Tag: nbfcs

RBI plans a four-layered regulatory framework for NBFCs

Banking & Finance

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The Reserve Bank of India (RBI) plans to usher in a four-layered regulatory and supervisory framework for non-banking finance NBFCs as it embarks on the path of a scale-based regulation in the backdrop of the recent stress in the sector.

In its discussion paper on “Revised Regulatory Framework for NBFCs — a Scale-Based Approach”, RBI said its proposed framework could be visualised as a pyramid, comprising NBFCs grouped in four layers — Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and a possible Top Layer (TL).

There will be least regulatory intervention for NBFCs in BL. As one moves up the pyramid, the regulatory regime will get stricter.

The framework proposes to prescribe Bank-like regulations for the top 25 to 30 NBFCs in the country.

Base Layer

About 9,209 NBFCs will be in the Base Layer (BL), which can consist of NBFCs, currently classified as non-systemically important NBFCs (NBFC-ND/Non-Deposit taking), Peer to Peer lending platforms, Account Aggregators, Non-Operative Financial Holding Company, and NBFCs up to ₹1,000 crore asset size.

As low entry point norms raise the chances of failure arising from poor governance of non-serious players, the central bank plans to revise these norms for NBFC-BL from ₹2 crore to ₹20 crore.

RBI proposes harmonising the extant NPA (non-performing asset) classification norm of 180 days to 90 days for NBFC-BL.

Middle layer

NBFCs in the Middle Layer (ML) can consist of entities, currently classified as NBFC-ND-SI/Non-Deposit taking-Systemically Important, deposit-taking NBFCs, Housing Finance Companies, Infrastructure Finance Companies, Infrastructure Debt Funds, Standalone Primary Dealers and Core Investment Companies.

While no changes are proposed in capital requirements for NBFC-ML, RBI said the

linkage of their exposure limits are proposed to be changed from Owned Funds to Tier I capital, as is currently applicable for banks.

The extant credit concentration limits prescribed for NBFC-ML for their lending and investment can be merged into a single exposure limit of 25 per cent for the single borrower and 40 per cent for a group of borrowers anchored to the NBFC’s Tier 1 capital.

NBFC-ML: IPO financing

While underscoring that Initial Public Offer (IPO) financing by individual NBFCs has come under scrutiny, more for their abuse of the system, the paper proposed to fix a ceiling of ₹1 crore per individual for any NBFC. NBFCs are free to select more conservative limits.

Further, a sub-limit within the commercial real estate exposure ceiling should be fixed internally for financing the land acquisition.

Restrictions on lending

As per the framework, a few restrictions should be extended to NBFCs in ML, including not allowing them to provide loans to companies for buy-back of shares/securities.

Guidelines on sale of stressed assets by NBFCs will be modified on similar lines as that for banks.

The paper suggested that NBFCs with ten and more branches shall mandatorily be required to adopt Core Banking Solution.

The paper recommended a uniform tenure of three consecutive years applicable for statutory auditors of the NBFC. It suggested that a functionally independent Chief Compliance Officer should be appointed.

Compensation Guidelines for NBFCs along the lines of banks can be considered to address issues arising out of excessive risk-taking caused by misaligned compensation packages.

Per the paper, making some of the disclosures prescribed for banks applicable to NBFCs would bring greater transparency and at the same time, provide a better understanding of the entity to the stakeholders.

Upper Layer

This layer can consist of NBFCs which are identified as systemically significant among them and will invite a new regulatory superstructure.

This layer will be populated by NBFCs which have a large potential of systemic spill-over of risks and can impact financial stability.

There is no parallel for this layer currently, as this will be a new layer for regulation.

The regulatory framework for NBFCs falling in this layer will be bank-like, albeit with suitable and appropriate modifications. It is expected that a total of not more than 25 to 30 NBFCs will occupy this layer.

It is felt that CET (Common Equity Tier) 1 capital could be introduced for NBFC-UL to enhance the quality of regulatory capital. It is proposed that CET 1 may be prescribed at 9 per cent within the Tier I capital.

To tune the regulatory framework for NBFC-UL to greater sensitivity, the paper suggested that NBFCs in this layer should be prescribed differential standard asset provisioning on banks’ lines.

Given the higher systemic risk posed by NBFC-UL, the Large Exposure Framework (LEF) as applicable to banks, can be extended with suitable adaptation.

Since NBFCs lying in the Upper Layer have the ability to cause adverse systemic risks, the regulatory tools can be calibrated on the lines of the private banks; that is, such NBFCs should be subject to the mandatory listing requirement and should follow the consequent Listing Obligations and Disclosures Requirements.

Top Layer

Considered supervisory judgment might push some NBFCs from out of the upper layer of the systemically significant NBFCs for higher regulation/supervision. These NBFCs will occupy the top of the upper layer as a distinct set.

Ideally, this top layer of the pyramid will remain empty unless supervisors view specific NBFCs.

In other words, if certain NBFCs lying in the upper layer are seen to pose extreme risks as per supervisory judgement, they can be put to significantly higher and bespoke regulatory/ supervisory requirements.

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Securitisation volume improves in Q3 on revival in economy: Crisil

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The securitisation volume in the third quarter (Q3/October-December 2020) of FY21 crossed ₹26,000 crore, trumping the first-half (H1/ April- September 2020) FY21 level of ₹22,000 crore, according to CRISIL Ratings.

The credit rating agency observed that the volume pick up happened as more originators entered the market; and, mutual funds, which had by and large stayed away in H1, started investing in new issuances.

This takes the total volume for the first nine months of this fiscal to about ₹ 48,000 crore, though that is still way behind fiscals 2018 (about ₹ 60,000 crore), 2019 (about ₹145,000 crore) and 2020 (about ₹ 1,52,000 crore.

CRISIL noted that the interest returned in the securitisation market, especially in September 2020, as the moratorium period for underlying assets ended.

Asset-backed securities

The agency stated that the stability in pool collections in the post-moratorium period has been a sign of confidence in securitisation for investors.

Consequently, mutual funds have joined banks, insurance companies, and high net-worth individuals (HNIs) as investors in securitisation transactions, albeit gradually.

Krishnan Sitaraman, Senior Director, CRISIL Ratings Ltd, said, “Disbursement activity at non-banking financial companies (NBFCs, including housing finance companies and microfinance institutions) has resumed in sync with the uptick in economic activity.

“With a gradual increase in investor appetite and amenable market conditions in the form of a lower interest rate environment, NBFCs have again started raising incremental funds through securitisation.”

Non-performing assets recovered via IBC rise 61% in 2019-20

The agency said asset-backed securities (ABS) continued to dominate in retail securitisation this fiscal.

Commercial vehicle, gold, microfinance, tractor and unsecured personal loans comprised over two-thirds of the volume securitised, while mortgage-backed securitisation (MBS) transactions with underlying home loans and loans against property, accounted for the balance.

As much as 63 per cent of the volume securitised this fiscal has been through the direct assignment (DA) route, including those under the government-sponsored Partial Credit Guarantee scheme.

The agency observed that rising collection efficiency in securitised pools with underlying microfinance loans has increased investors’ appetite for fresh exposures in the sector.

Fund mobilisation by microfinance triples

Funds mobilised by microfinance entities through securitisation in the third quarter tripled from the first half of the fiscal. However, construction equipment-, vehicle- and tractor-backed pools constituted over half of ABS issuances, it added.

The agency is of the view that as economic activity rebounds, NBFCs are expected to shift their focus to incremental disbursements and consider securitisation as a key funding source.

Consequently, if collection efficiencies continue to be steady, securitisation volumes could spurt in the fourth quarter and, possibly, equal or even surpass cumulative issuance witnessed in the first three quarters of the current fiscal.

Rohit Inamdar, Senior Director, CRISIL Ratings, “Once lenders refocus on portfolio growth, they may choose to tap into securitisation for meeting their incremental funding needs.

“Investors, reassured by improved collection ratios, would likely drive the market. Traction in securitisation volumes will, however, be dependent on continued improvement in collection efficiency and stabilisation of the business environment for NBFCs.”

Jana SFB: Disbursements almost normal, only micro finance loans lagging

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RBI for more measures to improve governance at banks, NBFCs: Shaktikanta Das

Personal Finance

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Any discussion on a bad bank must happen between the government and private players, and the RBI will consider such a proposal once presented with it, he said in response to a question at the Nani Palkhivala memorial lecture.

Integrity and quality of governance are key to good health and robustness of banks and non-banking financial companies (NBFCs), Reserve Bank of India (RBI) governor Shaktikanta Das said on Saturday, adding that the regulator plans to issue some more measures on improving governance at regulated institutions. Any discussion on a bad bank must happen between the government and private players, and the RBI will consider such a proposal once presented with it, he said in response to a question at the Nani Palkhivala memorial lecture.

Recent events in the rapidly evolving financial landscape have led to increasing scrutiny of the role of promoters, major shareholders and senior management vis-à-vis the role of the board and the RBI is constantly focused on strengthening the related regulations and deepening its supervision of financial entities, he said.

“A good governance structure will have to be supported by effective risk management, compliance functions and assurance mechanisms.”

“These constitute the first line of defence in matters relating to financial sector stability,” Das said, adding that the central bank is set to beef up the governance framework. “Some more measures on improving governance in banks and NBFCs are in the pipeline,” he said.

Das pointed to the measures the RBI has taken to strengthen its supervisory framework over regulated entities. The supervisory functions pertaining to the scheduled commercial banks (SCB), urban cooperative bank (UCB) and NBFC sectors are now integrated, with the objective of harmonising the supervisory approach. It has developed a system for early identification of vulnerabilities to facilitate timely and proactive action. It has also been deploying advances in data analytics to offsite returns so as to provide sharper and more comprehensive inputs to the onsite supervisory teams. “The thrust of the Reserve Bank’s supervision is now more on root causes of vulnerabilities rather than dealing with symptoms,” the governor said.

Going ahead, financial institutions in India have to walk a tightrope in nurturing the economic recovery within the overarching objective of preserving long-term stability of the financial system, he said. The pandemic-related shock will place greater pressure on the balance sheets of banks in terms of non-performing assets, leading to erosion of capital. Building buffers and raising capital by banks – both in the public and private sector – will be crucial not only to ensure credit flow but also to build resilience in the financial system. “Preliminary estimates suggest that potential recapitalisation requirements for meeting regulatory norms as well as for supporting growth capital may be to the extent of 150 bps (basis points) of common equity tier-I capital ratio for the banking system,” Das said.

While abundant capital inflows have been largely driven by accommodative global liquidity conditions and India’s optimistic medium-term growth outlook, domestic financial markets must remain prepared for sudden stops and reversals, should the global risk aversion factors take hold. “Under uncertain global economic environment, EMEs (emerging market economies) typically remain at the receiving end. In order to mitigate global spillovers, they have no recourse but to build their own forex reserve buffers, even though at the cost of being included in currency manipulators list or monitoring list of the US Treasury,” Das said, adding that the issue needs greater understanding on both sides so that EMEs can actively use policy tools to overcome challenges pertaining to capital flows.

The governor made a case for defining fiscal roadmaps not only in terms of quantitative parameters like fiscal balance to gross domestic product (GDP) ratio or debt to GDP ratio, but also in terms of measurable parameters relating to quality of expenditure, both for the Centre and states. While the conventional parameters of fiscal discipline will ensure medium and long-term sustainability of public finances, measurable parameters of quality of expenditure would ensure that welfarism carries significant productive outcomes and multiplier effects. Maintaining and improving the quality of expenditure would help address the objectives of fiscal sustainability while supporting growth, Das said.

On the subject of a bad bank, he said the idea has been under discussion for a very long time. “We in the RBI have provided regulatory guidelines for asset reconstruction companies and we are open to look at any proposal for setting up a bad bank. If any proposal comes, we are open to examining it and issuing regulatory guidelines, but then it’s for the government and private-sector players to really plan for it,” Das said.

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‘RBI’s special schemes helped MSMEs, NBFCs tide over liquidity crisis’

Banking & Finance

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Banks have weathered the shock to their balance sheets due to the Covid-19 pandemic well so far. In an interview with BusinessLine, Bank of Maharashtra (BoM) MD and CEO, AS Rajeev, attributed this to a host of factors including timely measures such as the partial credit guarantee scheme and the government guaranteed collateral-free loans; rate cuts, provision of adequate liquidity, and loan moratorium announced by the Reserve Bank of India (RBI). Excerpts:

How tough was 2020 in terms of business?

Banks played a crucial part in stabilising the financial sector and transmitting government stimulus and relief programmes to kick-start the economy. We (BoM) registered year-on-year (YoY) credit growth of 11.60 per cent till Q2 (July-September) end and year-to-date (YTD) credit growth of 9 per cent. Our credit growth was mainly on account of growth in RAM (retail, agriculture and MSME) advances which stood at 25.12 per cent on YoY basis.

Did the pandemic-related measures announced by the government and RBI benefit borrowers and credit off-take?

The government as well as RBI took several steps to improve credit growth with special focus on micro, small and medium enterprise (MSME) sector and NBFC (non-banking finance company) sector (for onward lending). The special schemes – Adhoc Line of Credit and Guaranteed Emergency Credit Line (GECL) scheme have given timely relief to MSME sector/business community by providing them much needed liquidity during the crisis period. Similarly, for the NBFC sector, the partial credit guarantee scheme helped them to tide over liquidity crisis.

Are stressed corporates warming up to restructuring based on the Kamath committee’s criteria?

Initially, when the resolution framework for Covid-19 related stress was announced (on August 6), very few borrowers sought restructuring of credit facilities. We firmly believe that with revival in business activity and availability of additional credit facilities through various other schemes of the government, borrowers are unlikely to go for further restructuring.

What has been your experience on the loan recovery front?

Our recovery during the current fiscal stands at ₹870 crore which is almost 80 per cent of the recovery in the previous year. The pandemic did impact the recovery in Q1 of the FY21, but thereafter it has improved significantly. We are further expecting an additional recovery of ₹500 crore by end FY21.

To aid recovery, our bank launched two new OTS schemes to cover the small borrowers, particularly MSME, taking the present economic conditions in to consideration. The OTS schemes are not only helping the bank to reduce the NPA but also the borrowers to become debt free. With the help of these two new schemes, we are expecting a recovery of ₹400 crore in the current fiscal.

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Interview| We need both NBFCs and banks to grow: Rashesh Shah, chairman and CEO, Edelweiss Group

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Rashesh Shah, chairman and CEO, Edelweiss Group

Non-banking financial players have hurtled from one crisis to another. Rashesh Shah, chairman and CEO of Edelweiss Group, in an interview with Malini Bhupta, says the NBFC model will come back. Excerpts:

At a group level how do you see the pandemic impacting your liquidity and what about the balance-sheet strength to deal with the stress?

I think in the last five or six months, we have done a fair amount of balance-sheet strengthening. Our credit book took a big impairment and we took a markdown, which we front-loaded. We also beefed up liquidity and while it is hurting earnings, it is a source of comfort. Across our entities we are holding liquidity for two years. We have `7,000 crore of liquidity at group level. Our overall book is Rs 17,000 crore. We have improved equity in all businesses. We agreed to sell 50% of our wealth business. In our NBFC business, capital adequacy is 24%, in housing finance it is 28% and in ARC it is 38%. Our wealth business has grown at 94% a year and asset management business has doubled in two years. Our general insurance business has grown at 58% this year and the life insurance business has seen positive growth every month this year.

What about build up of stress in your lending businesses?

Our collection efficiency is back to 93-94% against 98% at pre-Covid levels. Out of our Rs 18,000-crore loan book, the share of retail and wholesale is equal. In retail, our collection efficiency is at 94% which is at par with the industry. We have taken a Rs 2000-crore markdown in the wholesale book. Wholesale housing has improved a lot and sales have been the best in 20 years.

NBFCs have been hurtling from one crisis to another. Your view.

IL&FS applied the brakes on the financial sector. It was a huge upheaval. If IL&FS had not happened, we would have been unprepared for Covid. IL&FS was a good break for the financial sector and because of that shock, banks and NBFCs are much stronger than they were two years ago.

Are NBFCs out of the woods?

There was a crisis five months ago and that is over, but the growth challenge remains. The government is doing its bit to increase the share of manufacturing through PLI scheme. We need 12-13% credit growth for the economy to return to growth. The good banks and good NBFCs have similar levels of profitability. The only difference is scale. While NBFCs account for 25% of the credit market, they account for 40% equity in the sector. We need both NBFCs and banks to grow, it is not an either-or situation.

What’s the road map for Edelweiss Group, which also has a non-banking finance company? Do you see Edelweiss becoming a bank?

We have an ambition to continue to build strength in the financial services space. There are three parts to that – one is insurance, then there is capital markets and credit. I do think digital disruption in banking is a big opportunity. At our size it would not make sense to become a bank with branches like it is in the old model because that model works at a scale. Our credit book is Rs 17,000-18,000 crore. We are not near the Rs 50,000-crore threshold. The RBI has also come out with norms for NBFCs to work with banks for origination and to sell loans. The NBFC model will come back. It will not be a balance-sheet model, but one where they occupy niches and specialise in select segments. It will have to be an asset-light model. The fact that the RBI feels NBFCs above a certain size should become a bank is a good thing because if you are Rs 50,000 crore in size, you have to roll over Rs 20,000 crore a year. At that stage, you become systematically important. Between Rs 25,000-50,000 crore, you can be both. But below Rs 25,000 crore, it might be beneficial to be an NBFC.

What’s in store for credit markets after all this turmoil of the last two years?

After the turmoil, there is a rethink on the entire credit ecosystem. Between 1995 and 2000 there were a lot of changes in equity markets. Credit markets will see similar changes. Credit markets will need to have multi-lane highway. We need to think of an infrastructure that is cohesive.

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Pre-Budget meeting: NBFCs seek easier credit flow, TLTRO benefits

Banking & Finance

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As the risk profile of NBFCs is changing at a fast pace, there was a need for a regulatory framework for dividend declaration.

Financial sector and capital market players on Tuesday appealed to finance minister Nirmala Sitharaman to allow non-banking financial companies (NBFCs) to issue “on-tap” secured bonds and also requested greater liquidity flow to small NBFCs be ensured. At the pre-Budget consultation meeting, the Finance Industry Development Council (FIDC), a body of shadow banks, said NBFCs should be included in the list of eligible sectors under the central bank’s on-tap TLTRO (targetted long-term repo operation) scheme. Top executives of LIC, Axis Bank, Citi Bank (India), UTI Asset Management, Muthoot Group were among those who participated in the meeting.

Earlier in the day, the Financial Stability and Development Council (FSDC), headed by Sitharaman, decided to “keep a continuous vigil” on the financial conditions that could “expose financial vulnerabilities in the medium and long-term”. The Council’s meeting was also attended by heads of regulators, including RBI, Sebi, Irdai, IBBI and PFRDA, as well as top finance ministry officials.

At the same time, the Council acknowledged that government and the financial sector regulators have ensured faster economic recovery in India as reflected in the reduced contraction of real GDP in the second quarter (7.5% vs 23.9% in Q1).

The Reserve Bank of India (RBI) had in October announced an on-tap window for banks to borrow up to `1 lakh crore and invest in corporate bonds and other debt instruments of companies in certain sectors. While the central bank has conducted targeted long-term repo operations (TLTROs) in the past, but this time banks were allowed to use the money not just for debt investments, but also for corporate loans.

Raman Aggarwal, co-chairman of FIDC, said the Partial Credit Guarantee Scheme 2.0 should also include bank lending to NBFCs by way of term loans, as small players do not issue bonds or non-convertible debetures. “The arrangement of treating bank lending to NBFCs for on-lending to priority sector to be treated as PSL (priority sector lending) for banks, should be made permanent and the limit needs to be increased to at least 10% of total priority sector lending by banks,” Aggarwal said.

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