RBI announces the launch of the first pilot

– Subhojit Shome, Senior Executive | finserv@vinodkothari.com

On 7th October, 2022 the RBI published a Concept Note[1] on Central Bank Digital Currency (CBDC) that intended to “create awareness about CBDCs in general and the planned features of the digital Rupee, in particular”. Chapter 8 (“Way Forward”) of the Concept Note provided for a phased approach towards implementation that involved building a prototype and running large scale pilots before actual launch of the ‘Digital Rupee’. The guiding principle being that the introduction of Digital Rupee should cause only a minimal or no disruption to the financial system.

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RBI introduces corporate governance norms for Asset Reconstruction Companies

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Timothy Lopes | Manager | finserv@vinodkothari.com

The RBI has, on October 11, 2022, issued a circular[1], amending the extant regulatory framework for Asset Reconstruction Companies (‘ARCs’) and introducing corporate governance norms and other aspects through this circular.

Considering the importance of ARCs, a need was felt to review the extant regulatory framework. Through the Statement on Developmental and Regulatory Policies released along with the Monetary Policy Statement on April 7, 2021, the RBI had set up a committee to “undertake a comprehensive review of the working of ARCs in the financial sector ecosystem and recommend suitable measures for enabling such entities to meet the growing requirements of the financial sector.” The committee, constituted on April 19, 2021[2], had submitted its report to RBI and the same was placed on the website of RBI on November 02, 2021[3] and many recommendations have been implemented since. The circular comes pursuant to the recommendations of the said committee.

This circular is in addition to the extant regulatory framework governing ARCs and come into effect immediately or as otherwise indicated specifically therein.

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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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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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