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Services and Assistance for ICAAP Implementation

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Workshop on Emerging Regulatory Framework for NBFCs and digital lending

Register here: https://forms.gle/D7QTKbPDcZn3AP7y6
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The Law of Co-lending

Financial Services Division | finserv@vinodkothari.com

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Our write-ups on related topics may be viewed here –

Exploring Core Financial Services Solution for NBFCs

Applicability, Features, Modules & Challenges

– Subhojit Shome, Executive and Parth Ved, Executive | finserv@vinodkothari.com

Background

As a part of the overhaul for the NBFC Sector, the Reserve Bank of India (‘RBI’) had, on October 22, 2021, introduced the Scale Based Regulations (SBR): ‘A Revised Regulatory Framework for NBFCs’. Upon application of SBR, NBFCs will now be divided into four major categories starting from base layer, followed by middle and upper layers and a top layer. The categories can be briefly summarised through the below chart (visit https://vinodkothari.com/sbr/ to read our write-ups on SBR and related topics).

Overview of the Scalar Approach for Classifying NBFCs

Through SBR, various governance guidelines have been newly introduced while the existing guidelines have been modified to keep up with the current market practices. One of the requirements is the introduction of Core Financial Services Solution (CFSS) for NBFCs vide RBI circular dated February 23, 2022 (‘CFSS Circular’).

In this article, we discuss the applicability of CFSS on NBFCs, explore the current core banking systems of banks, highlight the necessary modules which can be adopted by NBFCs along with the issues that may arise during implementation.

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The Pious Intent of Promoting Factoring

Preserve of a select few?  

Over the last two years, the regulatory developments vis-à-vis factoring, and more specifically, ‘who can be a factor’ has been a to-and-fro ride. With widening of the scope of entities eligible for factoring to its effective roll back vide the Registration of Factors (Reserve Bank) Regulations, 2022 (‘Registration Regulations’), the factoring market found itself stuck in ambiguity arising because of the disparity between the Factoring Regulation (Amendment) Act, 2021 (‘Amendment Act’) and the Registration Regulations. Ironically enough, only days after the notification of Registration Regulations, the Economic Survey 2021-22 was released, which held a rather positive outlook as regards the factoring market, in view of the reliefs provided vide the Amendment Act.

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Understanding ICAAP for NBFCs

– 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.

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Prompt Corrective Action Framework for NBFCs

– 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/

FAQs on IPO Financing

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.

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