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Open in new tab Transfer of factoring receivables exempted from MHP
Qasim Saif | finserv@vinodkothari.com
What is the exemption provided by the RBI?
- The Reserve Bank of India (RBI) on 28th December, 2023 issued a circular amending the Master Direction on Transfer of Loan Exposures (MD-TLE) to exempt the Minimum Holding Period (MHP) requirement in case of transfer of receivables arising from factoring business.
- The circular further prescribes eligibility for exemption, providing that:
- The residual maturity of the receivables at the time of transfer should not exceed 90 days; and
- Proper credit appraisal of the drawee should have been conducted by the transferee as provided under clause 10 and 35 of MD-TLE
- It shall further be noted that, factoring business, can only be undertaken by eligible regulated entities, hence the transferee’s in case of transfer of factoring receivables can be only be entities eligible for factoring business which are:
- NBFC-Factors
- NBFC-ICC having specific licence for carrying out factoring business; and
- Entities identified under section 5 of the Factoring Regulation Act, 2011, viz. banks, and body corporates established under an Act of Parliament or State Legislature, or a Government Company
- Before the specific amendment, a view could have been taken that factoring of receivables not being a loan, did not fall within the ambit of MD-TLE. The amendment has in a way clarified two things:
- Transfer of factoring receivables shall be covered under the MD-TLE;
- The MHP requirement shall not be applicable in case the residual maturity of receivables is less than 90 days.
- In case the residual maturity is more than 90 days, the MHP shall be applicable along with all other provisions of the MD-TLE
Intent behind exemption from Minimum Holding Period requirement
- In accordance with MD-TLE any transfer of economic interest in a loan account/pool by regulated entities could only be undertaken after a prescribed period of 3 months in case of loans with tenure less than 2 years and 6 months in case of other loans has elapsed. The intent being to restrict REs from originating loans with the sole intent to transfer the same.
- The primary intent behind this amendment is to foster and enhance the secondary market operations associated with receivables acquired through ‘factoring business’. By exempting the MHP requirement for eligible transferors, RBI aims to encourage greater liquidity within the factoring industry.
Anticipated impact of the amendment
- Promoting an active secondary market would attract more participants, specifically the secondary market would help REs to work on their core competencies, such as eligible NBFCs may be able to originate assets in their specific niche which can be then transferred to banks or other large NBFCss for utilising their low-cost pool of funds.
- Factoring business in India has been an underperformer, removal of such bottlenecks shall help REs optimising their business and in turn facilitating easier working capital finance for MSMEs.
Conclusion
- To provide a little thrust to lagging factoring business in India, RBI has exempted transfer of factoring receivables from the requirement of MHP under the MD-TLE
- The said move can assist in larger participation and increased liquidity in the factoring industry.
RBI bars lenders’ investments in AIFs investing in their borrowers
– Team Finserv | finserv@vinodkothari.com
The Reserve Bank of India on 19th December 2023 issued a notification imposing a bar on all regulated entities (REs) with respect to their investments in AIFs. Highlights of the notification are as below –
What has the RBI done?
- Prohibited all regulated entities (REs), including banks, cooperative banks, NBFCs and All India Financial Institutions from making investments in Alternative Investment funds (AIFs), if the AIF has made any investment into a “debtor company”.
- Debtor company means a company in which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months
- The bar applies immediately, that is, effective 19th Dec 2023. No further investments to be made.
- If investments already exist, the RE shall exit within 30 days, that is, by 18th Jan 2024
- Further, if an RE has made an investment in an AIF, and the AIF invests in a debtor company, the RE shall make an exit within 30 days.
- Investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ subject to full deduction from RE’s capital funds.
Digital deceptive practices: Dark Patterns get blacked out
– Vinod Kothari, finserv@vinodkothari.com
Central Consumer Protection Authority (“CCPA”), issued the Guidelines for Prevention and Regulation of Dark Patterns, 2023 (“Guidelines”) on November 30, 2023 to prohibit any person or platform from engaging in the dark pattern practices.
Dark Patterns Explained
The term “dark patterns” was first coined by Harry Brignull a long time back in 2011, when digital marketing was in its early phases. “We might not like to admit it but deception is deeply entwined with life on this planet. Insects evolved to use it, animals employ it in their behavior, and of course, we humans use it to manipulate, control, and profit from each other. With this in mind it’s no surprise that deception appears in various guises in user interfaces on the web today”, he said. And his prognosis was absolutely correct: most e-commerce marketing employs devices to make consumers pay for what they would, based on application of free discretion, not have procured.
Dark patterns are tricky user interfaces “that benefit an online service by leading users into making decisions they might not otherwise make. Some dark patterns deceive users while others covertly manipulate or coerce them into choices that are not in their best interests” [Arvind Narayanan and Others, March 2020].
Read more →NBFCs: Learning to adjust with the new reality
– Vinod Kothari | vinod@vinodkothari.com
The increase of risk weights for consumer lending by the RBI, coupled with increase in risk weights for lending to NBFCs, has affected capital adequacy of several regulated financial entities, particularly NBFCs focused on consumer lending. It has also created a situation of risk aversion. While the full rigour of this very significant regulatory provision is still being absorbed, the Finance Minister also added her bit of garbed caution – “enthusiasm is good but take only how much you can digest”. Suddenly, the situation is now forcing NBFCs to review their product structure, resource mobilisation, capital plans, and above all, risk management.
Read more →Workshop on RBI Circular on Regulatory Measures on Consumer Credit by Banks & NBFCs
Introducing Financial Services on ONDC: Opportunities & Challenges for Digital Lenders
– Shreshtha Barman | finserv@vinodkothari.com
Read more →FAQs on Regulatory measures towards consumer credit and bank credit to NBFCs
– Team Finserv | finserv@vinodkothari.com
One may call it insecure about unsecured lending; the central bank has taken what in our view is a bold and timely measure, to rein in unsecured lending. Identifying a notable surge in specific segments of consumer credit, the RBI had recently met senior bankers. The latter had reportedly assured the central bank that things are under control. However, apparently, these assurances have failed to assuage the RBI’s view. Vide its notification dated November 16, 2023, the RBI has taken several mitigating measures.
We have developed a set of FAQs on the Circular, where we intend to answer some of the critical questions relating to the actionables by the REs and the impact of the circular.
Further, our detailed article on this topic can be read here – RBI raises red flag on increasing personal loans
Read more →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
RBI raises red flag on increasing personal loans
Increased risk weights on bank lending to NBFCs, Sectoral exposure limits among protective measures
– Vinod Kothari | vinod@vinodkothari.com
One may call it insecure about unsecured lending; the central bank has taken what in our view is a bold and timely measure, to rein in unsecured lending.
Identifying a notable surge in specific segments of consumer credit, the RBI had recently met senior bankers. The latter had reportedly assured the central bank that things are under control. However, apparently, these assurances have failed to assuage the RBI’s view. Vide its notification dated November 16, 2023, the RBI has taken several mitigating measures.
Read more →