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RBI takes steps to prepare for the aftermath of the pandemic

-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

On October 9, 2020, the RBI released its Statement of Developmental and Regulatory Policies[1] which lays down the next steps of the RBI in the direction of coping up with the impact of the pandemic. The intended moves of the RBI seem to ensure preparing the financial sector to support the economy get in track with the new normal. Below are a few highlights proposed by the RBI with respect to the financial sector.

With respect to capital adequacy of banks

Banks and NBFCs are required to maintain certain capital ratios prescribed by the RBI. As for banks, they are required to maintain a Capital to Risk-weighted Assets Ratio (CRAR) of 9%. For the calculation of risk-weighted assets, the RBI prescribes the weights to be assigned to each on and off the balance sheet assets of the banks.

Increase in the size- limit for regulatory retail portfolio

The RBI has prescribed 75% risk weight for the ‘regulatory retail portfolio’ of banks. For an exposure to qualify into the regulatory retail portfolio[2], the following conditions are required to be met:

  • The exposure shall towards an individual person or persons or small business;
  • The exposure shall be in the form of revolving credits, line of credit, term loans and leases, student and educational loans and small business facilities and commitments;
  • No aggregate exposure to one counterparty should exceed 0.2% of the overall regulatory retail portfolio;
  • The maximum aggregated retail exposure to one counterparty should not exceed Rs. 5 crores.

The above limit of Rs. 5 crores has now been increased to Rs. 7.5 crores for fresh facilities and incremental qualifying exposures. This has been done with an intent to reduce the cost of credit and to harmonisation the regulations with the Basel guidelines[3]. This measure is expected to increase the much-needed credit flow to the small business segment.

Revision in risk weights

The risk weights for housing loans to individuals have also been changed. The table below shows the change in risk weighting requirements:

Earlier Risk weighting requirements[4]

Outstanding Loan LTV ratio (%) Risk Weight (%)
Upto Rs. 30 lakhs <=80 35
>80 and <=90 50
Above Rs. 30 lakhs and upto Rs. 75 lakhs <=80 35
Above Rs. 75 lakhs <=75 50

Revised requirement:

LTV ratio (%) Risk Weight (%)
<=80 35
>80 and <=90 50

Under the existing regulations, differential risk weights are assigned to individual housing loans, based on the size of the loan as well as the loan-to-value ratio (LTV). In order to rationalise the risk weights, the regulator has linked them to LTV ratios only for all new housing loans sanctioned up to March 31, 2022. This measure is expected to give a fillip to the real estate sector. However, the determination of LTV is still linked to the size of the loan[5]. Hence, there is only a minimal change with this revision of limits, which is not likely to have much impact on housing loans extended by banks.

Wider inclusion with respect to priority sector lending

Loans co-originated by banks and NBFC-SIs were allowed to qualify for priority sector lending targets[6]. The RBI has now allowed loans co-originated by banks with NBFC-NSIs and HFCs as well for qualifying as priority sector loans. The detailed guidelines in this regard are awaited.

There already exist co-lending arrangements between banks and smaller NBFC and HFCs, however, they are not regulated by any specific guidelines. Though in spirit most of these arrangements are structured in accordance with the existing guidelines for NBFC-SI, however, some of the norms may be a challenge to implement- one of them being the minimum risk sharing of 20% by way of direct exposure by the NBFC.

Conclusion

These steps introduced by the RBI are not exactly a major move taken by the regulator, however, several such changes may have an impact in the long run. Further, the inclusion of NBFC-NSIs and HFCs in the scope of co-origination guidelines is a welcome move and is expected to work in the benefit of smaller NBFCs and HFCs.

 

 

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50480

[2] Refer: https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=4353

[3] Refer: https://www.bis.org/publ/bcbs128b.pdf

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=10995&Mode=0

[5] Refer: https://www.rbi.org.in/Scripts/BS_ViewMasCirculardetails.aspx?id=9851

[6] Refer: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11376&Mode=0

 

EASE OF RECOVERY FOR NBFCS?

–  Ministry of Finance relaxes the criteria for NBFCs to be eligible for enforcing security interest under SARFAESI

-Richa Saraf (richa@vinodkothari.com)

 

The Ministry of Finance has, vide notification[1] dated 24.02.2020 (“Notification”), specified that non- banking financial companies (NBFCs), having assets worth Rs. 100 crore and above, shall be entitled for enforcement of security interest in secured debts of Rs. 50 lakhs and above, as financial institutions for the purposes of the said Act.

BACKGROUND:

RBI has, in its Financial Stability Report (FSR)[2], reported that the gross NPA ratio of the NBFC sector has increased from 6.1% as at end-March 2019 to 6.3% as at end September 2019, and has projected a further increase in NPAs till September 2020. The FSR further states that as at end September 2019, the CRAR of the NBFC sector stood at 19.5% (which is lower than 20% as at end-March 2019).

To ensure quicker recovery of dues and maintenance of liquidity, the Finance Minister had, in the Budget Speech, announced that the limit for NBFCs to be eligible for debt recovery under the SARFAESI is proposed to be reduced from Rs. 500 crores to asset size of Rs. 100 crores or loan size from existing Rs. 1 crore to Rs. 50 lakhs[3]. The Notification has been brought as a fall out of the Budget.

Our budget booklet can be accessed from the link below:

http://vinodkothari.com/wp-content/uploads/2020/02/Budget-Booklet-2020.pdf

ELIGIBILITY FOR INITIATING ACTION UNDER SARFAESI

To determine the test for eligible NBFCs, it is first pertinent to understand the terms used in the Notification.

The Notification provides that NBFCs shall be entitled for enforcement of security interest in “secured debts”. Now, the term “secured debt” has been defined under Section 2(ze) of SARFAESI to mean a debt which is secured by any security interest, and “debt” has been defined under Section 2(ha) as follows:

(ha) “debt” shall have the meaning assigned to it in clause (g) of section 2 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) and includes-

(i) unpaid portion of the purchase price of any tangible asset given on hire or financial lease or conditional sale or under any other contract;

(ii) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable any borrower to acquire the intangible asset or obtain licence of such asset.

Further, Section 2(g) of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, provides that the term “debt” means “any liability (inclusive of interest) which is claimed as due from any person by a bank or a financial institution or by a consortium of banks or financial institutions during the course of any business activity undertaken by the bank or the financial institution or the consortium under any law for the time being in force, in cash or otherwise, whether secured or unsecured, or assigned, or whether payable under a decree or order of any civil court or any arbitration award or otherwise or under a mortgage and subsisting on, and legally recoverable on, the date of the application and includes any liability towards debt securities which remains unpaid in full or part after notice of ninety days served upon the borrower by the debenture trustee or any other authority in whose favour security interest is created for the benefit of holders of debt securities.”

Therefore, NBFCs having asset size of Rs. 100 crores and above as per their last audited balance sheet will have the right to proceed under SARFAESI if:

  • The debt (including principal and interest) amounts to Rs. 50 lakhs or more; and
  • The debt is secured by way of security interest[4].

EFFECT OF NOTIFICATION:

An article of Economic Times[5] dated 07.02.2020 states that:

“Not many non-bank lenders are expected to use the SARFAESI Act provisions to recover debt despite the Union budget making this route accessible to more such lenders due to time-consuming administrative hurdles as well as high loan ticket limit.”

As one may understand, SARFAESI is one of the many recourses available to the NBFCs, and with the commencement of the Insolvency and Bankruptcy Code, the NBFCs are either arriving at a compromise with the debtors or expecting recovery through insolvency/ liquidation proceedings of the debtor. The primary reasons are as follows:

  • SARFAESI provisions will apply only when there is a security interest;
  • NBFCs usually provide small ticket loans to a large number of borrowers, but even though their aggregate exposure, on which borrowers have defaulted, is substantially high, they will not able to find recourse under SARFAESI;
  • For using the SARFAESI option, the lender will have to wait for 90 days’ time for the debt to turn NPA. Then there is a mandatory 60 days’ notice before any repossession action and a mandatory 30 days’ time before sale. Also, the debtor may file an appeal before Debt Recovery Tribunal, and the lengthy court procedures further delay the recovery.

While the notification seems to include a larger chunk of NBFCs under SARFAESI, a significant question that arises here is whether NBFCs will actually utilise the SARFAESI route for recovery?

 

[1] http://egazette.nic.in/WriteReadData/2020/216392.pdf

[2] https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=952

[3] https://www.indiabudget.gov.in/doc/Budget_Speech.pdf

[4] Section 2(zf) “security interest” means right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes-

(i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or

(ii) such right, title or interest in any intangible asset or assignment or licence of such intangible asset which secures the obligation to pay any unpaid portion of the purchase price of the intangible asset or the obligation incurred or any credit provided to enable the borrower to acquire the intangible asset or licence of intangible asset.

[5] https://economictimes.indiatimes.com/industry/banking/finance/banking/not-many-nbfcs-may-use-sarfaesi-act-to-recover-loan/articleshow/74012648.cms