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.

Read more

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.

Read more

Chinese Non-banking financial entities in precarious state

Vinod Kothari, Director | finserv@vinodkothari.com

One of the trust companies defaults; other casualties likely

Chinese financial system is opaque and intriguing, for any outside trying to understand it. Regulatory framework is also mostly spasmodic, and given the fact that Chinese regulators do not follow global institutions or their regulations, Chinese institutions have developed along their own lines.

One of the non-banking financial entities in China is “trust companies”, somewhat similar to private collective investment vehicles or alternative investment funds seen elsewhere. These trust companies mostly invest in activities closely mimicking the lending of banks, while at the same time not being regulated as such. The size of the shadow banking industry in China, better known as “non banking financial intermediaries” (NBFIs) is huge, and is the second largest in the world, next only to the USA. Of the NBFIs, trust companies were estimated to be about USD 4 trillion, and 79% of the trust companies are based out of China, as per data as of end-December, 2021, appearing in the NBFI  report of the Financial Stability Board.

Read more

Loan Penal Charges: Accounting and GST implications

Abhirup Ghosh, Qasim Saif & Aanchal Kaur Nagpal  | finserv@vinodkothari.com

Background

Levying of penal charges or late payment charges are claimed as ‘just’, owing to the underlying breach of contract under the Contract Act, 1972. A breach or a non-performance by one party entitles the other party to receive compensation for any loss or damage suffered due to such breach. Penalties may not only be compensatory; they also have a deterrent element.

In order to ensure compliant behaviour, lenders  charge penalties to their borrowers for various ‘events of default’; the predominant ones being penalty for delayed payments (in the form of charges or interest) and prepayment penalties. However, such charges stopped being ‘just’ and ‘reasonable’ when lenders started maneuvering such penalties as revenue enhancement tools, rather than as a deterrent measure and compensation for a breach. Such unreasonable penalties coupled with non-disclosures, compounding of penal interest, etc. were highly prejudicial to consumer interest and accordingly, caught the eye of the regulator. 

The RBI introduced guidelines to the lenders to ensure reasonableness and transparency in the disclosure of penal interest vide its Circular on ‘Fair Lending Practice – Penal Charges in Loan Accounts’(RBI Guidelines on penal charges’)  dated August 18, 2023. Our article and FAQs[1] on the same may be read here[2].Our YouTube video discussing the guidelines may be viewed here.

However, charging penal interest also raises several practical questions for lenders, mainly indirect taxation and accounting of penal charges, which will be discussed in detail in this article.

Read more

Workshop on Regulatory Framework for New-age NBFCs

Register Here : https://forms.gle/C2DQCp5BrAGu9Nry5
Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [267.25 KB]

YouTube live: RBI Guidelines on Default Loss Guarantee

Anita Baid in conversation with Vinod Kothari

Live on YouTube – 20th June, 2023 | 5:00 P.M. – https://www.youtube.com/@vinodkotharicompany3966/videos

Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [229.46 KB]

RBI to release guidelines to permit default guarantees

The evolution of a concept, from its inception to being prohibited, and ultimately establishing a regulatory framework to allow its practice

– Anita Baid (finserv@vinodkothari.com)

The concept of First Loss Default Guarantees (FLDGs) in the financial industry has experienced a remarkable journey, marked by its inception, subsequent prohibition, and eventually being on the verge of a resurgence with the introduction of a regulatory framework. It had gained significant attention in the realm of fintech industry, whose remarkable expansion in India is largely responsible for propelling FLDGs. Nevertheless, it is essential to note that guarantees are not a novel concept; they have been widely employed in the financial sector for a considerable period of time. (Our article on ‘Lending without risk and risk without lending’ can be read here)

In its Statement on Developmental and Regulatory Policies dated June 8, 2023, the RBI has announced its intention to issue a regulatory framework for permitting Default Loss Guarantee arrangements in Digital Lending. This article delves into the intriguing evolution of Structured Default Guarantees, examining their rise, fall, and subsequent rebirth, shedding light on the regulatory landscape that has shaped their existence.

Read more

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

Amended KYC norms: A move towards faceless KYC

RBI amends KYC norms to permit faceless KYC; beneficial owner of 10% or more to be subjected to KYC

– Anita Baid, Vice President | anita@vinodkothari.com

Recognising the increasing trend towards faceless lending, and the use of technology for customer due diligence, the RBI has made much-needed changes in the KYC process, permitting lenders to avoid any of physical interface with borrowers and rely on documents stored in Digilocker or other e-documents. Amendments, immediately effective, were made to the Master Direction – Know Your Customer (KYC) Direction, 2016 vide a notification dated April 28, 2023.

Watch our YouTube video on the topic here – https://www.youtube.com/live/Ewi4FW8G0xk?feature=share

The amendments in the KYC Directions are applicable to every entity regulated by the RBI, including but not limited to banks, cooperative banks, payment system providers, AIFIs  as well as NBFCs intend to achieve the following:

Read more