Vehicle financiers must follow SARFAESI process for repossession: Patna High Court
Ruling holds self-help repossession as a breach of the borrower’s fundamental rights of livelihood and dignity
– Vinod Kothari, finserv@vinodkothari.com
Repossession of vehicles (from two-wheelers to four-wheelers), in case of borrowers’ defaults, has been done almost entirely using common law process, on the strength of the provisions of the hypothecation agreement. The roughly Rs 500000 crores auto finance market in India, including financing of passenger vehicles and commercial vehicles, rarely makes use of the process of SARFAESI Act for repossession of vehicles from defaulting borrowers, even though most of the NBFCs and all of the banks are authorised to make use of the process.
However, a recent Patna High Court, from a single judge of the Court[1], holds that since hypothecation is a “security interest” on the vehicle, the use of the process of the SARFAESI Act is mandatory, and any repossession action not adhering to the process of that Act is illegal. The Court has gone to the extent of ordaining all banks and NBFCs in the State to return the repossessed vehicles which are either not sold or are traceable to the borrowers on payment of 30% of the due amount, and in case of those vehicles which are not traceable or returnable, it permits the petitioners to seek compensation. It has simultaneously directed the Police to investigate and register cases of use of force or illegal tactics in repossession.
Read more →Penal charges not a cash-cow for lenders
RBI issues draft guidelines on fair lending practices for penal charges
– Aanchal Kaur Nagpal, Manager and Dayita Kanodia, Executive | finserv@vinodkothari.com
Introduction
Levying of penal interest/ charges is a punitive measure adopted by lenders on borrowers defaulting in making repayments and/ or breaching any terms and conditions mutually agreed in the loan agreement. The Reserve Bank of India also allows lenders to charge such rates as long as the same are communicated to the borrower and are in accordance with the Board approved policy framed in this behalf.
However, lenders, cashing in on such autonomy and flexibility, have adopted varied practices which are often prejudicial to the borrower. These include charging exorbitant rates, capitalisation of penal charges, charging of penal interest on the loan amount and not the defaulted portion etc.
The RBI, in its Statement on Developmental and Regulatory Policies dated February 08, 2023[1], announced policy measures for introduction of guidelines for regulating the penal charges levied by financial institutions[2]. Pursuant to the same, RBI, on April 12, 2023 has issued a draft circular on Fair Lending Practice – Penal Charges in Loan Accounts (‘Draft Circular’) to persuade lenders to use penal charges for their true compensatory nature and not as a revenue enhancement tool.
While the Draft Circular comes with good intentions, there are certain provisions that may seem ambiguous and contradictory, and the final guidelines would need to provide sufficient clarity to achieve the desired execution.
Read more →RBI regulates outsourcing of IT Services by financial entities
-Anirudh Grover, Executive | finserv@vinodkothari.com
1. Introduction
With the penetration of the internet in India, newer and more efficient technologies are being built and these dynamic technologies are being leveraged by various sectors of the economy, and the financial sector is one of them. Financial institutions have extensively been outsourcing their IT services requirements to third parties in order to get easier access to newer technologies. In this process of availing the services of a third party, financial institutions expose themselves to significant financial, operational, and reputational risk as the Reserve Bank of India has pointed out.
Accordingly, the RBI in the year 2022 had in its Statement on Developmental and Regulatory Policies proposed to issue draft directions on outsourcing of IT services since the existing Directions on Managing Risks and Code in Outsourcing of Financial Services (‘Guidelines on Outsourcing of Financial Services’) as provided for in the Master Direction- Non Banking Financial Company- Systemically Important Non Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 (Updated as on December 29, 2022) (‘SI Directions’) specifically excluded IT services from its ambit. Following which on June 23, 2022 the RBI issued Draft Master Direction on Outsourcing of IT Services (‘Draft IT Outsourcing Directions’) for public comments. We had briefly in our previous write up discussed the introduction of the Draft IT Outsourcing Directions.
Read more →RBI Framework for Green Deposits
– Team Finserv | finserv@vinodkothari.com
Climate change is clearly one of the most pertinent regulatory themes in recent times, as the move to sustainable business practices and energy efficient technologies need massive funding. The availability of finance for move to sustainability has an important role to play in mitigating climate change. To this effect, RBI also conducted a survey in January 2022 to assess the status of climate risk and sustainable finance in leading scheduled commercial banks, and observed a need for concerted effort and further action in this regard. Following the same, RBI conducted a discussion, and released a press release indicating its intention to release a framework for acceptance of green deposits in India. On 11th April, 2023, RBI released the Framework for Acceptance of Green Deposits (“Framework”) for banks and deposit-taking NBFCs/HFCs, to be applicable from 1st June, 2023.
| Our video lecture on the topic is available here: https://youtu.be/7rRhVYR-zT0 |
As the green deposits formally mark its presence in the Indian financial markets, one may be inquisitive on various aspects related to it. We have tried to analyze and put our views on the same in this write-up.
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PML Act and Rules: Recent changes may have new compliance requirements
-Team Finserv | finserv@vinodkothari.com
Background
Financial sector entities have to follow PMLA and related rules, including by way of KYC Directions. The Finance Ministry came up with various amendments pertaining to the Prevention of Money-Laundering Act, 2002 (“PML Act”) and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’). The amendments pertain to revised thresholds for ascertainment of beneficial ownership (25% to 10%), implementation of group wide policies for compliance with provisions of Chapter IV, expanding the obligations under PMLA to service providers of virtual digital assets, etc.
Effective date and applicability:
The amendment shall be effective from the same date, i.e. March 07, 2023. It may be noted that the Master Direction – Know Your Customer (KYC) Direction, 2016 (‘KYC Directions’) are issued and updated by the regulator based on the amendment in PML Act and PML Rules. However, the Regulated Entities (RE) are required to ensure compliance with the provisions of PML Act and PML Rules, as amended from time to time. Hence, necessary steps must be taken based on the amendments.
Whether applicable to existing or new customers?
Customer Due Diligence (as required under the PML Act and Rules) is required to be undertaken at the time of commencement of a financial transaction or account-based relationship with the customer. Accordingly, necessary steps must be taken by the RE to ensure compliance with the Amendment Rules for all new customers or new financial transactions undertaken with existing customers after March 07, 2023. However, it is also pertinent to note rule 9(12) of the PML Rules which requires reporting entities to exercise continuous due diligence with respect to the business relationship with every clients.
Read more →Base Layer NBFCs amenable to NSI or SI regulations?
Rhea Shah, Executive | finserv@vinodkothari.com
Background
Prior to the implementation of the SBR Framework, NBFCs were classified into Systemically Important (SI) and Non-Systemically Important (NSI) on the basis of the overall risk involved in their operations and the economic importance of the operations that they undertake. NBFCs with asset size upto 500 crores were classified as NSI, and those with Rs. 500 crores and above, were classified as SI and are respectively governed by Master Direction – Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016[1] (‘NSI Directions’) and Master Direction – Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016[2] (‘SI Directions’). Besides, there are certain other directions [e.g. Master Direction – Monitoring of Frauds in NBFCs (Reserve Bank) Directions, 2016[3]], which are applicable to NBFC-SIs and not NBFC-NSI. Even the return filing requirements differ for NBFC-SIs and NBFC-NSIs.
Read more →RBI Regulation of Investment Companies: Futile, counter-productive and counter-intuitive
–Vinod Kothari | finserv@vinodkothari.com
The RBI has launched a major base-layer study of “base-layer NBFCs”, whereby audit firms will be surveying these NBFCs. Apparently, the audit firms will visit their offices to see if there is a physical office (which means a name plate outside the office), whether that physical office houses other offices too (an anachronistic objective in the age of co-working spaces), track the directors and the beneficial owners of such companies. The RBI’s definition of “beneficial owners” is remarkably different from the very same concept under section 90 of the Companies Act, which, after huge rounds of discussion, settled on certain rules for determination of such beneficial owners, and given the fact that the Companies Act is already tracking beneficial owners, it is interesting to note that the RBI would do its own enquiry into such beneficial owners.
Understandably, this massive exercise, with a budget of Rs. 2.36 crores, has been launched to do a reality check on the 9471 entities forming part of the so-called “Base layer”, which, by the regulators’ own determination, are entities which do not matter much for the financial system. Once again, out of these base layer entities, approximately 97% of the entities qualify as “investment and credit companies”.
Read more →Liquidity stress testing for NBFCs
– 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
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.
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