Posts

Harmonising computation for concentration limits across NBFCs

– Kaushal Shah, finserv@vinodkothari.com 

Reserve Bank of India (RBI) has recently announced amendments to the Credit and Investment concentration norms, specifically targeting Base and Middle Layer Non-Banking Financial Companies (NBFCs). The circular, dated January 15, 2024, brings about notable changes aimed at ensuring uniformity and consistency across NBFCs while computing the concentration norms. 

What has RBI done?

For Middle Layer NBFCs (NBFC-MLs) :

  1. In addition to the use of Credit Default Swaps (‘CDS’), RBI has now allowed NBFC MLs to offset the aggregate exposure with the following additional Credit Risk Transfer (CRT) instruments: 
  • Cash margin/caution money/security deposit held as collateral on behalf of the borrower against the advances for which right to set off is available;

It is pertinent to note that, as per para 84 of the SBR Directions, already requires the NBFC for the purpose of assignment of risk weight to net off the amount of cash margin/ caution money/security deposits held as collateral against the advances out of the total outstanding exposure of the borrower. 

  • Central Government guaranteed claims which attract 0 per cent risk weight for capital computation;
  • State Government guaranteed claims which attract 20 per cent risk weight for capital computation; and 
  • Guarantees issued under Credit guarantee Schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises, Credit Risk Guarantee Fund Trust for Low Income Housing and individual schemes under National Credit Guarantee Trustee Company Ltd
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Rebuilding Regulatory Infrastructure: The New SRO Norms

Draft Framework for SROs for financial sector entities

– Srinithi Sreepathy, finserv@vinodkothari.com

On December 21, 2023, the Reserve Bank of India presented its first  ‘Draft Omnibus Framework for recognising Self-Regulatory Organisations for Regulated Entities’(‘Omnibus’). The Framework comes in pursuance of its Statement on Developmental and Regulatory Policies dated October 06, 2023.

The Omnibus Framework is in response to a vacuum located between Regulators and the ever-evolving industry dynamic. The RBI has proposed a draft in the form of the present omnibus framework, for Self-Regulatory Organisations (SROs) indicating a willingness to enter a collaborative approach to regulatory frameworks.

The present Omnibus, taking the increasing number of regulated entities and their growing scale of business into consideration recognises the lack of sufficient industry standards for self-regulation. Identifying this need and being aware of the futility of increasing the burden on regulatory bodies like the RBI, SEBI or IRDA, (in this case, specifically: the RBI) the framework finds middle ground by recognising self-regulation amongst members of various industry entities.

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RBI mandates appointment of an Internal Ombudsman by NBFCs

Updated as on December 29, 2023

– Team Finserv | finserv@vinodkothari.com

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Our Resources on the topic:

  1. RBI mandates appointment of an Internal Ombudsman by NBFCs
  2. RBI’s Ombudsman storm- Tough road ahead for NBFCs
  3. Ombudsman Scheme for PPI issuers
  4. Extension of Ombudsman Scheme to remaining class of notified NBFCs

Year 2023 in retrospect: Regulatory changes for NBFCs

Aanchal Kaur Nagpal | Senior Manager

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Watch our regulatory round series on YouTube here

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.

Workshop on RBI Circular on Regulatory Measures on Consumer Credit by Banks & NBFCs

– Vinod Kothari | vinod@vinodkothari.com

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Our Resources on the topic:-

  1. RBI raises red flag on increasing personal loan
  2. FAQs on Regulatory measures towards consumer credit and bank credit to NBFCs
  3. Workshop on RBI Circular on Regulatory Measures in Consumer Credit by Banks & NBFCs (YouTube live)

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

Sale of Retail NPAs : A synoptic overview

– Team Finserv | finserv@vinodkothari.com

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  1. NBFC NPA characterisation: A reprieve a day too late?
  2. NPA classification norms significantly tightened
  3. Non-Performing Assets: A Solution at Last?
  4. NPA recognition for trailing borrower payments by NBFCs
  5. Presentation on harmonisation of NPA recognition

IT Governance, Risk, Controls and Assurance Practices Direction, 2023

Analysis of Impact on Financial Sector Entities

Kaushal Shah & Subhojit Shome | finserv@vinodkothari.com

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Read our other resources

  1. RBI regulates outsourcing of IT Services by financial entities
  2. Draft Master Direction on IT Governance, Risk, Controls and Assurance Practices
  3. Erstwhile Directions on IT Framework for the NBFC Sector – RBI keen on implementing several operational requirements

Access our resource centre on SBR Framework :

Snippet on Regulation of Payment Aggregator – Cross Border

Shreshtha Barman and Tejasvi Thakkar| finserv@vinodkothari.com

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Our Resources on the topic :

  1. Understanding regulatory intricacies of Payment Aggregator business
  2. RBI to regulate operation of payment intermediaries
  3. Payment and Settlement Systems: A Primer