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Various forms of Secured Lending

-Anita Baid, anita@vinodkothari.com

In this era of ever-increasing demand and continuous urge for developments, limitation of financial resources come as the biggest constraint in overall satisfaction of an individual or entity’s needs. Financial or funding options provided by various financial institutions such as banks and NBFCs come as a solution to such financial constraints. Loans from such financial institutions can be availed depending upon one’s immediate requirement and repayment capacity.

From the consumer’s perspective, funding is granted and resource constraint is sort out. However, there is always a fear of default in repayment of loans faced by the lenders. Thus, the position of the lender becomes ambiguous and unsafe in granting such loans. Here, comes the concept of secured financing. Secured financing is one in which the lender has security rights over certain collateral that the borrower makes available to support the loan. The borrower agrees that should he not repay the loan as agreed, the lender has a right to seize the collateral to satisfy the debt.

There are various instruments offered under secured financing depending upon the collateral the borrower is willing to provide. Some of the commonly used instruments have been discussed herein this article[1].

Loan Against Property (LAP)

A loan against property is a loan given or disbursed against the mortgage of a property. LAP belongs to the secured loan category where the credit evaluation of the borrower is done keeping his property as a security. The property can be commercial or residential.[2]

Immovable property being one of the most non-volatile security is mortgaged with the financial institution for obtaining required funds. Borrowers willing to purchase a residential/commercial property can obtain loan by keeping such desired property as the underlying security. The underlying security can be the property for which loan is being taken and/or a separate property as well. The loan is given as a certain percentage of the property’s market value, usually around 40% to 60%.

Here the loan is granted based on the quality of the collateral and less importance is given to the credit quality of the borrowers. Also, usually, these loans do not come with any end use restriction, that is to say, the borrowers get a free hand with respect to utilization of funds.

Loan Against Securities (LAS)

A loan against securities (LAS) is a loan given against the collateral of shares or securities. LAS enables one to borrow funds against listed securities such as shares, mutual funds, insurance and bonds to meet current financial needs. Borrowers can opt for this loan when they need instant liquidity for their personal/business needs and are sure to pay it back in few months.

There are however, specific regulations issued by RBI with respect to loan against shares of listed entities,

As per the [3]Master Directions applicable on NBFC-NSI-ND issued by RBI, NBFCs with asset size of Rs.100 crore and above who are lending against the collateral of listed shares shall, maintain a Loan to Value (LTV) ratio of 50% for loans granted against the collateral of shares. Additionally, for LAS in case where lending is being done for investment in capital markets, only Group 1 securities (specified in SMD/ Policy/ Cir – 9/ 2003 dated March 11, 2003 as amended from time to time, issued by SEBI) shall be accepted as collateral for loans of value more than Rs5 lakh, subject to review by the Bank. The lender shall also be required to report on-line to stock exchanges on a quarterly basis, information on the shares pledged in their favour, by borrowers for availing loans in the prescribed format.

Difference between LAP and LAS

The underlying security for LAP and Las is different which is prevalent from the respective names itself. Apart from this major difference there are other areas of difference between the two as well. The basic differences between the two are highlighted hereunder:

 

Features Loan against securities Loan against property
Nature of facility A loan against securities (LAS) is a loan given against the collateral of shares or securities. A loan against property (LAP) is a loan given or disbursed against the mortgage of a property.
Exposure In case of LAS the exposure is based on the value of securities In case of LAP it is based on the value of property.
Volatility The value of securities, in case it is listed shall fluctuate very frequently and hence the value of security is very volatile. The value of property is less volatile as compared to LAS.
Type of security The shares or securities can either be listed or unlisted. The property can either be movable or immovable.
End use Usually the end use of the facility extended is for investment in the securities. There is no end use restriction in case of LAP.
Regulations from RBI As per the Master Directions applicable on NBFC-NSI-ND issued by RBI, all Applicable NBFC with asset size of Rs.100 crore and above who are lending against the collateral of listed shares shall, maintain a Loan to Value (LTV) ratio of 50% for loans granted against the collateral of shares. No specific regulatory guideline has been prescribed regarding LTV ratio for granting loan against property by an NBFC.

 

 

LTV Ratio Further, as per the statutory provision, if the value of listed securities falls down thereby increasing the LTV ratio, additional security must be provided to maintain such LTV ratio. The Applicable NBFC must ensure that any shortfall in the maintenance of 50% LTV occurring on account of movement in the share prices is to be made good within 7 working days. In case of LAP, such reinstating is not statutory. However, the lender may revise the sanctioned limit in case the loan agreement provides for such discretionary right to the lender.

 

Statutory Requirement Additionally, for LAS in case where lending is being done for investment in capital markets, only Group 1 securities (specified in SMD/ Policy/ Cir – 9/ 2003 dated March 11, 2003 as amended from time to time, issued by SEBI) shall be accepted as collateral for loans of value more than Rs5 lakh, subject to review by the Bank. The lender shall also be required to report on-line to stock exchanges on a quarterly basis, information on the shares pledged in their favour, by borrowers for availing loans in the prescribed format. No such regulatory requirement.

 

IPO Funding

IPO or Initial Public Offer is a rewarding experience for individuals and companies as it offers substantial return to investors on the shares subscribed by them. However, it may so happen that an investor might not possess the requisite funds to subscribe to IPOs. In such a situation, inflow of funds from another source may become necessary. Here comes the concept of IPO funding which bridges the deficit between the resources at hand and the funds needed in aggregate. The lender creates a right of lien on the shares to be allotted to the investor/borrower in the IPO. This shall form the underlying security against the loan which can be liquidated in case of non-payment of principle and/or interest.[4]

Similar to LAS, IPO Financing is loan against acquiring shares and making a short-term profit that is expected at the time of initial price discovery of the shares once the shares are listed. However, unlike LAS, it is specifically for funding subscriptions to IPOs. In case of an 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 transaction forces the applicant to sell the shares once listed, hence, the idea cannot be to finance an investment in shares.

The financial institution demands for an upfront payment of the margin amount based on the assessment of subscription levels. For example, if an investor applies for 100 shares and gets allotted only 10 shares due to oversubscription, the refund on 90 shares is divided between the borrower and lender proportionately. The shares allotted are held as lien by the lender.

Recently, the RBI had released a Discussion Paper on the Revised Regulatory Framework for NBFCs on 22nd January, 2021[5], wherein it has been proposed to fix a ceiling of Rs. 1 crore per individual in case of IPO financing by any NBFC.

Equipment Finance

Equipment financing is yet another type of secured financing wherein loan is given for purchase of commercial or office equipment. The underlying asset is the equipment for which loan is advanced and/or any other equipment. The loan is secured by way of a hypothecation over the equipment financed. For efficient and smooth functioning of various units of a commercial enterprise, existence of upgraded machinery is of utmost importance. Such acquisitions may require additional funds from external sources. Hence, equipment finance helps in improving the overall production levels.

Secured Working Capital Finance

Fulfilment of working capital requirements is perhaps the most integral responsibility of a company. Adequate working capital is needed to meet the day-to-day activities of an enterprise and enable it to function smoothly. Financing options for meeting working capital limits is also available. Loan is given for maintaining such working capital by placing a floating charge on the assets of the company. No fixed asset is kept aside as the underlying security. In case of any default, an asset of sufficient value shall be a seized and liquidated to meet the default.

Here, it is important to understand the difference between LAS or LAP and a regular secured working capital loan. For instance, in case of LAS or LAP the exposure is based on the value of securities or the property, as the case may be, and not on the borrower. Whereas, in case of a secured loan the exposure is based on the borrower and the securities or property are taken as collateral for securing the obligations under the loan. Such a secured loan shall not be classified as LAS or LAP and hence maintaining the prescribed regulatory LTV ratio will also not be applicable in this case.

At a Glance

 

Features

LAP LAS IPO Funding Equipment Financing Working Capital Financing
Nature of facility Loan disbursed against the collateral of property Loan disbursed against the collateral of shares Loan extended for investing in IPO Loan advanced for purchase of equipment against the collateral of the same and/or any other equipment Loan advanced for meeting working capital requirements and accordingly a floating charge is created
Nature of security Property Shares Shares subscribed in IPO Equipment Floating charge on the assets.
Exposure Property Shares Investor Borrower Borrower
Volatility Very less Volatile Volatile Less volatile Less volatile
Regulatory Framework No specifications but additions can be made in the loan agreement as per discretion As per the Master Directions applicable on NBFC-NSI-ND issued by RBI, all Applicable NBFC with asset size of Rs.100 crore and above who are lending against the collateral of listed shares shall, maintain a Loan to Value (LTV) ratio of 50% for loans granted against the collateral of shares. No specifications but additions can be made in the loan agreement as per discretion No specifications but additions can be made in the loan agreement as per discretion No specifications but additions can be made in the loan agreement as per discretion

Conclusion

Secured financing comes as a relief to both borrowers and lenders. The borrower avails the required funds for meeting its financial or domestic purpose and the lender ensures security against the loan advanced by creating a mortgage or lien on the borrower’s property/shares.

Read our other relevant articles and books on the subject matter:

1. Securitisation, Asset Reconstruction & Enforcement of Security Interest-
http://vinodkothari.com/arcbook/
2. Fragmented framework for perfection of security interest-
http://vinodkothari.com/2021/03/fragmented-framework-for-perfection-of-security-interest/
3. Vehicle financing: Multiple Security Interest Registrations & its Impact by Vinod Kothari
https://www.youtube.com/watch?v=CeXqlsrEDYI

[1] The discussion on the regulatory aspects have been restricted to the regulations applicable to NBFCs only.

[2] Read our article titled- Sitting comfy in the lap of LAP: NBFCs push loans against properties-  http://vinodkothari.com/wp-content/uploads/2017/03/sitting_comfy_in_the_lap_of_LAP.pdf

[3] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MD44NSIND2E910DD1FBBB471D8CB2E6F4F424F8FF.PDF

[4] http://www.thehindubusinessline.com/opinion/the-risky-game-of-ipo-financing/article9631176.ece

[5] https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/DP220121630D1F9A2A51415B98D92B8CF4A54185.PDF

Restructuring of restructuring: Post 1st April NPAs may be upgraded as Standard under ResFra 2.0

– Anita Baid (anita@vinodktohari.com)

Source: FIDC’s letter to RBI dated June 3, 2021 seeking clarification on clause of Resolution framework – 2.0 relating to Individuals and Small Businesses and disclosures in the balance sheet read along with the RBI response via email dated June 7, 2021. Though called a clarification it actually makes a substantive positive change which is a silent realisation that there is substantial deterioration of performance of loans during the second wave of Covid-19.

The Reserve Bank of India (RBI) had proposed two restructuring frameworks on May 05, 2021- one for individuals and small businesses (‘Notification 31’) and the other one for MSMEs (‘Notification 32’). The intent of both frameworks is to allow restructuring of the loan account in distress due to the second wave of Covid-19.

Pursuant to the restructuring of the eligible loan account (under the respective framework) the standard classification of the assets can be retained. However, there are certain disparities between the two notifications in terms of eligibility criteria, process, etc.

One of the major distinctions is the fact that under Notification 31, there is no relaxation provided to borrowers who have slipped into NPA between the period from March 31, 2021 to the date of invocation. Hence, such loan accounts, which have become NPA from 1st April to the invocation date, irrespective of being restructured in compliance with the provisions of  Notification 31 will continue to be classified as NPA. However, whereby the loan account slipped into NPA classification between the date of invocation and implementation of resolution plan, such account can be upgraded to standard classification as on date of implementation of resolution plan. This position is different in case of MSMEs coming under Notification 32, wherein the borrowers who have slipped into NPA between the period from March 31, 2021, till the date of implementation shall be upgraded to standard.

The aforesaid interpretation was coming clear from the language of para 16 of Notification 31, which states as follows-

  1. If a resolution plan is implemented in adherence to the provisions of this circular, the asset classification of borrowers’ accounts classified as Standard may be retained as such upon implementation, whereas the borrowers’ accounts which may have slipped into NPA between invocation and implementation may be upgraded as Standard, as on the date of implementation of the resolution plan.

As per the language, the asset classification can be retained as standard- this would mean the account which was standard as on the date of implementation has to be retained as standard. However, if the same has degraded to sub-standard category, the upgradation as standard is allowed only if it slipped into NPA between invocation and implementation. Hence, it could be inferred that the slippage before the invocation would not get the relief of upgradation upon restructuring.

This was a huge demotivation of the lenders who intend to restructure the loan accounts under Notification 31. Consequently, representation was made by the Finance Industry Development Council (FIDC) bringing to the notice of RBI that the restructuring notification for individuals and small businesses omits, though maybe unintentionally, to benefit the customers who may have slipped into NPA between April 1 and May 5 as it refers to invocation date and implementation date.

The eligible loan accounts of individuals and small businesses which were standard as on March 31, 2021 can be restructured under Notification 31 if the restructuring is invoked by September 30, 2021. Further, there is a likelihood that such an account may have slipped into NPA between April 1, 2021 till the date of invocation. Though Notification 32  for MSMEs clearly provides for an upgradation to account which might have slipped into NPA from March 1, 2021 till the implementation, however, similar relief was missing from Notification 31.

The RBI has, however, vide an email communication to the FIDC on June 7, 2021, clarified that the loan accounts that may have slipped into NPA between April 1, 2021 and the date of implementation, on the same lines as mentioned in Notification 32 for MSMEs, can be upgraded as standard assets on implementation of the resolution plan.

This would be a relief for not just the borrower but also the lenders who would not hesitate to restructure eligible and potential loan accounts, even if they have turned into NPA by the time the RBI notifications were issued.

Refer to our article on restructuring:

 

Rationalisation of KYC- Measures for relief or technical advancement?

-Kanakprabha Jethani and Anita Baid (finserv@vinodkothari.com)

Background

Considering the resurgence of the Covid-19 pandemic on the economy, the RBI Governor, on May 5, 2021, announced several measures with a view to infuse liquidity in the economy, avoid another wave of borrower defaults[1] as well as aid in ease of business during the lockdown.

Out of the several measures announced by the Governor, one was to simplify the KYC process, which is the initial step of any lending transaction. Some of the amendments seem to provide immediate relief from compliance requirements and some are intended to encourage carrying out KYC compliances electronically, given the social distancing norms.

In this regard, the RBI has issued the following notifications:

  1. Periodic Updation of KYC – Restrictions on Account Operations for Non-compliance dated May 5, 2021[2]
  2. Amendment to the Master Direction (MD) on KYC dated May 10, 2021[3]

In this article we intend to discuss the prima facie implications of the amendments introduced by the aforesaid notifications. Read more

CKYCR becomes fully operational: The long-awaited format for legal entities’ information finally introduced

-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

The Central KYC Registry (CKYCR) is a registry that serves as a central record for KYC information of all the customers of financial institutions. In India, the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) has been authorised to carry out the functions of CKYCR. It was operationalised in 2016 beginning with collecting information on ‘individual’ accounts. Until now, the CKYCR did not have a feature to collect KYC information of legal entities.

The CERSAI has, in consultation with the RBI, prepared a template for submission of KYC information of legal entities (the same is yet to be published by CERSAI). The RBI has, through a notification dated December 18, 2020[1] (‘Notification’) directed financial institutions to begin submitting KYC information of legal entities w.e.f April1, 2021 (‘Notified Date’). The Master Direction – Know Your Customer (KYC) Direction, 2016 (‘KYC Directions’) have been updated in line with the said notification.

In this note we have discussed the implications for NBFCs, having customer interface, specifically.

Actionables for financial entities

In compliance with the existing KYC provisions on CKYCR and the Notification, NBFCs shall be required to take the following steps:

For customer who are legal entities, other than individuals and FPIs

  • Ensure uploading KYC data of legal entities whose loan account has been opened after the Notified Date; within 10 days of commencement of an account-based relationship with the customer. It is to be noted that the existing time limit for uploading the documents of individual accounts was 3 days.
  • Ensure uploading KYC records of legal entities on CKYCR, whose accounts are opened before the Notified Date, while undertaking periodic updation[2] or otherwise on receipt of updated KYC information from the customers. (When KYC information is uploaded during periodic updation or otherwise, it must be ensured that the same is in accordance with the CDD process as prevailing at such time.) Such uploading may not be required for loan accounts that are closed before undertaking the first periodic updation after the Notified Date.
  • Communicate the KYC identifier generated after uploading of KYC information to the customer.

 For individuals

  • Ensure that the existing KYC records of individual customers pertaining to loan accounts opened prior to April 01, 2017, should be incrementally uploaded on CKYCR at the time of periodic updation or earlier when the updated KYC information is obtained/received from the customers. (When KYC information is uploaded during periodic updation or otherwise, it must be ensured that the same is in accordance with the CDD process as prevailing at such time.) Such uploading may not be required for loan accounts that are closed before undertaking the first periodic updation after the Notified Date.
  • Ensure uploading KYC data of individual loan account opened after the Notified Date; within 10 days of commencement of an account-based relationship with the customer.
  • Communicate the KYC identifier generated after uploading of KYC information to the customer.

Clarification with respect to identity verification through CKYCR

There has been a confusion regarding validity of identity verification done by fetching KYC details from the CKYCR. While the provisions of the Prevention of Money Laundering Act, 2002 (PMLA) and rules thereunder as well as the operating guidelines clearly state that if the customer submits KYC identifier for identity and address verification, no other documents need to be obtained.

The KYC Directions have remained silent on the same for long. The Notification also clarified that-

“Where a customer, for the purpose of establishing an account based relationship, submits a KYC Identifier to a RE, with an explicit consent to download records from CKYCR, then such RE shall retrieve the KYC records online from CKYCR using the KYC Identifier and the customer shall not be required to submit the same KYC records or information or any other additional identification documents or details, unless –

  • there is a change in the information of the customer as existing in the records of CKYCR;
  • the current address of the customer is required to be verified;
  • the RE considers it necessary in order to verify the identity or address of the customer, or to perform enhanced due diligence or to build an appropriate risk profile of the client.”

Hence, for the purpose of verification, what is necessary is the KYC Identifier and an explicit consent from the customer to download his/her KYC information from the CKYCR.

Conclusion

The template for uploading KYC information of legal entities on the CKYCR portal has been formulated and shall be live on CERSAI Platform shortly. Financial institutions shall be required to ensure uploading of KYC information of legal entities w.e.f. the Notified Date. Further, additional obligations have been placed on financial institutions in terms of uploading KYC documents for existing customers and intimation of KYC identifier to all customers. Clarification regarding the validity of KYC verification using data from CKYCR is a welcome move.

 

[1] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12008&Mode=0

[2] As per para 38 of the KYC Directions- Periodic updation shall be carried out at least once in every two years for high risk customers, once in every eight years for medium risk customers and once in every ten years for low risk customers as per the prescribed procedure.

ECLGS 2.0- Another push for businesses

-Kanakprabha Jethani (kanak@vinodkothari.com)

Background

The Government of India had, in response to the crisis caused by the COVID-19 pandemic, announced an Emergency Credit Line Guarantee Scheme (ECLGS). Under the scheme, the Government undertook to guarantee additional facilities provided by Lending Institutions (LIs) to their existing borrowers[1]. These facilities were limited to business loans only.

On November 12, 2020, the Finance Minister (FM), in a press conference, extended the last date granting loans under ECLGS 1.0 from November 30, 2020 to June 30, 2020. Further, the FM also announced introduction of ECLGS 2.0. On November 26, 2020, ECLGS 2.0 was introduced and the existing operational guidelines[2] and FAQs on the scheme[3] were revised. The below write-up discusses the major features of ECLGS 2.0 and changes in the existing ECLGS (referred to as ECLGS 1.0).

Opt-in Vs. Opt-out

While ECLGS 1.0 is essentially an opt-out facility, i.e. the lenders are required to offer a pre-approved additional facility to all the existing eligible borrowers and provide them an option to opt-out (not avail the funding). Under ECLGS 1.0, it is the responsibility of the LIs to determine the eligibility of the borrowers and offer loans.

On the contrary, the ECLGS 2.0 is an opt-in facility i.e. only those eligible borrowers, who intend to avail the funding and make an application for the same, will receive the additional facility. Here, the LIs would check the eligibility of the borrower upon receipt of application from the borrower for such funding. Hence, the responsibility of the lender to offer has now been changed to the responsibility of the borrower to apply.

Difference between ECLGS 1.0 and ECLGS 2.0

Particulars ECLGS 1.0 ECLGS 2.0
Eligibility of the borrower ·         Credit outstanding (fund based only) across all lending institutions- up to Rs.50 crore

·         Days Past

·         Due (DPD) as on February 29, 2020 – up to 60 days or the borrower’s account should not have been classified as SMA 2 or NPA by any of the lender as on 29th February, 2020

·         Borrower should be engaged in any of the 26 sectors identified by the Kamath Committee on Resolution Framework vide its report[4] and the Healthcare sector

·         Total credit outstanding (fund based only) across all lending institutions- above Rs.50 crores and not exceeding Rs.500 crore

·         DPD as on February 29, 2020 -up to 30 days respectively or the borrower’s account should not have not been classified as SMA 1, SMA 2 or NPA by any of the lender as on 29th February 2020

Nature of Facility Pre- approved additional funding with 100% guarantee coverage from the NCGTC Non-fund based (in case of banks and FIs-other than NBFCs)/fund-based/mix of fund-based and non-fund based additional facility- with 100% guarantee coverage
Amount 20% of the total credit outstanding of the borrower up to Rs. 50 crores 20% of the total credit outstanding of the borrower up to Rs. 500 crores
Tenure 4 years from the date of disbursement 5 years from the date of first disbursement of fund based facility or first date of utilization of non-fund based facility, whichever is earlier

Other changes

Along with introduction of ECLGS 2.0, a few changes have been introduced in ECLGS 1.0 as well. The major changes are as follows:

  • Extension of last date of disbursing loans from November 30, 2020 to June 30, 2021;
  • Extension of the last date for sanctioning loans to March 31, 2021;
  • The limit on turnover, under the eligibility criteria has been removed;
  • The requirement of creating a second charge on the existing security has been waived-off in case of loans up to Rs. 25 lakhs.

Conclusion

With intent to provide relief and to give a push to the real sector, the government has been introducing various benefits and facilities; ECLGS being one of them. The date of the scheme has been extended to further provide benefit to the business. In this line, ECLGS 2.0 has also been introduced, with stricter eligibility criteria (to ensure lower risk) and higher loan sizes.

[1] Refer our detailed FAQs on the scheme here- http://vinodkothari.com/2020/05/guaranteed-emergency-line-of-credit-understanding-and-faqs/

[2] https://www.eclgs.com/documents/ECLGS%20-Operational%20Guidelines%20-%20Updated%20as%20on%2026.11.2020.pdf

[3] https://www.eclgs.com/documents/FAQs-ECLGS%20-Updated%20as%20on%2026.11.2020.pdf

[4] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1157

 

Our related write-ups:

 

 

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

 

Sec 29A in the Post-COVID World- To stay or not to stay

-Megha Mittal

(resolution@vinodkothari.com)

If the Insolvency and Bankruptcy Code, 2016 (‘Code’) is the car driving the ailing companies on road to revival, resolution plans are the wheels- Essentially designed to explore revival opportunities for an ailing entity, the Code invites potential resolution applicants to come forward and submit resolution plans.

Generally perceived as an alluring investment opportunity, resolution plans enable interested parties to acquire businesses at considerably reduced values. An indispensable aspect of these Resolution Plans, however, is the applicability of section 29A, which restricts several classes of entities, including ex-promoters of the corporate debtor, from becoming resolution applicants- for the very simple purpose of preventing re-possession of the corporate debtor at discounted rates. Hence, section 29A is seen as a crucial safeguard in revival of the corporate debtor, in its true sense.

In the present times, however, we cannot overlook the fact that the unprecedented COVID disruption, has compelled regulators around the globe, to reconsider the applicability and continuity of several laws, including those considered as significant; and one such provision is section 29A of the Code.

In a recent paper “Indian Banks: A Time to Reform? dated 21st September,2020, the authors, Viral V Archarya and Raghuram G. Rajan, the former Deputy Governor and Governor of the Reserve Bank of India, have discussed banking sector reforms in view of the COVID disruption, calling for privatisation of Public Sector Banks, setting up of a ‘Bad Bank’[1] amongst other suggested reforms.  In the said Paper, they also suggest that “for post-COVID NCLT cases to allow the original borrower to retain control, with the restructuring agreed with all creditors further blessed by the court. Another alternative might be to allow the original borrower to also bid in the NCLT-run auction”- thereby setting a stage for holding back applicability of section 29A in the post COVID world.

In this article, the author makes a humble attempt to analyse the feasibility and viability of doing-away with section 29A in the post-COVID world.

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RBI refines the role of the Compliance-Man of a Bank

Notifies new provisions relating to Compliance Functions in Banks and lays down Role of CCO.

By:

Shaivi Bhamaria | Associate

Aanchal Kaur Nagpal | Executive

Introduction

The recent debacles in banking/shadow banking sector have led to regulatory concerns, which are reflected in recent moves of the RBI. While development of a robust “compliance culture” has always been a point of emphasis, RBI in its Discussion Paper on “Governance in Commercial Banks in India’[1] [‘Governance Paper’] dated 11th June 2020 has dealt extensively with the essentials of compliance function in banks.  The Governance Paper, while referring to extant norms pertaining to the compliance function in banks, viz. RBI circulars on compliance function issued in 2007[2] [‘2007 circular’] and 2015[3] [‘2015 circular’], placed certain improvement points.

In furtherance of the above, RBI has come up with a circular on ‘Compliance functions in banks and Role of Chief Compliance Officer’ [‘2020 Circular’] dated 11th September, 2020[4], these new guidelines are supplementary to the 2007 and 2015 circulars and have to be read in conformity with the same. However, in case of or any common areas of guidance, the new circular must be followed.  Along with defining the role of the Chief Compliance Officer [‘CCO’], they also introduce additional provisions to be included in the compliance policy of the Bank in an effort to broaden and streamline the processes used in the compliance function.

Generally, in compliance function is seen as being limited to laying down statutory norms, however, the importance of an effective compliance function is not unknown. The same becomes all-the-more paramount in case of banks considering the critical role they play in public interest and in the economy at large. For a robust compliance system in Banks, an independent and efficient compliance function becomes almost indispensable. The effectiveness of such a compliance function is directly attributable to the CCO of the Bank.

Need for the circular

The compliance function in banks is monitored by guidelines specified by the 2007 and 2015 circular. These guidelines are consistent with the report issued by the Basel Committee on Banking Supervision (BCBS Report)[5] in April, 2005.

While these guidelines specify a number of functions to be performed by the CCO, no specific instructions for his appointment have been specified. This led to banks following varied practices according to their own tailor-made standards thus defeating the entire purpose of a CCO. Owing to this, RBI has vide the 2020 circular issued guidelines on the role of a CCO, in order to bring uniformity and to do justice to the appointment of a CCO in a bank.

Background of CCOs

The designation of a CCO was first introduced by RBI in August, 1992 in accordance with the recommendations of the Ghosh Committee on Frauds and Malpractices in Banks. After almost 15 years, RBI introduced elaborate guidelines on compliance function and compliance officer in the form of the 2007 circular which was in line with the BCBS report.

According to the BCBS report:

‘Each bank should have an executive or senior staff member with overall responsibility for co-ordinating the identification and management of the bank’s compliance risk and for supervising the activities of other compliance function staff. This paper uses the title “head of compliance” to describe this position’.

Who is a CCO and how is he different from other compliance officials?

The requirement of an individual overseeing regulatory compliance is not unique to the banking sector. There are various other laws that the provide for the appointment of a compliance officer. However, there is a significant difference in the role which a CCO is expected to play. The domain of CCO is not limited to any particular law or its ancillaries, rather, it is all pervasive. He is not only responsible for heading the compliance function, but also overseeing the entire compliance risk[6] in banks.

Role of a CCO in a Bank:

The predominant role of a CCO is to head the compliance function in a Bank. The 2007 circular lays down the following mandate of a CCO:

  1. overall responsibility for coordinating the identification and management of the bank’s compliance risk and supervising the activities of other compliance function staff.
  2. assisting the top management in managing effectively the compliance risks faced by the bank.
  3. nodal point of contact between the bank and the RBI
  4. approving compliance manuals for various functions in a bank
  5. report findings of investigation of various departments of the bank such as at frequent intervals,
  6. participate in the quarterly informal discussions held with RBI.
  7. putting up a monthly report on the position of compliance risk to the senior management/CEO.
  8. the audit function should keep the Head of compliance informed of audit findings related to compliance.

The 2020 circular adds additional the following responsibilities on the CCO:

  1. Design and maintenance of compliance framework,
  2. Training on regulatory and conduct risks,
  3. Effective communication of compliance expectations

Selection and Appointment of CCO:

The 2007 circular is ambiguous on the qualifications, roles and responsibilities of the CCO. In certain places the CCO was referred to as the Chief Compliance officer and some places where the words compliance officer is used. This led to difficulty in the interpretation of aspects revolving around a CCO. However, the new circular gives a clear picture of the expectation of RBI from banks in respect of a CCO. The same has been listed below:

Basis 2020 circular 2007 circular
Tenure Minimum fixed tenure of not less than 3 years The Compliance Officer should be appointed for a fixed tenure
Eligibility Criteria for appointment as CCO The CCO should be the senior executive of the bank, preferably in the rank of a General Manager or an equivalent position (not below two levels from the CEO). The compliance department should have an executive or senior staff member of the cadre not less than in the rank of DGM or equivalent designated as Group Compliance Officer or Head of Compliance.
Age 55 years No provision
Experience Overall experience of at least 15 years in the banking or financial services, out of which minimum 5 years shall be in the Audit / Finance / Compliance / Legal / Risk Management functions. No provision

 

Skills Good understanding of industry and risk management, knowledge of regulations, legal framework and sensitivity to supervisors’ expectations No provision
Stature The CCO shall have the ability to independently exercise judgement. He should have the freedom and sufficient authority to interact with regulators/supervisors directly and ensure compliance No provision
Additional condition No vigilance case or adverse observation from RBI, shall be pending against the candidate identified for appointment as the CCO. No provision
Selection* 1.      A well-defined selection process to be established

2.      The Board must be required to constitute a selection committee consisting of senior executives

3.      The CCO shall be appointed based on the recommendations of the selection committee.

4.      The selection committee must recommend the names of candidates suitable for the post as per the rank in order of merit.

5.      Board to take final decision in the appointment of the CCO.

No provision
Review of performance appraisal The performance appraisal of the CCO should be reviewed by the Board/ACB No provision
Reporting lines The CCO will have direct reporting lines to the following:

1.      MD & CEO and/or

2.      Board or Audit Committee

No provision
Additional reporting In case the CCO reports to the MD & CEO, the Audit Committee of the Board is required to meet the CCO quarterly on one-to-one basis, without the presence of the senior management including MD & CEO. No provision
Reporting to RBI 1.      Prior intimation is to be given to the RBI in case of appointment, premature transfer/removal of the CCO.

2.      A detailed profile of the candidate along with the fit and proper certification by the MD & CEO of the bank to be submitted along with the intimation, confirming that the person meets the supervisory requirements, and detailed rationale for changes.

No provision
Prohibitions on the CCO 1.      Prohibition on having reporting relationship with business verticals

2.      Prohibition on giving business targets to CCO

3.      Prohibition to become a member of any committee which brings the role of a CCO in conflict with responsibility as member of the committee. Further, the CCO cannot be a member of any committee dealing with purchases / sanctions. In case the CCO is member of such committees, he may play only an advisory role.

No provision

*The Governance paper had proposed that the Risk Management Committee of the Board will be responsible for selection, oversight of performance including performance appraisals and dismissal of a CCO. Further, any premature removal of the CCO will require with prior board approval. [Para 9(6)] However, the 2020 circular goes one step further by requiring a selection committee for selection of a CCO.

Dual Hatting

Prohibition of dual hatting is already applicable on the Chief Risk Officer (‘CRO’) of a bank. The same has also been implemented in case the of a CCO.

Hence, the CCO cannot be given any responsibility which gives rise to any conflict of interest, especially the role relating to business. However, roles where there is no direct conflict of interest for instance, anti-money laundering officer, etc. can be performed by the CCO. In such cases, the principle of proportionality in terms of bank’s size, complexity, risk management strategy and structures should justify such dual role. [para 2.11 of the 2020 circular] 

Role of the Board in the Compliance function

Role of the Board

The bank’s Board of Directors are overall responsible for overseeing the effective management of the bank’s compliance function and compliance risk.

Role of MD & CEO

The MD & CEO is required to ensure the presence of independent compliance function and adherence to the compliance policy of the bank.

Authority:

The CCO and compliance function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to enable him/her to carry out entrusted responsibilities in respect of compliance issues.

Compliance policy and its contents

The 2007 circular required banks to formulate a Compliance Policy, outlining the role and set up of the Compliance Department.

The 2020 circular has laid down additional points that must be covered by the Compliance Policy. In some aspects, the 2020 circular provides further measures to be taken by banks whereas in some aspects, fresh points have been introduced to be covered in the compliance policy, these have been highlighted below:

1. Compliance philosophy: The policy must highlight the compliance philosophy and expectations on compliance culture covering:

  • tone from the top,
  • accountability,
  • incentive structure
  • Effective communication and Challenges thereof

2. Structure of the compliance function: The structure and role of the compliance function and the role of CCO must be laid down in the policy

3. Management of compliance risk: The policy should lay down the processes for identifying, assessing, monitoring, managing and reporting on compliance risk throughout the bank.

The same should adequately reflect the size, complexity and compliance risk profile of the bank, expectations on ensuring compliance to all applicable statutory provisions, rules and regulations, various codes of conducts and the bank’s own internal rules, policies and procedures and must create a disincentive structure for compliance breaches.

4. Focus Areas: The policy should lay special thrust on:

  • building up compliance culture;
  • vetting of the quality of supervisory / regulatory compliance reports to RBI by the top executives, non-executive Chairman / Chairman and ACB of the bank, as the case may be.

5. Review of the policy: The policy should be reviewed at least once a year

Quality assurance of compliance function

Vide the 2020 circular, RBI has introduced the concept of quality assurance of the compliance function Banks are required to develop and maintain a quality assurance and improvement program covering all aspects of the compliance function.

The quality assurance and improvement program should be subject to independent external review at least once in 3 years. Banks must include in their Compliance Policy provisions relating to quality assurance.

Thus, this would ensure that the compliance function of a bank is not just a bunch of mundane and outdated systems but is improved and updated according to the dynamic nature of the regulatory environment of a bank.

Responsibilities of the compliance function

In addition to the role of the compliance function under the compliance process and procedure as laid down in the 2007 the 2020 circular has laid down the below mentioned duties and responsibilities of the compliance function:

  1. To apprise the Board and senior management on regulations, rules and standards and any further developments.
  2. To provide clarification on any compliance related issues.
  3. To conduct assessment of the compliance risk (at least once a year) and to develop a risk-oriented activity plan for compliance assessment. The activity plan should be submitted to the ACB for approval and be made available to the internal audit.
  4. To report promptly to the Board/ Audit Committee/ MD & CEO about any major changes / observations relating to the compliance risk.
  5. To periodically report on compliance failures/breaches to the Board/ACB and circulating to the concerned functional heads.
  6. To monitor and periodically test compliance by performing sufficient and representative compliance testing. The results of the compliance testing should be placed before the Board/Audit Committee/MD & CEO.
  7. To examine sustenance of compliance as an integral part of compliance testing and annual compliance assessment exercise.
  8. To ensure compliance of Supervisory observations made by RBI and/or any other directions in both letter and spirit in a time bound and sustainable manner.

 Actionables by Banks:

Links to related write ups –

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49937

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=3433&Mode=0

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9598&Mode=0

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11962&Mode=0

[5] https://www.bis.org/publ/bcbs113.pdf

[6]  According to BCBS report, compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities”

The new PSL Master Direction and its Impact on NBFCs

-Siddharth Goel (finserv@vinodkothari.com)

Introduction

The Reserve Bank of India (RBI) issued Master Directions-Priority Sector Lending (PSL) Targets and Classification on September 4, 2020 (‘Master Directions’).[1] The Master Directions consolidates various circulars and guidelines issued by RBI with respect to PSL.

The changes made in the Master Directions primarily deal with targets and sub-targets for classification of loans as priority sector loans. Further there are some addition of new sectors in Eligible categories, along with increase in lending limit of some of the existing eligible categories for priority sector lending.

Our detailed write-up on the topic can be viewed here.

Changes in priority sector norms do not have a direct impact on the NBFCs, but they have an indirect impact. Banks are allowed to acquire loans under Direct Assignment arrangements or invest in pass through certificates backed by loans which qualify the definition of PSL, in order to meet the prescribed targets. Mostly, the banks acquire these receivables from NBFCs who does the origination of the loans. Additionally, banks also engage in co-lending arrangements with NBFCs to originate PSLs. Therefore, it is worthwhile to examine the impact of these changes on NBFCs.

Co-origination of loans by Banks for lending to Priority Sector

RBI through its vide notification RBI/2018-19/49 dated September 21, 2018 issued guidelines on Co-origination of loans by Commercial Banks and NBFC-ND-SI (“Co-origination Guidelines”).[2] These guidelines excluded Regional Rural Banks (RRBs) and Small Finance Banks (SFBs). Essentially, the banks could claim priority sector status in respect of its share of credit while engaging in the co-origination arrangement with NBFC under the Co-origination Guidelines. Provided, the priority sector assets on the bank’s books should at all times be without recourse to the NBFC.

It is pertinent to note that the PSL Master Directions under its para 25 covers Co-origination of loans by Banks and NBFC-ND-SI. The Master Direction specifically excludes, RRBs SFBs and Urban Co-Operative Banks (UCBs) and Local Area Banks (LABs) under the above para. Moreover, the Master Directions under the said para, specifically stipulates that detailed guidelines in this regard are to be governed as provided under Co-origination Guidelines dated September 21, 2018. Hence there are no changes intended to be introduced vis-a-vis Master Direction, to the co-origination of loans by banks and NBFCs.

PSL- Lending by Banks to NBFCs for On-Lending

In the earlier regime, after the review of Priority sector lending by banks to NBFC for On-Lending notification dated August 13, 2019[3], RBI through its notification dated March 23, 2020,[4] extend the priority sector classification for bank loans to NBFCs for on-lending for the FY 2020-21. Further, existing loans disbursed under the on-lending model continued to be classified under Priority Sector till the date of repayment/maturity. The extension notification also stipulated an overall capping limit for calculating bank’s total priority sector lending as produced herein below;

“3. Bank credit to registered NBFCs (other than MFIs) and HFCs for on-lending will be allowed up to an overall limit of five percent of individual bank’s total priority sector lending. Further, banks shall compute the eligible portfolio under on-lending mechanism by averaging across four quarters, to determine adherence to the prescribed cap.”

Para 22 of the Master Directions governs Bank loans to registered NBFCs (other than MFIs). It is highlighted that there is no change in sub-category for On-lending by NBFC, and limits also remain unchanged. The above para in the Master Direction, clearly stipulates that on-lending will be eligible for classification as priority sector under respective categories which is subject to the following conditions:

(i) Agriculture: On-lending by NBFCs for ‘Term lending’ component under Agriculture will be allowed up to ₹ 10 lakh per borrower.

(ii) Micro & Small enterprises: On-lending by NBFC will be allowed up to ₹ 20 lakh per borrower.

The above dispensation is valid up to March 31, 2021 and will be reviewed thereafter. However, loans disbursed under the on-lending model will continue to be classified under Priority Sector till the date of repayment/maturity. Caping of overall limit of Bank Credit to 5 percent has been prescribed under para 24 of the Master Directions.

Investments by Banks in Securitised Assets & Direct Assignment

Investments by banks in securitised assets or assignment/outright purchase of a pool of assets, representing loans by banks and financial institutions to various categories of priority sector, except ‘others’ category, are eligible for classification under respective categories of priority sector depending on the underlying assets. However, earlier the requirement was that the interest rate charged to the ultimate borrower in securitised assets and in case of transfer of assets through direct assignment, shall be capped at Base Rate of the investing bank plus 8 percent per annum.

Therefore, investments by banks, in securitised assets and purchase of assets originated by NBFCs in eligible sectors had to comply with above capping in order to qualify as eligible for PSL. To encourage MSME lending in smaller areas where cost of intermediation is high for the smaller NBFCs, the UK Sinha committee in its report has proposed the cap at Base Rate of the investing bank plus 12% per annum initially and periodical review thereafter. The intent of the recommendation stood on the grounds that price caps are not applicable to banks when they originate directly through branches.

Accordingly, such capping limit has been relaxed and as per the as per the revised requirement the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the External Benchmark Lending Rate (EBLR)/ MCLR of the investing bank plus appropriate spread which will be communicated separately. It is expected that the RBI shall be separately communicating the limits to the banks.

The aforesaid relaxation in the interest rate capping would widen the eligibility of loans originated by the NBFCs for securitisation and direct assignment to banks, for meeting the PSL requirement.

Adjustments for weights in PSL Achievement

To address the regional disparities in flow of credit at the district level, currently districts have been ranked on the basis of per capita credit flow. Higher weight (125%) is assigned to the incremental priority sector credit in districts with low per capita credit flow. Similarly, lower weight (90%) has been assigned to incremental PSL in districts with comparatively higher credit flow. The higher PSL credit (125 %) districts are specified in ANNEX-I A and districts with comparatively low PSL credit (90%) are specified in ANNEX-IB of the Master direction. Districts not mentioned in either of the Annex will be having weightage of 100%. PSL incremental credit shall be applicable from F.Y. 2021-2022 onwards.

Thus, for the purpose of above incentives, banks will get incremental PSL credit, if they invest as following:

  • Investment in securitsed assets/direct assignment/outright purchase, of loans originated by NBFCs from high priority districts. The entire investment in PTCs made by the banks, the proportion which is represented by those as priority districts will be weighted at 125% and low priority districts at 90% and others at 100%.
  • On-lending by Banks to NBFCs, wherein NBFCs are further lending in districts with high priority.
  • Incremental credit incentive will be available to Banks, on proportion of their share of loans, to district with high priority under Co-Origination model.

Impact of new Master Directions on NBFCs

The new Master Direction does not seem to impact legal relationship between banks and NBFCs in respect to co-origination of loans and co-lending materially, since all the regulations are similar to the earlier PSL regime. However, the incentives introduced by way of incremental PSL credit to Banks will channel the credit to districts with low credit penetration. Therefore, banks will be benefitted by dealing with NBFCs having portfolio of loans (eligible for PSL) and presence in districts with lower credit penetration.

Further, change in capping, of investments by Banks in securitised assets and direct assignment/ outright purchase of loans, originated by NBFCs is intended to cover loans originated with higher spreads. Further lending to new sub sectors introduced through Master Direction, would also qualify towards PSL target investments by Banks.

The indicative list of new sub-sectors and sub-sectors with enhanced credit limit is reproduced herein below for ready reference.

Agriculture Lending Including Farm Credit (Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities. ·        Inclusion of loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps.

·        Inclusion of loans to farmers for installation of solar power plants on barren/fallow land or in stilt fashion on agriculture land owned by farmer

·        Inclusion of loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.

·        Inclusion of loans up to ₹2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. This change is in line with recommendation by M.K. Jain Committee7.

·        Inclusion of loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.

·        Laying of Indicative list conveying permissible activities under Food Processing Sector as recommended by Ministry of Food Processing Industries.

·        A credit limit of ₹5 crore per borrowing entity has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. This inclusion is as per the M.K Jain Committee Recommendations8.

 

Other Finance to MSMEs In line with the series of benefits being extended to MSMEs, loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME has been included under the PSL catergory. (On the basis of recommendations by UK Sinha Committee, to financially incentivise the startups in India)

 

 

Housing Loans

 

·        Increase in Loans up to ₹ 10 lakh (earlier ₹ 5 lakh) in metropolitan centres and up to ₹6 lakh (earlier 2 ₹ Lakh) in other centres for repairs to damaged dwelling units.

·        Bank loans to governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 square meters. Under the earlier regime, it was based on cost of dwelling unit which was ₹ 10 lakh per unit.

·        Inclusion of bank loans for affordable housing projects using at least 50% of FAR/FSI (Floor Area Ratio/ Floor Space Index) for dwelling units with carpet area of not more than 60 sq.m.

 

Social Infrastructure

 

Inclusion of loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. This is in addition to the existing limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.

 

Renewable Energy Increase in loan limit to ₹ 30 Crore for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities etc. This is to boost renewable energy sector, the earlier limit was up to ₹ 15 Crore.

 

 

[1]https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT49BAA4688D36A64EAF8DB0BFD99C6FC54C.PDF

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11659&Mode=0

[4] https://www.rbi.org.in/scripts/FS_Notification.aspx?Id=11828&fn=2754&Mode=0

 

Our related write-ups