Understanding ICAAP for NBFCs

/0 Comments/in , , /by

– Qasim Saif | Manager | finserv@vinodkothari.com

Systemic risk of NBFCs has been an issue for discussion, specifically in India as there have been some major NBFC failures, and the issue of inter-connectivity between NBFCs and the rest of the financial sector became clearly evident. The issue is not limited to India, an annual publication of the Financial Stability Board, called Global Monitoring Report on Non-banking Financial Intermediation has been drawing attention to the increasing relevance of non-banking financial intermediaries and the risk they pose on a global level.[1]

In order to carry out the risk assessment, the banks are required to follow the Internal Capital Adequacy Assessment Process (ICAAP) as per Pillar II of the Basel II framework. However, with the increasing importance of non-banking financial institutions, the RBI has through its Revised Regulatory Framework for NBFCs (Revised Framework)[2] have inserted the ICAAP requirements to the middle layer NBFCs too from October 2022.

Under the existing regulatory framework, the NBFCs are required to carry out stress testing of only securitisation exposures or pool of loans acquired from other institutions.

Our services and Assistance for ICAAP Implementation can be viewed here – https://vinodkothari.com/2022/09/services-and-assistance-for-icaap-implementation/

As this would be a new requirement for NBFCs, and the specific directions in this respect are still awaited, the literature and guidance in this respect is scarce. In this article we have tried to discuss in brief, the expectations of the regulator along with a probable approach for NBFCs towards the ICAAP.

Read more →

NBFC NPA characterisation: A reprieve a day too late?

/2 Comments/in , , /by

– Vinod Kothari, Director (Vinod Kothari Consultants P. Ltd.) | finserv@vinodkothari.com

The RBI, vide a so-called “clarification” dated February 15, 2022[1], relating to what itself was termed as a “clarification”, dated November 12, 2021[2], has effectively provided a reprieve to NBFCs for treating those assets as NPAs, which have historically had a default of 90 days or more, but are currently trailing by less than 90 days. Unfortunately however, the clarification comes on the 45th day of the end of 3rd quarter, by which all listed NBFCs, and debt-listed entities, would have already prepared and published their financial results for the quarter, which would have implemented the November 12 Clarification. Read more →

Circulation of credit information: RBI notification paves the way for “Specified Users”

/0 Comments/in , , /by

– Team Finserv | finserv@vinodkothari.com

Background

One of the important elements of the lending process is credit evaluation of customers, which involves referring to the credit information of such customers. Credit information is the information relating to credit performance or credit worthiness of the customer. Procurement, storage and distribution of such credit information is regulated by the Credit Information Companies (Regulation) Act, 2005 (‘Act’)[1] and the regulations made thereunder. Read more →

Prompt Corrective Action Framework for NBFCs

/0 Comments/in , , /by

– Team Finserv | finserv@vinodkothari.com

RBI Notification dated December 14, 2021 – https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12208&Mode=0

Our recent write-ups around the financial services sector – https://vinodkothari.com/category/financial-services/

Round-up of regulatory updates during 2021

/0 Comments/in , , , , , , , , , , /by

We have attempted to collate all major regulatory amendments notified throughout the year, with our resources on the same. Below we present a regulatory round-up for the year 2021, be it for MCA, SEBI, RBI or the like, along with the links to our major articles/ FAQs on the same.

Our youtube video giving a quick view on the same can be accessed at – https://www.youtube.com/watch?v=WJbJx2jgK9A

This version: 4th December, 2021

FAQs on IPO Financing

/4 Comments/in , , , , /by

IPO Financing, as the name suggests, is providing finance for the purpose of subscribing to initial public offers done by companies. In case of IPO Financing, the exposure is based on the borrower, and the securities/ shares, if allotted, are taken as collateral for securing the obligations under the loan. The investor will realise the shares so allotted in the IPO and pay-off the loan taken from the Banks/NBFCs.

How does IPO Financing work?

IPO Financing is widely used by High Networth Individuals (HNIs) as a tool to leverage the funds available with an intent to make profits from the IPO allotment price and the price at the time of listing. Typically, the lender would provide a short-term loan to the borrower at a certain interest rate, till the shares are listed. The transaction forces the investor to sell the shares once listed. Out of the proceeds, the lender would retain the repayment of loan and payment of interest plus other charges, as may be levied; and the balance is taken home by the investor as profits.  Hence, the idea is not to “invest” in an IPO and eventually earn investment rewards; rather, the intent usually is to “enter” and “exit” by booking possible gains in the shortest time span.

Recently, the RBI has released Scale Based Regulation (SBR): A Revised Regulatory Framework for NBFCs (SBR) on October 22, 2021. While the SBR provides for broad contours of the revised framework, concrete regulations in the form of ‘Directions’ are awaited from RBI. SBR fixes a ceiling of Rs. 1 crore per borrower in case of IPO financing by any NBFC.

We have tried to figure out the probable questions arising out of the aforesaid proposal and respond to the same in the form of these FAQs. However, these are subject to final directions yet to be issued by RBI in this regard. We shall update this FAQ once there are clear directions in this regard. These FAQs shall be read accordingly.

Read more →

Presentation on changes in NPA-SMA Recognition

/0 Comments/in , , , /by

Our Article explaining changes in NPA-SMA classification can be read here: https://vinodkothari.com/2021/11/npa-classification-norms-2/

 

NPA classification norms significantly tightened

/29 Comments/in , , /by

Daily NPA determination, full payment to move back to standard among several measures

– Anita Baid, anita@vinodkothari.com

RBI has issued a notification on Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Clarifications (‘RBI Circular’). The said RBI Circular dated November 12, 2021 is depicted to be a clarification issued by the RBI on the applicable prudential norms for all lending institutions. However, the same would have a major impact on the NPA classification by banks and NBFCs, specifically. The intention of the RBI is to clarify and harmonise certain aspects of the extant regulatory guidelines, making it applicable mutatis mutandis to all lending institutions Read more →

FAQs on Transfer of Loan Exposure

/2 Comments/in , , , , , /by

The RBI has consolidated the guidelines with respect to transfer of standard assets as well as stressed assets by regulated financial entities under a common regulation named Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (“Directions”).

The Directions divided into five operative chapters- the first one specifying the scope and definitions, the second one laying down general conditions applicable on all loan transfers, the third one specifying the requirements in case of transfer of loans which are not in default, that is standard assets, the fourth one provides the additional requirement for transfer of stressed assets and the fifth chapter is on disclosure and reporting requirements.

Under the said Directions, the following entities are permitted as transferor and transferee to transfer loans-

We bring you this frequently asked questions on Transfer of Loans to assist you better understand the guidelines.

The file can be downloaded at this link: https://mailchi.mp/887939b2f979/qa32ogwo2t

We have also published FAQs on Securitisation of Standard Asset, the contents of FAQs can be accessed here and the file can be downloaded at this link.

Read more →