Implementation of Compliance Function by NBFC-ML
Eliza Bahrainwala, Executive| eliza@vinodkothari.com
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Penal charges not a cash-cow for lenders
RBI issues draft guidelines on fair lending practices for penal charges
– Aanchal Kaur Nagpal, Manager and Dayita Kanodia, Executive | finserv@vinodkothari.com
Introduction
Levying of penal interest/ charges is a punitive measure adopted by lenders on borrowers defaulting in making repayments and/ or breaching any terms and conditions mutually agreed in the loan agreement. The Reserve Bank of India also allows lenders to charge such rates as long as the same are communicated to the borrower and are in accordance with the Board approved policy framed in this behalf.
However, lenders, cashing in on such autonomy and flexibility, have adopted varied practices which are often prejudicial to the borrower. These include charging exorbitant rates, capitalisation of penal charges, charging of penal interest on the loan amount and not the defaulted portion etc.
The RBI, in its Statement on Developmental and Regulatory Policies dated February 08, 2023[1], announced policy measures for introduction of guidelines for regulating the penal charges levied by financial institutions[2]. Pursuant to the same, RBI, on April 12, 2023 has issued a draft circular on Fair Lending Practice – Penal Charges in Loan Accounts (‘Draft Circular’) to persuade lenders to use penal charges for their true compensatory nature and not as a revenue enhancement tool.
While the Draft Circular comes with good intentions, there are certain provisions that may seem ambiguous and contradictory, and the final guidelines would need to provide sufficient clarity to achieve the desired execution.
Read more →PML Act and Rules: Recent changes may have new compliance requirements
-Team Finserv | finserv@vinodkothari.com
Background
Financial sector entities have to follow PMLA and related rules, including by way of KYC Directions. The Finance Ministry came up with various amendments pertaining to the Prevention of Money-Laundering Act, 2002 (“PML Act”) and the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’). The amendments pertain to revised thresholds for ascertainment of beneficial ownership (25% to 10%), implementation of group wide policies for compliance with provisions of Chapter IV, expanding the obligations under PMLA to service providers of virtual digital assets, etc.
Effective date and applicability:
The amendment shall be effective from the same date, i.e. March 07, 2023. It may be noted that the Master Direction – Know Your Customer (KYC) Direction, 2016 (‘KYC Directions’) are issued and updated by the regulator based on the amendment in PML Act and PML Rules. However, the Regulated Entities (RE) are required to ensure compliance with the provisions of PML Act and PML Rules, as amended from time to time. Hence, necessary steps must be taken based on the amendments.
Whether applicable to existing or new customers?
Customer Due Diligence (as required under the PML Act and Rules) is required to be undertaken at the time of commencement of a financial transaction or account-based relationship with the customer. Accordingly, necessary steps must be taken by the RE to ensure compliance with the Amendment Rules for all new customers or new financial transactions undertaken with existing customers after March 07, 2023. However, it is also pertinent to note rule 9(12) of the PML Rules which requires reporting entities to exercise continuous due diligence with respect to the business relationship with every clients.
Read more →Market-linked debentures: Is it the end of the market for them?
– Aanchal Kaur Nagpal, Manager | finserv@vinodkothari.com
Tax proposal to tax gains on MLDs as short-term capital gains
The Budget proposes that the capital gains on market linked debentures (MLDs) will be taxed as short term capital gain.
Presently, MLDs are mostly listed, and as listed securities they have 2 advantages:
- First , there are exempt from withholding tax. This is one of the carve-outs in sec. 193
- Secondly, the holding period for capital gain purposes is 12 months, as opposed to 36 months in case of normal capital assets. This comes from sec. 2 (42A) of the Act. Therefore, if a listed security is held for at least 12 months, and transferred or redeemed thereafter, the gain will be taxed as long term capital gain, with a rate as low as 10%.
Market linked debentures is a concept that prevails world-over, with different names such as equity-linked bonds, index-linked bonds, etc. However, in India, the issuance of MLDs was being exploited as a regulatory and tax arbitrage device.
Tweezing out for dormancy: RBI intends to intensify regulatory audits of NBFCs
- By CS Anita Baid, Vice President, Vinod Kothari Consultants P. Ltd.
As per reports available on public domain[1], the RBI intends to intensify regulatory audits of non-banking finance companies, to find dormancy, non-compliance, non clarity of business models, or other risks that the regulator may wish to check. The intent seems to be weed out the truant ones out of the crowd of over 9000 NBFCs that exist. It is a fact that in the recent years, the RBI has been granting lesser new registrations, and canceling more of existing registrations, causing the number to come down. It is also important to note that if the number of NBFCs looks overwhelming, it is not because so many companies are into real operation: it is because the regulations currently define a company investing its owned capital into financial investments, with absolutely no access to either public funds or customer interface, as an NBFC, by imputing the public interest that actually does not exist. The number would have been a lot lesser had the regulator had the realisation that if there are no public funds, no customer interface and investment of owned funds being done, there is no reason for the regulator to interfere, as the intent of the country’s Central Bank cannot be to regulate investment activity that one does with one’s own money.
While this issue remains to be advocated for a potential reform, in the meantime, it is important for NBFCs to brace up for the RBI’s inquisitorial interest.
This article is intended to help NBFCs to be better prepared for such regulatory interface.
Read more →Presentation on ICAAP for NBFCs
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Workshop on Emerging Regulatory Framework for NBFCs and digital lending
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- Scale Based Resources – https://vinodkothari.com/sbr/
- Digital Lending – https://vinodkothari.com/?s=digital+lending
- Co-lending – https://vinodkothari.com/?s=co-lending
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 –
- Participation in loan exposure by lenders – https://vinodkothari.com/2021/10/loan-participations-the-rising-star-of-loan-markets/
- New model of Co-lending in financial sector – https://vinodkothari.com/2020/11/new-model-of-co-lending-in-financial-sector-scope-expanded-risk-participation-contractual-borders-with-direct-assignment-drawn/
- Presentation on Co-lending Guidelines – https://vinodkothari.com/wp-content/uploads/2020/11/Presentation-on-Co-lending-guidelines-final-1.pdf
- One stop RBI norms on transfer of loan exposures – https://vinodkothari.com/2021/09/rbi-norms-on-transfer-of-loan-exposures/
- FAQs on Transfer of Loan Exposure – https://vinodkothari.com/2021/10/37064/
