F i n a n c e I n d u s t r y Development C o u n c i l

Transcription

1 F i n a n c e I n d u s t r y Development C o u n c i l JANUARY - MARCH 2014 VOLUME 5 NO. 4 Two wheeler financing by AFCs On the basis of contention of the inspecting officials of some of the RBI s regional offices that two wheelers and private cars are the assets for the personal use of the borrowers and do not generate any income, RBI taking a view that Financing of two wheelers cannot be reckoned for computation of asset-income pattern for determining the AFC status, appears too hasty and damaging the economy. The definition of principal business of Asset Financing Companies [AFCs] given by the Reserve Bank in 2006 imply income of AFC and not of the borrower and therefore the inspecting officials expectation of vehicle generating income for borrower is unfounded and uncalled for and does not arise from the definition of AFCs or their Principal Business. More over it is also quite difficult to identify the vehicles that may be put to only personal use The real issue is why AFC as a financier and RBI as a regulator indulge in such questionable exercise of differentiation of use of vehicles financed in the country? Are banks going to be debarred from financing these categories of vehicles on such imaginary and subjective grounds of personal uses/not income generating? To take such a narrow view by side-tracking the reality on ground in a vast and diverse country like ours and ignoring the innovativeness of a large number of users/buyers of two wheelers and passenger cars being put to several business and productive uses, which are financed by AFCs will not only seriously affect AFCs but it has far wider implications to the economy of the country that is experiencing down turn. Passenger car sales fell by 9.59% and overall sales of two wheelers fell by 1.21 %. Deceleration in automobile sector has a cascading effect on several sectors of the economy. Such a negative measure by the regulatory authority will depress the automobile and other sectors quite adversely. Two-wheelers occupy more than 75 % of the segment-wise market share of the Automobile Industry. India is world s second largest manufacturer of two wheelers. Two-wheelers contribute 6% of India s GDP. Therefore, it contributes to the economic growth of the country and generates income in the economy. It makes no sense to tinker with such growth and employment promoting segment. We believe that the Regulatory authorities have to broaden the horizon of concept of credit to productive purposes as outlined by the Governor of RBI in one of his recent egalitarian speech. That will surely give fillip to financial sector and the NBFC- AFCs segment as well to help serve the customers at the bottom of pyramid as expected by him. R Sridhar, Chairman, FIDC AT A GLANCE Two wheeler financing by AFCs Regulatory Perimeter Non-Banking Finance Companies : Game Changers With limited bank funds, NBFCs are a shadow of themselves National Summit on NBFCs Game Changers in pictures Legal Eagle Moves SEBI Moves Periscope FIDC in Action... R Sridhar, Chairman, FIDC... P. Vijaya Bhaskar, Executive Director, RBI... - M. Ramesh FOR PRIVATE CIRCULATION REGULATORY PERIMETER RBI NOTIFICATIONS/CIRCULARS: 1. P r e p a i d P a y m e n t Instruments issued by Non- B a n k i n g I n s t i t u t i o n s : R B I / / DNBS(PD).CC. No 368 / / : Conversion of debt into shares, consent level of security enforcement actions and permission to acquire debt from other SC/RCs: DNBS (PD) CC. No. 35/SCRC/ / ; RBI/ / Review of Guidelines on Restructuring of Advances by NBFCs: RBI/ /459- DNBS.CO. PD. No. 367/ / Implementation of Section 51-A of UAPA, Updates of the UNSCR 1267 (1999) /1989 (2011) Committee s Al Qaida Sanctions List and Consolidated List: RBI/ /443- DNBS(PD).CC. No 366/ / A n t i - M o n e y L a u n d e r i n g (AML)/Combating of Financing of Terrorism (CFT) Standards: RBI/ / D N B S ( P D ). C C. N o 364/ / EDITORIAL COMMITTEE MR. R. SRIDHAR MR. ALOK SONDHI MR. T. T. SRINIVASARAGHAVAN MR. RAMAN AGGARWAL MR. MAHESH THAKKAR MR. MUKESH GANDHI MR. SRINIVAS ACHARYA MR. N M MUKHI...Chairman... Co-Chairman... Director General... Editor FIDC News 1

2 6. Advances guaranteed by Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) Risk Weights and Provisioning: RBI/ /425- DNBS. PD. 363/ / Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) Directions Modifications in Pricing of C r e d i t : R B I / / ; D N B S ( P D ) CC.No.369/ / February 7, Form a single representative body: RBI tells NBFCs A single representative body for NBFCs will make life easier for the RBI in resolving issues faced by this sector, said P. Vijaya Bhaskar, Executive Director, RBI, at a national summit on NBFCs, organised by Assocham. Time has come for the non-banking finance companies to come up with one representative body, Bhaskar said, adding that the exception could be for microfinance where the RBI is keen on a self-regulatory organisation to cater to this segment s needs. The RBI now regulates as many as 10 categories of NBFCs, including those engaged in asset financing, gold loans, microfinance, credit information companies, factoring and residuary NBFCs. NBFCs are a heterogeneous lot engaged in a plethora of activities that include asset financing, equipment leasing, hire purchase, investments, loans and micro-finance. Currently, different segments of NBFCs have separate associations to pursue their interests. Responding to the senior RBI official s suggestion, the Finance Industry Development Council, which largely represents asset finance companies, said it was not averse to expanding its role to include other categories of NBFCs. We will certainly move ahead on this front and try and include other NBFC categories so that we can present a single face to the RBI, Raman Aggarwal, Director, FIDC, told Business Line. [Business Line, Jan. 23] NBFC to not make provisions for guaranteed portion of loans: RBI NBFCs do not have to make provision for guaranteed portion of loans for low income housing, said RBI according to the PTI report. In case of NBFC-MFIs, if the advance covered by Credit Risk Guarantee Fund Trust for Low Income Housing (CRGFTLIH) guarantee becomes non-performing, no provision need be made towards the guaranteed portion, RBI said in a notification. The amount outstanding in excess of the guaranteed portion should be provided for as per the guidelines on provisioning for nonperforming advances, it added. NBFC-MFIs may assign zero risk weight for the guaranteed portion, it said, adding, the balance outstanding in excess of the guaranteed portion would attract a riskweight as per extant guidelines. The CRGFTLIH for urban areas has been set up by the government in June The corpus of the fund is Rs 1,000 crore to be contributed by Government of India, the settler of the Trust. The government has released Rs 50 crore in The fund trust is managed by the National Housing Bank. [Goodreturns.in, Jan 2] Redo NBFC classification: RBI panel The Reserve Bank of India (RBI) s panel on financial services for small business and low-income households has advised replacing the multi-category classification of non-banking financial companies (NBFCs) with a two-category structure. NBFCs should be classified as either core investment companies and another category for all others, says the committee on comprehensive financial services for small businesses and low-income households, headed by Nachiket Mor. It asked RBI to revisit priority sector lending (PSL) definitions, to enable the gradual transition of NBFCs to wholesale consumer banks or wholesale investment banks or national banks. There should a provision in the Banking Regulation Act to allow this, it has said. Benefits such as tax sops or bank limits previously available to specific NBFC types (such as asset finance or infrastructure finance units) should continue even after consolidation. The panel advocated regulatory convergence between banks and NBFCs on the principle of neutrality for classification of non-performing assets and using the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaesi) Act. For addressing wholesale funding constraints faced by NBFCs, it said RBI and the Securities and Exchange Board of India should develop a framework for Qualified Institutional Buyers and Accredited Individual Investors to participate in debt market issuances. Regulators should allow external commercial borrowing (ECB) in rupees for all institutions. For ECB not in rupees, eligibility should be linked to size and capacity to absorb foreign exchange risk, it said. The nature of activity must be the criterion for availing refinance from agencies such as Nabard, Sidbi or NHB, and credit guarantee facilities. The current capitalisation slabs on foreign equity funding should be relaxed. The regulatory focus must be on total indebtedness and debt servicing capacity of the small borrower. The total borrowing limit for small borrowers could be raised to Rs 100,000 across all lenders. On the PSL norms, it says there should be an active market for these assets. The related relevance in the rules on Statutory Liquidity Ratio and Cash Reserve Ratio should be reassessed. The proposed wholesale banks may be permitted only to accept deposits larger than Rs 5 crore. As they will not take retail deposits, the minimum entry capital requirement should be eased to Rs 50 crore, compared to Rs 500 crore for full-service scheduled commercial banks. Institutions with 20 or fewer branches could be called Wholesale Investment Banks, while those with a larger branch network could be referred to as Wholesale Consumer Banks. The latter should be permitted to act as business correspondents for other full service banks. [Business Standard, Jan. 8] RBI allows firms to issue debt to NRIs as bonus The RBI has allowed Indian companies to issue non-convertible or redeemable preference shares or debentures to non-resident shareholders from their reserves as bonus. So far, RBI was granting permission for such issuances on a case-to-case basis. On a review and with a view to rationalising and simplifying the procedures, it has been decided that an Indian company may issue non-convertible/redeemable preference shares or debentures to non-resident shareholders...by way of distribution as bonus from its general reserves, RBI said in a notification. Further, RBI clarified t h a t i s s u e o f p r e f e r e n c e s h a r e s ( e x c l u d i n g n o n - convertible/redeemable preference shares) and convertible debentures (except optionally convertible or partially convertible debentures) would be subject to Foreign Direct Investment Scheme.[Business Today, 6 Jan.] RBI permits ARCs to convert debt into equity Reserve Bank permitted asset reconstruction companies (ARCs) to convert debt of crisis-ridden companies into equities as part of restructuring process. Securitisation or reconstruction companies are permitted to convert a portion of debt into shares of the borrower company as a measure of asset reconstruction provided their shareholding does not exceed 26% of the post converted equity of the company under reconstruction, RBI said in a notification. Such companies are required to obtain, for the purpose of enforcement of security interest, the consent of secured creditors holding not less than 60% of the amount outstanding to a borrower as against 75% at present. [Financial Express, 24 Jan.] RBI says ECB conversion can be below fair value The RBI clarified that the External Commercial Borrowings (ECB) conversion by an Indian company can be below its fair value. However, RBI also said that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only. It is clarified that where the liability sought to be converted by the company is denominated in foreign currency as in case of ECB, import of capital goods, etc. it will be in order to apply the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion. RBI will have no objection if the borrower company wishes to issue equity shares for a rupee amount less than that arrived at as mentioned above by a mutual agreement with the ECB lender, said RBI. RBI also clarified that the principle of calculation of rupee equivalent for a liability denominated in foreign currency shall apply to all cases where any payables/liability by an Indian company such as, lump sum fees/royalties, etc. are permitted to be converted to equity shares or other securities to be issued to a non-resident.[business Standard, 16 Jan.] FIDC News 2

3 Non-Banking Finance Companies : Game Changers P. Vijaya Bhaskar, Executive Director, RBI NBFCs are already game changers in areas of financial inclusion, especially micro finance, affordable housing, second hand vehicle finance, gold loans and infrastructure finance NBFCs play an important role in promoting inclusive growth in the country, by catering to the diverse financial needs of bank excluded customers. NBFC sector clocked phenomenal growth in the last ten years. The sector on an average, witnessed a Compound Annual Growth Rate of 22 per cent during the period between March 2006 and March Most of the years, NBFC sector grew faster than banking sector. Introduction The Indian financial sector consists of a wide variety of institutions which cater to different market segments. At the apex level are scheduled commercial banks which follow universal banking model. Next, there is the cooperative banking sector with two different strands. While the three Tier rural cooperative structure (State/District/grass root level outfits), takes care predominantly of agriculture and allied activities; the urban co-operative banking structure provides succor mainly to the small customers at the bottom of pyramid in urban areas. On the other hand, Non-Bank Financial Companies (NBFCs) are largely involved in serving those classes of borrowers who are generally excluded from the formal banking sector. However, progressively over the years, the exclusiveness between the banks and NBFCs has somewhat blurred. More recently, NBFCs are competing with banks in providing financial services such as infrastructure finance and housing finance among others. NBFCs historically, involved in providing financial services such as offering of small ticket personal loans, financing of two/ three wheelers, truck financing, farm equipment financing, loans for purchase of used commercial vehicles/machinery, secured/unsecured working capital financing etc. Further, NBFCs also often take lead role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSME) most suitable to their business requirements. The characteristics of NBFC financial services include simpler processes and procedures in sanction and disbursement of credit; timely, friendly and flexible terms of repayment aligned to the unique features of its clientele, albeit at a higher cost. There s an element of unavoidable overlap of functions, which in no way impinges on the efficiency or effectiveness of the formal financial system in the country. Section 1 Profile of NBFC Sector 1.1. Legal Definition of NBFC A company is considered as an NBFC if it carries on as its business or part of its business, any of the activities listed in Section 45 I (c ) of the RBI Act, 1934, viz., business of making loans/advances or acquisition of shares / securities, etc. or hire purchase finance or insurance business or chit fund activities or lending in any manner provided the principal business of such a company does not constitute any of the following non-financial activities viz. (a) agricultural operations (b) industrial activity (c) trading in goods (other than securities) (d) providing services (e) purchase, construction or sale of immovable property. Further in terms of section 45 I (f) of the RBI Act, a company would also be an NBFC, if its principal business is that of receiving deposits under any scheme or arrangement. Thus a company whose principal business is agricultural operations, industrial activity, trading or real estate business is not a financial institution. RBI regulates and classifies NBFCs into ten categories namely Asset Finance Companies (AFCs), Loan Companies (LCs), Investment Companies (ICs), Infrastructure Finance Companies (IFCs), Core Investment Companies (CICs), Infrastructure Debt Funds (IDF-NBFCs), NBFC-Microfinance Institutions (NBFC-MFIs), Factoring companies (FCs), Mortgage Guarantee Companies (MGCs) and Residuary Non-Banking Companies (RNBCs) Size of the Sector The share of NBFCs assets in GDP (at current market prices) which stood at 12.5 per cent as on March 31, 2013 increased steadily from just 8.4 per cent as on March 31, 2006 to 12.5 per cent as on March 31, 2013; while the share of bank assets increased from 75.4 per cent to 95.5 per cent during the same period (Table 1). In fact, if the assets of all the NBFCs below Rs.100 crore are reckoned, the share of NBFCs assets to GDP would go further. In comparison to assets of the banking system (Scheduled Commercial Banks-SCBs), asset size of NBFC sector was around 13 per cent; while deposits (including RNBCs) of the sector were less than 0.15 per cent of bank deposits (SCBs) as on March 31, Public deposits held with the NBFC sector declined in line with RBI policy directions. The decline in public deposits was largely on account of RNBCs. Due to concerted efforts of RBI, the number of deposit taking NBFCs have come down from 428 in June 2006 to 254 in June Business - Concentration Unlike the banking sector, entities under NBFCs differ not only in terms of size and sophistication of operations but also in terms of activities they undertake. NBFC would include not only entities which are part of large multinational groups, but also small players with assets around Rs.25 lakhs. The business concentration in terms of total assets and total credit based on Herfindahl Hirschman Index (HHI) indicate that competition is greater in NBFC sector as compared with banking sector, as HHI for NBFC sector was found to be on lower side during both March 2012 and March Non Bank Financial Institutions Cross Country Analysis Globally, the size of non-bank financial intermediation was equivalent to 117 per cent of GDP as at the end of 2012 for 20 jurisdictions and the euro area. In absolute terms, total assets of non-bank financial intermediaries remained at around $ 70 trillion as at end US has the largest system of non-bank financial intermediation with assets of $ 26 trillion, followed by FIDC News 3

4 during the period between March 2007 and March 2013 as against 21.4 per cent by the banking sector. Although Indian economy is slowing down in the recent past, the robust NBFC credit growth is largely on account of significant growth in infrastructure credit and retail finance Financing of Infrastructure By financing infrastructure projects, NBFCs broaden capital formation of the country and thereby contribute to the overall the euro area ($ 22 trillion), the UK ($ 9 trillion) and Japan ($ 4 trillion). On an average, the size of non-bank financial intermediation in terms of assets was equivalent to 52 per cent of the banking system. However, there were significant cross-country differences, ranging from 10 per cent to 174 per cent. Non-bank financial intermediation is relatively small in the case of emerging market economies compared to the level of GDP. In India, Turkey, Indonesia, Argentina, Saudi Arabia the amount of non-bank financial activity remained less than 20 per cent of the GDP as at end As such, the size of the non-banking financial sector in India is relatively low, by global standards. Section 2 Extant Regulatory Framework for NBFCs With the objective of designing comprehensive regulatory and supervisory framework for NBFCs, Chapter IIIB, IIIC and V of the RBI Act 1934 were amended in The principles of regulation are broadly aimed at (i) protection of interests of depositors, (ii) mitigating the systemic risks emanating from inter-connectedness with the rest of the financial system, and (iii) Consumer Protection. On implementation of UT Committee Recommendations, the regulatory framework would get further refined. Section 3 Business Trends of the NBFC sector An Analysis 3.1. Balance Sheet Growth NBFC sector clocked phenomenal growth in the last ten years. The sector on an average, witnessed a Compound Annual Growth Rate of 22 per cent during the period between March 2006 and March Most of the years, NBFC sector grew faster than banking sector (Chart 1). NBFC sector exhibited counter cyclical movements in In other words, NBFC sector clocked a growth of 25.7 per cent in although GDP growth decelerated to 6.3 per cent in from 10.5 per cent in Credit Growth Credit growth across NBFC and banking sectors is presented in Chart 2. NBFC credit grew more rapidly as compared with the economic growth and development of the country. The quantum of infrastructure finance provided by the NBFC sector witnessed a CAGR of 26.2 per cent during the period between March 31, 2010 and March 31, In absolute terms, NBFC finance to infrastructure increased from Rs.2228 billion on March 31, 2010 to Rs billion as on March 31, NBFC finance to infrastructure accounted for 35.8 % of their assets as on March 31, 2013 while in case of banks it was 7.6% (Chart-2) Public Deposits In line with RBI directions, the public deposits of NBFC sector (including RNBCs) declined considerably from Rs. 247 billion as on March 2007 to Rs.106 billion as on March The decline in public deposits is largely on account of RNBCs, which Chart-1 banking sector. NBFC credit witnessed a CAGR of 24.3 per cent * A commonly accepted measure of concentration. It is calculated by squaring the share of each firm in total assets (or credit), and then summing the resulting numbers. HHI result varies from 0 to 10,000, with 10,000 indicating monopoly and zero indicating perfect competition. If HHI result is less than 1,000 then the industry is considered as competitive; a result of 1,000-1,800 to be a moderately concentrated; and a result of 1,800 or greater to be a highly concentrated. are going to exit from NBFC business model by June The public deposits of RNBCs decreased from Rs. 202 billion as on March 31, 2007 to just Rs. 35 billion as on March 31, Inter-connectedness with the Banking Sector Borrowings from banks is one of the major sources of funding for the NBFCs. NBFC borrowings from the banking sector increased manifold from Rs. 542 billion as on March 31, 2006 to Rs billion in March 31, 2013 (an increase of more than 4 times). However, growth of bank credit to NBFCs decelerated in March 2013 to 13.6 per cent from 32.5 per cent and 42.8 per cent recorded in September 2012 and March This deceleration is attributed to lower demand for auto and consumer loans, stricter norms on lending against gold, withdrawal of priority sector status for some loans given by banks to NBFCs for on-lending for specific purposes, etc. Further, bank credit to NBFCs decelerated on account of revised RBI-DBOD guidelines. FIDC News 4

5 3.6. Borrowings from the Markets Borrowings from the markets increased from just Rs billion as on March 31, 2006 to Rs.4764 crore as on March 31, 2013, increased by more than 4.5 times during the period of 8 years. Among various sources, borrowings through NCDs constitute the largest source of finance for the NBFC sector and its share in total funding sources remained at more than 30 per cent. Since March 2010, funds raised through NCDs witnessed phenomenal growth largely on account of (i) Infrastructure Finance Companies and (ii) Gold loan NBFCs. The quantum of finance raised through NCDs increased from Rs. 682 billion as on March 31, 2006 to Rs.4044 billion as on March 31, In order to promote discipline in resource raising, the RBI has issued guidelines on private placement of NCDs in June Profitability Trends in Return on Assets (RoA) of NBFC sector are furnished in Chart 4. Comparative figures for banks are also indicated for banking sector. The RoA of NBFC sector is always found to be on the higher side as compared with that of the banking sector largely on account of lower operating costs and also, NBFCs do not have statutory pre-emptions like CRR and SLR To sum up, the NBFC sector has exhibited robust growth in the face of declining GDP by resorting to higher market borrowings, predominantly NCDs; while public deposits have declined in tandem with RBI policy. The sector s profitability continues to be consistently higher than that of the banking sector. Simultaneously, interconnectedness with the banking sector and other segments of financial markets has increased due to credit and other linkages, which needs to be watched closely by regulators in the context of financial stability. Section 4 Role of NBFCs in Promoting Inclusive Growth NBFCs play an important role in promoting inclusive growth in the country, by catering to the diverse financial needs of bank excluded customers. By financing real assets and extending credit to infrastructure projects, NBFCs play a pro-active role in the development process of the country. Activities undertaken by the NBFCs for achieving inclusive growth in the country are described below: 4.1. Credit to MSMEs MSME sector has large employment potential of 59.7 million persons over 26.1 million enterprises and is considered as an engine for economic growth and promoting financial inclusion in rural areas. The outstanding credit provided by the NBFC sector to MSMEs stood at Rs.625 billion as at end March (Rs.464 billion in the previous year). The figures for banking sector were at Rs.22,302 billion as at end March (Rs.19,374 in the previous year). Statistics based on 4th Census on MSME sector revealed that only 5.18% of the units (both registered and unregistered) had availed finance through institutional sources. 2.05% got finance from non-institutional sources the majority of units say 92.77% had no finance or depended on self-finance. The fact that a large segment in the micro and small industries sector does not have access to formal credit provides a window of opportunity for the NBFCs to design suitable innovative products Micro Finance Institutions NBFC-MFIs provide access to basic financial services such as loans, savings, money transfer services, micro-insurance etc. to poor villagers and attempt to fill the void left between the mainstream commercial banks and money lenders. Over the last few years NBFC-MFIs have emerged as a fast growing enablers in providing the financial services to the poor villagers by providing capital inputs to poor which generates self-employment, and thereby promotes inclusive growth. The credit provided by the NBFCs - MFIs increased from just Rs. 105 billion as on March 2010 to Rs.151 billion as on March 2011 and declined to Rs.117 billion on account of the ordinance passed by the AP Government that stopped all MFIs from collecting payments by force or even disbursing loans by the MFIs. However, in March 2013, the outstanding credit disbursed by the MFIs increased to Rs.144 billion due to partial resumption of MFI activities, owing to implementation of the Malegam Committee recommendation and certain Supreme Court orders favourable for MFIs. To encourage MFIs, as per the Malegam committee recommendations, RBI has created separate category under NBFCs. As on date, around 33 MFIs have been registered with RBI Monetisation of Gold Gold loan NBFCs provide loans against security of gold jewellery. Although banks are also involved in gold loan business, NBFCs gold loans witnessed phenomenal growth due to their customer friendly approaches like simplified sanction procedures, quick loan disbursement etc. Branches of gold loan NBFCs increased significantly during the last couple of years mostly housed at semiurban and rural centres of the country. Gold loan NBFCs help in monetisation of idle gold stocks in the country and facilitate in creating productive resources. Credit extended by the gold loan NBFCs witnessed a CAGR of 86.7 per cent during the period March 2009 to March In absolute terms, NBFC gold loans increased from just Rs. 39 billion as on March 31, 2009 to Rs.475 billion as on March 31, Second Hand Vehicle Financing Apart from providing loan against property, NBFCs also engage in financing used/ second hand vehicles, reconditioned vehicle, threewheelers, construction equipment besides secured/unsecured working capital financing etc. Incidentally, in India except NBFCs no other financial sector player finance second hand vehicles; which are very popular with road transport operators essentially in the selfemployed segment. 4.5 Affordable Housing Another area where NBFCs are participating in the inclusive growth agenda is affordable housing. Large NBFCs are setting up units to extend small-ticket loans to home buyers targeting low-income customers across the country. Firms are offering loans of Rs. 2-6 lakh to borrowers with monthly income of Rs who find it difficult to borrow from the commercial banks. Firms offer easier know-your customer (KYC) norms such as relaxation in documentation requirements to facilitate easy access to low-income borrowers Housing finance NBFCs are real game changers in terms of providing housing loans at par with Public Sector Banks (PSB). The quantum of housing loans provided by the housing finance NBFCs is almost the same although they are comparatively far smaller than PSBs 4.6. To sum up, NBFCs role in financial inclusion as explained above, indicate the fact that they have been game changers in certain areas like financial inclusion especially micro finance, affordable housing, second-hand vehicle finance, gold loans and infrastructure finance. NBFCs can also become game changers provided they exhibit the requisite nimbleness and innovative zeal in reaching a complete suite of financial products such as shares, mutual funds, depository services etc., as also insurance products both life and non-life together with their current product offerings, to the common man. In respect of MSMEs, NBFCs can become game changers by providing factoring and bill payment services which are of crucial importance at the present juncture of financial sector development. FIDC News 5

6 Section 5 Imperatives for NBFCs to become Real Game Changers A. Action Points for the Industry The following issues need to be addressed on priority basis in order to morph themselves as real game changers. 5.1 Customer Protection Issues Protection of customers against unfair, deceptive or fraudulent practices has become top priority internationally after the crisis. Incidentally, the Bank has received and is receiving number of complaints against charging of exorbitant interest rates, raising of surrogate deposits under the garb of non-convertible debentures, various types of preference shares, Tier II Bonds, etc. Aggressive practices in re-possessing of automobiles in the case of auto loans and improper/opaque practices in selling the underlying gold jewellery in the case of gold loans are the two categories in which relatively more complaints are received / are being received by the Reserve Bank. NBFCs are often found not to practice Fair Practices Code (FPC) in letter and spirit. Developing a responsive and proper grievance redressal mechanism is the more important agenda in the context of this action point. 5.2 Camouflaging Public Deposits NBFCs have been prone to adopt variety of instruments/ways of accepting camouflaged public deposits for resource mobilisation viz., use of Cumulative Redeemable Preference Shares (CRPS)/ Convertible Preference Shares (CCPS) / NCDs / Tier 2 capitals. These instruments are generally marketed as any other deposit products mostly by agents. Regulators should distinguish tiny differences in a clear manner to check and control NBFCs which are raising resources through camouflaged public deposits. Furthermore, complaints are received that deposit receipts issued to customers reveal that the deposits are accepted on behalf of other group companies, whose operations are neither known / are opaque. 5.3 Improving Corporate Governance Standards To become real game changers, business transparency is inevitable for any financial entity. In the case of NBFCs, there is an imperative for adopting good corporate governance practices. RBI has already prescribed a governance code for NBFCs as part of their best practices; these include constitution of Risk Management, Audit and Nomination Committees, disclosure and transparency. When due diligence was undertaken on significant shareholders and directors at the time of registration it was observed there are no prescriptions for qualifications for directors, change in directors etc. 5.4 Capacity Building NBFCs on both individual and collective basis need to work towards building a responsive ecosystem for capacity building; since in the medium to long term, it is the quality of staff which to a large extent, determines the health of the sector. 5.5 Greater Innovation Although NBFCs have been designing innovative products to suit the client and market conditions, the sophistication of financial services has been gradually increasing in the recent past. There is an imperative need for NBFCs to aggressively involve in designing innovative products to become real game changers in the economy. In this context, a cue may be taken from the description of daily financial lives of poor people given in detail in Portfolios of the Poor, a prominent investigation into the everyday problems which they face (Collins, Kulkarni and Gavron (2009)). It is stated therein that typical low income families used some 10 different financial instruments, several channels of transport for money and multiple ways of keeping money safe. Their fundamental protection against financial risk is diversification, knowledge about counterparties and the judicious exploitation of relationships that are expected to last. NBFCs should closely study such behaviour of poor people taking advantage of the last mile connectivity which they do possess, to craft innovative products. 5.6 White Label ATMs As NBFCs already have significant business presence in semiurban and rural centres, there is a case for them to explore business potential by establishing white label ATMs in such areas. 5.7 Need for a single representative body for the Industry In the case of NBFCs, there are multiple representative bodies such as Finance Industry Development Council (FIDC) for Assets Finance Companies, Association of Gold Loan Companies (AGLOC) for Gold Loan NBFCs, etc. In addition, RBI has recently issued guidelines for Self-Regulatory Organisation for Micro Finance Institutions. At this stage of development of the NBFC sector, in the interests of harmonious development of all its segments, establishing our representative body for the entire sector would be an idea worth exploring by subsuming the existing bodies. However, care should be taken to ensure that all segments are adequately represented in such an apex body, to promote harmonious and balanced growth of the sector and avoid internecine conflicts. 5.8 Coparcener with RBI and Other Regulators NBFCs should become coparcener with RBI and other regulators and disclose the challenges they are confronting in the markets and provide valuable inputs to regulators for developing conducive regulatory environment. B. Role of Regulators Regulators too need to act on certain issues to enable the NBFC sector to become Real Game Changers Regulators as Consumer Advocates and as Also Prudential Regulators In the context of NBFCs, customer protection issues take the centre stage as can be seen from paragraphs 5.1 to 5.3 above. Hence regulators need to wear two hats in the context of NBFCs viz. being consumer advocates as also prudential regulators. The need to become consumer advocates need hardly any overemphasis in the context of the various issues highlighted in paragraphs 5.1 to 5.3 above. As regards the role of a prudential regulator, they need to take care of individual NBFCs (micro prudential) as also the system as a whole (macro prudential regulations) Enhanced Monitoring The regulators should have a hands-on approach in unearthing the activities of unauthorised entities as also authorised entities undertaking non-permitted activities. In this context, wherever possible, laws may need to be amended to bestow the requisite regulatory and supervisory powers to the respective regulators Regulatory convergence All the concerned regulators should bring about regulatory convergence among themselves, to avoid any possible regulatory arbitrage by the players Higher level of co-ordination All the regulators should actively strive to bring about higher level coordination amongst themselves on a continuous basis, so that regulatory gaps and overlaps could be identified at the very earliest and immediate corrective action taken thereon Section 6 The Way Forward & Concluding Thoughts NBFCs are already game changers, as can be seen from the analysis above in areas of financial inclusion, especially micro finance, affordable housing, second hand vehicle finance, gold loans and infrastructure finance. NBFCs can play a vital role going forward, in closing the loop as regards financial inclusion for individuals and MSMEs. As regards individuals, NBFCs can reach various financial products offered by the securities industry, viz., shares, mutual funds, depository services etc., as also insurance products both life and non-life together with their current product offerings. As regards MSMEs, NBFCs can become game changers by providing factoring and bill payment service which are of critical importance at the present juncture. The way forward is to ensure that both the NBFI sector and all the concerned regulators play an active part in attending on the imperatives mentioned at Section 5 above. The complimentary role of the financial sector and all the regulators hardly needs overemphasis in the context of NBFCs morphing as game changers for providing the last mile connectivity and closing the loop as regards financial inclusion. In this context, NBFCs have a special responsibility against the background of the need to improve the customer service by conducting their operations as per the best FIDC News 6

7 practices of corporate governance. In the ultimate analysis, adhering to best corporate governance and ethical practices is the only way for gaining the confidence of their customers in particular, and the society in general. Consequently, the NBFC sector would be able to garner greater trust of both its customers and the society. That would provide the springboard for increasing their business levels in the process of fulfilling their role as game changers in the areas mentioned above. NBFCs becoming true game changers would be a sweetener for financial inclusion efforts in our country. [Edited and abridged version of speech delivered by Shri P. Vijaya Bhaskar, Executive Director, Reserve Bank of India at the ASSOCHAM-FIDC NBFC National Summit held on 23rd January 2014 at New Delhi.] NBFCs expected more from Mor panel The recommendations of the Nachiket Mor Committee, released by the RBI on January 7, fall short of expectations of leading nonbanking finance companies. NBFCs are a motley lot, though. Included under the same rubric are large, bulk lenders. Common brush: The refrain of NBFCs is that the regulations are too broad-based, not distinguishing their varied characteristics. Ever since the failure of CRB Capital Markets in 2000, NBFCs seem to think the RBI sees them as companies that raise funds from the public and vanish. The irony is that the amount of public deposits with them is a mere Rs 7,000 crore compared with some Rs 40-lakh crore held by banks as deposits. However, the committee s report titled Comprehensive Financial Services for Small Business and Low-Income Households, observes that NBFCs have a great deal of continuing value to add. This held out the hope that some pathbreaking recommendations would ensue. Key demands unmet: Many NBFCs that Business Line spoke to said that while the recommendations had some positive features such as allowing them to raise funds from abroad as external commercial borrowings and permitting them to seize the assets of defaulters under the Sarfaesi Act, just as banks do some of their biggest and long-standing demands have not been addressed. They, for instance, have been seeking permission to raise more money from the market for the same amount of own capital. Banks need Rs 9 of their own for every Rs 100 they lend; NBFCs need Rs 15. That is, if a bank has Rs 9 of its own money, it can borrow Rs 91 from the market to be able to lend Rs 100. An NBFC, on the other hand, can borrow only Rs 85. The Mor Committee wants to retain status quo. The committee has also rejected the call to bring risk weights of the loans given by NBFCs on a par with those by banks. A lower risk weight means lesser amount of own funds relative to the quantum of the loan. Had these two demands been met, NBFCs would have had more funds to lend. NBFCs are surprised that given the mandate of the committee, which is to step up access to formal credit to all, these demands were not met. Financial inclusion: Today, most Indians have no means of getting a loan from an institution, which is far cheaper than their only source currently, the local moneylender. The committee itself notes: Close to 90 per cent of small businesses have no links with formal financial institutions and 60 per cent of the rural and urban population do not even have a functional bank account. NBFCs, being the closest to the poor borrowers, claim they are best suited for achieving more financial inclusion. Those who know financial inclusion the best are being excluded, laments T. T. Srinivasa Raghavan, Managing Director, Sundaram Finance Ltd. Bad loans: Also, the Mor Committee wants to tighten the screws on NBFCs when it comes to bad loans. For banks, if a borrower has not paid interest for 90 days, the money lent to him becomes a nonperforming asset and has to be provided for, which means lower profits. NBFCs could, however, wait until 180 days before having to declare the loan as an NPA. The committee now wants to bring NBFCs on a par with banks, though it says both types of institutions should follow risk-based approaches, rather than a generic that is, number of days. Banks, however, can claim tax benefits for the provision for NPA, while NBFCs cannot. The committee is silent on this, presumably because tax issues come under the Finance Ministry. [Business Line, Jan. 13] With limited bank funds, NBFCs are a shadow of themselves - M. Ramesh A recent exchange of letters between former Finance Minister and incumbent Chairman of the Parliamentary Standing Committee on Finance, Yashwant Sinha, and RBI Governor Raghuram Rajan, underscores the difficulties that non-banking finance companies face in getting funding from banks, which is the cheapest source of funds. In his letter to the Governor, Sinha noted the difficulties faced by NBFCs in raising funds from banks and said that all efforts in this direction to persuade banks have failed to bear fruit so far. NBFC is a sweeping term covering large infrastructure finance companies, such as Power Finance Corporation to very small companies that give loans to whom they know well. It is well recognised that NBFCs, particularly the smaller ones, play an indispensable role in financial inclusion, providing finance to those who are unable to borrow from banks. NBFCs have for long been complaining that the RBI and the Government, rather than encourage them to do more business, have been turning the regulatory screws on them, crimping their operations in the process. The regulations restrict NBFCs ability to borrow, but industry insiders stress that more than the regulations themselves it is the way the RBI views the sector that makes things difficult. Shadow banking Take, for instance, this line from the RBI s latest Trends and Progress of Banking in India: In India, NBFCs, which remain outside the regulatory framework as applicable to banks, in essence, are referred to as shadow banking. (If it had not been for the comma after NBFCs, it would have been alright, because the comment would then have referred to only some NBFCs.) Now, shadow banking, or doing finance business outside traditional regulatory regime, is a bad word in the financial industry and there is a global effort to clamp down on it. If the RBI itself refers to NBFCs as shadow banking, which bank will be willing to lend to them? The consequences are there to see. While there were 12,255 registered NBFCs at the end of (down from 14,097 in ), bank funding is essentially available to the non-deposittaking but systemically important and deposit-taking companies. These numbered 418 and 254, respectively, at the end of The other companies practically have no access to bank funding. Separate category But even these NBFCs are facing difficulty in getting bank funds, as pointed out by Yashwant Sinha (see table). The RBI must consider an arrangement under which NBFCs may be able to raise more resources through loans from banks, secured deposits and easy access to capital markets, said Sinha in the letter. But the thrust of the letter was the need to create a separate category of NBFCs that provide loans to small businesses. I was told that last year a Key Advisory Group established by the Ministry of Finance had recommended the RBI create a sub-category of NBFC-MSE in order to provide greater focus, appropriate development policies and regulatory framework for such institutions lending to small businesses, the letter states, adding that the Finance Minister had personally endorsed this recommendation. In his reply to the letter, the RBI Governor said that he had requested the department concerned in the RBI to examine the matter. [Business Line, Jan.21] FIDC News 7

8 ASSOCHAM- FIDC National Summit on Non-Banking Finance Companies Game Changers At New Delhi on 23rd January, 2014 Inaugural session (from left to right): Mr. R K Bhasin, Mr. Raman Aggarwal. Mr. T T Srinivasaraghavan, Mr. J D Seelam, Mr. P Vijaya Bhaskar, Mr. Mahesh Thakkar and Mr. Jyoti Praksh Gadia Mr. J D Seelam, Hon ble Minister of State for Finance (Revenue), Government of India Release of Knowledge Paper Inaugural session guests and ASSOCHAM team Mr. P Vijaya Bhaskar, Executive Director, Reserve Bank of India Mr. Nachiket Mor, Chairperson, Committee on Comprehensive Financial Services for Small Businesses and Low Income Households Mr. T T Srinivasaraghavan, Founder Chairman, FIDC & MD, Sundaram Finance Ltd. Mr. Raman Aggarwal, Founder Co-chairman, FIDC and Senior VP, SREI. FIDC News 8

9 Mr. Alok Sondhi, Co-Chairman, Finance Industry Development Council Mahesh Thakkar, Director General, Finance Industry Development Council Mr. K V Srinivasan, CEO, Reliance Commercial Finance Mr. Mukesh Gandhi, Director, MAS Financial Services Ltd. Mr. Kavi Arora, MD & CEO, Religare Finvest Ltd Mr. S D Chug, Member, Managing Comittee, FIDC Mr. Umesh Revankar, MD, Shriram Transport Finance Ltd. Mr. George Alexander Muthoot, MD, Muthoot Finance Ltd. FIDC News 9

10 Legal Eagle Police help for repossession in UP Director General of U P police, in view of a Supreme Court [S C] judgment saying that in case vehicle is seized by financier, no criminal action can be taken against him as he is repossessing goods owned by him, has directed the police officials that if a finance company/institution seizes vehicle in conformity with the spirit of judgment of the court and as prescribed in the fair practice code of Reserve Bank of India then it will not come in the purview of criminal act. This is because the purchaser remains merely a trustee/bailee on behalf of financier and ownership remains with latter, S C has ruled. The circular dated 31 January, 2014 also notes that if a financier comes with order of a court or Arbitral Tribunal for police help for repossession of vehicle police force will be provided by Police Officials with cost. It is also directed that if any financier/institution acts otherwise then action will be taken on merit of each case. FIDC, welcoming the initiative of U P DGP, has moved DGPs of all the states in the country to issue similar circular under their jurisdiction adding that lodging of false complaints of theft / robbery by the defaulting borrowers against the lending NBFCs not only creates avoidable confusion but also leads to undue increase in the number of such cases registered. Banks can keep loan security for other liabilities The Kerala High Court has ruled that a bank is entitled to retain security, including gold ornaments deposited for taking a loan, even after clearing the same, if the borrower is yet to repay another loan. Justice V. Chithambaresh ruled that a bank had a general lien over all forms of security, including gold ornaments deposited by the borrower, for the entire outstanding balance amount due to the bank. The court made the ruling while disposing of a writ petition filed by Nakulan of Kollam seeking a directive to Canara Bank to release the gold ornaments pledged as he had already cleared the loan. According to him, when took a personal loan in January 2012 from the bank, no security had been given. The petitioner later took another loan by pledging his gold ornaments. He said that though he repaid the gold loan, the bank was retaining it as security for his personal loan. The bank took the stand that the gold ornaments could be released only after the petitioner cleared his entire liability. As per section 171 of the Indian Contract Act, it could exercise its right of lien and retain as security the pledged gold ornaments. The court held that the bank had the right to sell the securities like the gold ornaments and use the proceeds in discharge of the liability due by the borrower in respect of even other loans, subject to the condition that there was no contract to the contrary between the borrower and the bank.the burden is always on the borrower to establish a contract to the contrary to remove the presumption in favour of the bank under Section 171 of the Act. [Business Line, Jan. 8] Mortgage registry to cover more assets Banks and lending institutions may soon be required to file with a central registry all information on loans sanctioned for gold jewellery, plant and machinery, corporate brands and logos. A legal working group set up by CERSAI(Central Registry of Securitisation Asset Reconstruction and Security Interest of India) and International Finance Corporation, under the chairmanship of M. R. Umarji, Chief Legal Advisor, Indian Banks Association, has recommended that the scope of CERSAI be expanded to cover movable assets, tangibles and intangibles. [Business Line, Jan. 9] Bring NBFCs under SARFAESI Act: study NBFCs should be brought under the ambit of the SARFAESI Act to enhance investor confidence and ensure robust growth of the financial services sector, a study has said. The study, conducted jointly by business chamber Assocham and consultancy firm Resurgent India, said a reform in this area is critical since the Act empowers banks and financial institutions to recover their non-performing assets (NPAs) without courts' intervention. "A suitable legislative change to bring NBFCs under the purview of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) would go a long way in fortifying the faith of investors which in turn would greatly contribute to their growth," it said. [PTI/Business Standard, Feb 23] Suing directors for loan recovery The Supreme Court ruled that though a mortgage of assets of a company which failed to return a loan may have come to an end with their sale, the contract of indemnity with regard to the loan would continue. They are independent contracts. The directors who stood guarantee will still be liable to return the full loan. Chidambaram promises a slew of financial market reforms One record for all financial assets for individuals: Moves Like there is a depository for securities, we want to create one record for all financial assets. There the data will be for share, bonds, mutual funds and bank deposits, Chidambaram said at a post-budget press confer ence. All financial sector regulators have agreed on the concept and a sub-committee is working on it, he said adding that Financial Sector Development council will take a final call and then it will be implemented. The Government will also comprehensively revamp the ADR/GDR scheme and enlarge the scope of depository receipts. Plans are afoot to deepen and strengthen the currency derivatives market to enable Indian companies to fully hedge against foreign currency risks. The Centre will also enable smoother clearing and settlement for international investors looking to invest in Indian bonds. Rupeedenominated corporate bond market will also be liberalised, Chidambaram said. [Business Line, Feb. 17] Finmin pushes for quick rollout of KYC registry for telecom, finance Concerned over the delay in implementation of an important proposal in the Budget, the finance ministry has called for expediting the setting up of a central Know Your Customer (KYC) depository for financial services and telecom sectors. Besides doing away with multiplicity of registration in getting demat and bank accounts opened or obtaining an insurance policy or a mobile/telephone connection, the common KYC registry will also help reduce compliance costs to institutions in these sectors and customers. The department of financial services (DFS) in the finance ministry recently in the finance ministry recently wrote to the Central Registry of Securitisation Asset Reconstruction And Security Interest of India (Cersai) to operationalise a new common KYC registry as soon as possible, official sources told FE. The DFS has also asked Sebi, Irda, PFRDA, RBI, FMC and TRAI to be in a state of readiness so that as soon as the common KYC registry is launched, these regulators, registered financial institutions and individual customers can avail of the benefits. However, it is still only in the trial stage. [Financial Express, Jan 13] MCA advocates impact assessment of regulators The ministry of corporate affairs (MCA) has batted for an impact assessment study of various sector regulators in the country to establish whether they are functioning effectively. In this context, the MCA has written a letter to Prime Minister Manmohan Singh, said corporate affairs minister Sachin Pilot. According to MCA, the impact assessment could be done on parameters such as current work vis-avis the availability and utilisation of manpower at their disposal; analysis of their powers and whether more is required; and the need/requirement of regulators for coming years, among others. The Damodaran committee made some important points, including the presence of so many regulators in the country. We must take a step back and see what has been the impact of a regulator, Pilot said. [FE Bureau, Jan 02] RBI mulling exchange for receivables of small units The RBI is discussing with market participants the possibility of setting up an exchange through which trade receivables of micro, small and medium enterprises (MSMEs) can be sold in the market. Since MSMEs get squeezed all the time by their large buyers, who pay after long delays, the Governor said, All would be better off if the MSME could sell its claim on the large buyer in the market, RBI Governor Raghuram Rajan said at the Nasscom India Leadership Forum. If a trade receivables exchange is set up with fully automated acceptance of bills and auction of bills, then we can reduce the transaction cost considerably. The RBI has been discussing with market participants on how to do this, and, in a very short while, we should have the structure in place, the RBI Governor said. According to him, the key is to reduce transaction costs by automating every aspect of the transaction. Once the cost is reduced and volume of business rises, financial inclusion can be achieved. Once the MSME sells its claim on the large buyer in the market, the MSME would get its money quickly while the market would get a claim on the better-rated large buyer instead of holding a claim on the MSME, Rajan said. [Business Line, 12 Feb.] FIDC News 10

11 New SEBI norms a step ahead SEBI of Companies Act MOVES The corporate governance norms announced by the SEBI go beyond those mentioned in the Companies Act. SEBI has pushed for better corporate governance of listed companies through measures such as the need for a succession policy, prior approval of the audit committee for all related-party transactions and e-voting facility for all shareholder resolutions by the top 500 companies (by market capitalisation). All these measures have either not been specified in the Companies Act or haven t been made mandatory. [Business Standard, 14 Feb.] Regulators to amend financial sector rules to aid uniformity Financial sector regulators will soon make amendments to sectorspecific rules to ensure consistency and issue regulations to protect the personal information of customers. Regulators, including the SEBI, FMC, IRDA and PFRDA will start implementing the Indian Financial Code that seeks to harmonise standards and processes across financial the sector. It is learnt the government wants the regulators to start working in this direction immediately. The finance ministry has released a guidance handbook for the regulators to implement the non-legislative recommendations of the Financial Sector Legislative Reforms Commission. [Business Standard, 11 Jan.] Report securitised debt trades in 15 minutes: SEBI to bourses Trades in securitised debt instruments (both listed and unlisted) should be reported within 15 minutes on the trade reporting platforms of exchanges (NSE, BSE or MCX-SX) from April 1, 2014, market regulator SEBI said. [Business Line, Jan. 7] SEBI makes grading mechansim voluntary for IPO Market watchdog SEBI notified a regulation that makes grading mechanism voluntary for initial public offers. [Business Standard/PTI, Feb 4] SEBI now holding individuals accountable for irregularities To bring greater accountability in stock market, SEBI is now holding individuals also accountable along with their companies for any misdeeds, chairman U K Sinha said. He said that improvement, in terms of rules, will also be made in the system of companies merger and acquisition.[india T V, 6 Jan.] SEBI tightens civil proceedings norms SEBI on Jan.9 strengthened measures pertaining to the settlement of administrative and civil proceedings, saying it will not settle an application if a default has been committed within a period of 24 months from the date of previous settlement or a plea filed earlier has been rejected by the regulator. Further, a specified proceeding shall not be settled if it involves default involving insider trading, fraudulent and unfair trade practices, including front running which in the opinion of SEBI are serious and have a market wide impact or have caused substantial losses to or affect the rights of investors in securities, especially retail investors and small shareholders. [Financial Express, Jan 10] Single demat a/c for all financial investments: SEBI SEBI said that investors will soon be able to have a single dematerialised account for all classes of their financial investments. All financial instruments can be operated through single dematerialised account and this facility will be operational by the end of , said SEBI joint director Prabhakar R Patil. [PTI, Feb 07] SEBI to make related-party transaction norms more stringent SEBI may soon tighten its norms for related party transactions of listed companies, by mandating greater disclosures and barring concerned parties from voting for shareholder approvals to such deals. The regulator also plans to widen its definition of related party transactions (RPTs), while making it tougher for promoters and others to use such deals for personal gains. Besides, the companies may have to adopt a policy on RPTs and make the same public for benefit of all stakeholders. [PTI/Business Standard, Feb 27] Fund raising for NBFCs W h i l e m a k i n g a p r e s e n t a t i o n a t ASSOCHAM-FIDC organized National Summit on Non-Banking Finance Companies Game Changers at new rd Delhi on 23 January Nesar Ahmed, past president of Institute of Company Secretaries of India speaking on fund raising for NBFCs said that a large number of N B F Cs are restricted to accept deposits from Public and NBFCs are required to resort to raising funds through sale of high yield bonds to institutional as well as retail investors. More over RBI has restricted number of investors in a private placement to 49 and RBI has mandated that all debt issues must be fully secured by underlying assets, he added. Outlining the measures suggested by RBI appointed Nachiket Mor Committee in respect of fund mobilization for NBFCs Mr. Nesar Ahmed noted: Providing benefits of shelf prospectus for 1 year to all issuers including NBFCs. The criteria for availing refinance from NABARD, NHB, SIDBI and credit guarantee facilities should be based on nature / area of activity rather than the institution type. Currently such refinance schemes are restricted by institution type rather than activity, thus violating the Neutrality principle as far as NBFCs are concerned. Current capitalization slabs on foreign equity funding should be relaxed and money laundering concerns should be mitigated by levying additional reporting requirements on Banks/Authorized Dealers (AD). Addressing of wholesale funding constraints faced by NBFCs in a systematic manner by: Developing a clear framework by RBI and SEBI for QIBs and Accredited Individual Investors to participate in the debt market issuances of NBFCs so as to deepen capital market access for NBFCs. It also suggested that investors such as mutual funds, insurance companies, provident and pension funds and private accredited investors could complement bank funding to this sector. Permission for raising ECB in Rupees for all institutions. For non-rupee ECB funding, eligibility should be linked to size and capacity to absorb foreign exchange risk rather than specific NBFC categories. Presently norms on ECBs are rigidly defined and eligibility varies across different categories of NBFCs.[Source: ASSOCHAM] Discounts on toxic assets up on rising Asset reconstruction companies of bad debt ARCs are now able to buy assets at a far more attractive discount of 45-50%.ARCs are now able to buy assets at a far more attractive discount of 45-50%. With asset quality deteriorating both nonperforming assets (NPAs) and loan recasts are showing a rising trend banks are now willing to sell toxic assets at half their value, reports Vishwanath Nair in Mumbai. Asset reconstruction companies (ARCs), which were earlier picking up such assets at average discounts of just 25-26%, are now able to buy them at a far more attractive discount of 45-50%. In FY14, bad loans worth Rs 16,500 crore were put on the block, of which ARCs have snapped up Rs 3,500 crore worth, ARC players say. [Financial Express, Jan 23] NBFCs cheer new guidelines on restructuring of advances NBFCs have cheered the RBI guidelines on restructuring of advances. New rules are in sync with guidelines for commercial banks and give NBFCs a little more flexibility for dealing with stressed loans. Said N Sivaraman, president and whole-time director, L&T Finance Holdings: Previously, if NBFCs restructured loans, it would be qualified as an NPA. Now, we get the benefit of it being a restructured standard asset rather than an NPA. Gross NPAs in the balance sheet will come down, and restructured loans would be classified separately. [Financial Express, Jan 25] FIDC News 11

12 ASSOCHAM-FIDC National Summit on NBFCs A seminar at the behest of FIDC in collaboration with ASSOCHAM held at New Delhi on January 23 was the most successful NBFC event where officials from MOF and RBI were also present. Sh. J D Seelam, Union Minister of State for Finance (Revenue) was the Chief Guest and Mr. P Vijaya Bhaskar, Executive Director, RBI was the Guest of Honour. Dr. Nachiket Mor, Chairman, Committee on Comprehensive Financial Services for Small Businesses and Low Income Households chaired the session on Role of NBFCs in Promoting Financial Inclusion, said Mr. Raman Aggarwal, former co-chairman of FIDC. NBFCs innovative products for financial inclusion Innovation is the key for financial inclusion and NBFC sector has innovated several products in the country that no other financial institution or bank has ventured into to reach out poor and in remote areas, said Raman Aggarwal, former co-chairman of FIDC at the ASSOCHAM-FIDC organized National Summit on Non-Banking Finance Companies Game Changers at new Delhi on 23 Jan. Initiative of the NBFC sector has evolved several products such as: Used/ Second hand vehicles/equipment financing which has a huge untapped market. R e c o n d i t i o n e d v e h i c l e s f i n a n c i n g b y p r o v i d i n g authenticated second hand vehicles to illiterate customers which are backed with warranty. Financing vehicles run on cleaner fuels like CNG/ LPG In compliance to the court orders which contributes to the cleaner environment. Three wheeler financing which is the only mode of public transport in small towns & villages. Financing of Solar Lanterns in remote areas having no electricity which is funded by International Agencies including World Bank. Financing tyres & Refrigeration kits and also providing additional finance for the customer in crisis. Financing for Retro fitting of CNG kits in vehicles that enables used vehicles to comply to the court orders and new emition norms. Gold Loans have huge potential as gold is an integral part of Indian family. Gold NBFCs provide this secured finance in fastest mode. Thus NBFCs enable monetization of idle assets. Small Ticket Personal Loans. Financial inclusion: need for partnerships between specialists and large generalist institutions The committee [Mor panel] set up by RBI sought to lay down a clearly articulated vision for financial inclusion recommended among other measures suggested that Leveraging existing regional (such as Regional Rural Banks and Cooperative Banks) and national banks and NBFCs to improve access to credit, while simultaneously also building the ground for the eventual growth of many more banks in a graduated manner. This can be achieved through the progression of high quality NBFCs (including MFI- NBFCs), that are already engaged in financial inclusion and priority sector lending activities, into functionally specialized wholesale consumer and investment banks. These are not envisaged to take retail deposits. These wholesale banks will be able to deliver on financial inclusion goals immediately without putting retail Published by : R. Sridhar, Chairman for and on behalf of Finance Industry Development Council, 101/103, Sunflower, 1st Floor, Rajawadi Road No. 2, Ghatkopar (East), Mumbai , INDIA. Phone : / Director General : maheshthakkar45@yahoo.in Website : FIDC In Action depositors at risk and the strong performers in this group could be good candidates for full-service banks in the future, said Mr. Nachiket Mor at the ASSOCHAM-FIDC organized National Summit on Non-Banking Finance Companies Game Changers at new Delhi on 23 Jan. Explaining the core approach that moves away from an exclusive focus on any one model linked to existing banks to an approach where new entrants are permitted and multiple models and partnerships are allowed to emerge, particularly between national full-service banks; regional banks of various types; non-bank finance companies; business correspondents; newer, more narrowly focussed, payments banks and wholesale consumer and investment banks, and financial markets, Mr. Mor added.[source: ASSOCHAM] Presentation on issues raised in report on financial inclusion: FIDC has decided to make a detailed presentation to Reserve Bank of India and Ministry of Finance on the Issues pertaining to NBFCs raised in the RBI Committee Report on Comprehensive Financial Services for Small Businesses and Low Income Households under the Chairmanship of Mr. Nachiket Mor on suggestion from Mr. T T Srinivasaraghavan, former chairman of FIDC. Repossession rights of NBFCs-a circular by DGP Uttar Suggestions and feed-back We would appreciate your views, suggestions and feed-back to make the 'FIDC News' more useful and illuminating. Your inputs and contributions too are welcome on : fidcnews@gmail.com - Editorial Committee Pradesh FIDC has written and circulated this to DGPs in various states of country and requested a similar line of action by them and FIDC has suggested the regional associations to take up/follow up with them. [See an item titled: Police help for repossession in UP on page-10] A special package for FIDC members from Experian Credit Information Company of India Pvt. Ltd. Especially to suit small NBFCs, Experian Credit Information Company of India Pvt. Ltd. has waived off the entry fee as well as first 3 years Annual Fees. This will enable to get access to the vast data of borrowers, defaulters, their status and history. decisions There is a growing recognition within the RBI about the importance of NBFCs. However, it will have to go back on some of the decisions taken earlier, said Mr. G. S. Sundararajan, Managing Director, Shriram City Union Finance. For instance, it said that NBFCs should not collect retail debentures more than twice a year. How it matters if the NBFC that has the license to collect deposits raises money through debentures, he asked. Because of episodes such as Sharada, the RBI decided to put restrictions on raising resources through debentures. We have expressed our displeasure to them, he added. Mr. Sundararajan was commenting on regulatory challenges faced by the NBFCs. Next, the asset classification (Usha Thorat Committee) norm is again something NBFCs have serious issues with. Aligning the asset classification norm (from 180 days to 90 days) for NBFCs with banks will be a disaster for NBFCs. It is conceptually a wrong thing to do. It will severely impair financial inclusion and reduce the difference between banks and NBFCs he added. But the speed at which the committee s proposal came, they have not implemented it. We believe that it will go into cold storage. I don t think it will come, he hoped. [Extract from an interview] The RBI must go back on some Printed by : Aditya Print Shop (Ph.) FIDC News 12