Posts

Harmonising computation for concentration limits across NBFCs

– Kaushal Shah, finserv@vinodkothari.com 

Reserve Bank of India (RBI) has recently announced amendments to the Credit and Investment concentration norms, specifically targeting Base and Middle Layer Non-Banking Financial Companies (NBFCs). The circular, dated January 15, 2024, brings about notable changes aimed at ensuring uniformity and consistency across NBFCs while computing the concentration norms. 

What has RBI done?

For Middle Layer NBFCs (NBFC-MLs) :

  1. In addition to the use of Credit Default Swaps (‘CDS’), RBI has now allowed NBFC MLs to offset the aggregate exposure with the following additional Credit Risk Transfer (CRT) instruments: 
  • Cash margin/caution money/security deposit held as collateral on behalf of the borrower against the advances for which right to set off is available;

It is pertinent to note that, as per para 84 of the SBR Directions, already requires the NBFC for the purpose of assignment of risk weight to net off the amount of cash margin/ caution money/security deposits held as collateral against the advances out of the total outstanding exposure of the borrower. 

  • Central Government guaranteed claims which attract 0 per cent risk weight for capital computation;
  • State Government guaranteed claims which attract 20 per cent risk weight for capital computation; and 
  • Guarantees issued under Credit guarantee Schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises, Credit Risk Guarantee Fund Trust for Low Income Housing and individual schemes under National Credit Guarantee Trustee Company Ltd
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RBI mandates appointment of an Internal Ombudsman by NBFCs

Updated as on December 29, 2023

– Team Finserv | finserv@vinodkothari.com

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Our Resources on the topic:

  1. RBI mandates appointment of an Internal Ombudsman by NBFCs
  2. RBI’s Ombudsman storm- Tough road ahead for NBFCs
  3. Ombudsman Scheme for PPI issuers
  4. Extension of Ombudsman Scheme to remaining class of notified NBFCs

Year 2023 in retrospect: Regulatory changes for NBFCs

Aanchal Kaur Nagpal | Senior Manager

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Watch our regulatory round series on YouTube here

Workshop on RBI Circular on Regulatory Measures in Consumer Credit by Banks & NBFCs

Click here to register: https://forms.gle/5MkAYcULqUK3unxu9

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Read our article here: RBI raises red flag on increasing personal loans

Sale of Retail NPAs : A synoptic overview

– Team Finserv | finserv@vinodkothari.com

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  1. NBFC NPA characterisation: A reprieve a day too late?
  2. NPA classification norms significantly tightened
  3. Non-Performing Assets: A Solution at Last?
  4. NPA recognition for trailing borrower payments by NBFCs
  5. Presentation on harmonisation of NPA recognition

IT Governance, Risk, Controls and Assurance Practices Direction, 2023

Analysis of Impact on Financial Sector Entities

Kaushal Shah & Subhojit Shome | finserv@vinodkothari.com

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Read our other resources

  1. RBI regulates outsourcing of IT Services by financial entities
  2. Draft Master Direction on IT Governance, Risk, Controls and Assurance Practices
  3. Erstwhile Directions on IT Framework for the NBFC Sector – RBI keen on implementing several operational requirements

Access our resource centre on SBR Framework :

Draft framework for Financial Services Outsourcing

Elevating Risk Management and Regulatory Compliance

– Team Finserv | finserv@vinodkothari.com

Introduction

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.

The concerns about outsourcing by financial entities have been a part of regulatory attention for years. In 2005, the Basel Committee framed General Principles on Outsourcing, and it was indicated in 2023 that these principles will be superseded by new outsourcing principles. The European Banking Authority also has comprehensive guidelines on outsourcing IOSCO also has set principles on outsourcing by entities coming within its regulatory domain. 

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..  .

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Defaulters at will, and defaulters of size: RBI proposes new Directions: Middle and Upper Layer NBFCs also part of the system

Team Finserv, Vinod Kothari Consultants 

finserv@vinodkothari.com

Introduction

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 finalised, 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.

While a default itself is bad for a bank, where the default is backed by ability, but unwillingness to pay, it assumes a different level of seriousness. Such a borrower, and the entities that such borrower promoters or fosters, should remain deprived of further assistance from the financial system.

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Unlocking Working Capital: An Overview of Supply Chain Finance

-Dayita Kanodia, Executive | finserv@vinodkothari.com

The best way to reduce your supply chain inventory is to sell it.” Dilbert.

Background

A supply chain is a complex network of organizations, people, activities, information, and resources involved in the creation and distribution of a product or service from its initial sourcing of raw materials to the delivery of the final product to the end customer. The supply chain of a business can vary significantly depending on the industry, size of the company, and the specific products or services it offers.

Financing the supply chain is a critical aspect of supply chain management and is essential for ensuring the smooth flow of goods and services. 

This article discusses the model of supply chain finance and how it helps in improving the health of the supply chain.

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Workshop on NBFCs: Ensuring Strong Compliance Management

Register here: https://forms.gle/311C3q9zreMJBK236
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