Post on 06-Jul-2018
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2nd National Summit
Non-Banking Finance Companies“The way forward”
PROCEEDINGS &
RECOMMENDATIONS
THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY OF INDIA
23rd January, 2015 – New Delhi
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MESSAGE
NBFCs are emerging as an alternative to mainstream banking. Besides, they are
also emerging as an integral part of Indian Financial System and have commendable
contributions towards Government’s agenda of nancial Inclusion. They have been to
some extent successful in lling the gap in oering credit to retail customers in underserved
and unbanked areas.
NBFCs in India have recorded marked growth in recent years. After their existence, they
are useful and successful for the evolution of a vibrant, competitive and dynamic nancial
system in Indian money market. The success factors of their business has been by making
the most of their ability to contain risk, adapt to changes and tap demand in markets that
are likely to be avoided by the bigger players. Thus the need for uniform practices and
level playing eld for NBFCs in India is indispensable.
ASSOCHAM along with PwC have come out with this knowledge paper with the objective
to contemplate the issues and challenges being faced by NBFCs (specically considering
the revised regulatory framework) and suggest measures that can be taken to optimize
their contribution thereto.
We hope that this study would help the regulators, market participants, Government
departments, and other research scholars to gain a beer understanding on NBFCsrole in promoting ‘Financial Inclusion’ for our country. I would like to express my
sincere appreciation to ASSOCHAM-PwC team for sharing their thoughts, insights and
experiences.
D. S. Rawat
Secretary General, ASSOCHAM
THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY OF INDIA
ASSOCHAM Corporate Ofce: 5, Sardar Patel Marg, Chanakyapuri, New Delhi - 110 021
Phone: +91-11-46550555 (Hunting Line) • Fax: +91-11-23017008-9 • E-mail: assocham@nic.in • Website: www.assocham.org
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MESSAGE
NBFCs form an integral part of the Indian Financial System. They have been providing
credit to retail customers in the underserved and unbanked areas. Their ability to
innovate products in consonance to the needs of their clients is well established. They
have played a key role in the development of important sectors like Road Transport
and Infrastructure which are the life lines of our economy. This role has been well
recognized and strongly advocated for, by all the Expert Commiees and Taskforces
setup till date, by Govt. of India & RBI. It is an established fact that many unbanked
borrowers avail credit from NBFCs and over the years use their track record with
NBFCs and mature to become bankable borrowers. Thus, NBFCs act as conduits and
have furthered the Government’s agenda on Financial Inclusion
NBFCs are today passing through a very crucial phase where RBI has issued a revised
regulatory framework with the objective to harmonize it with banks and Financial
Institutions and address regulatory gaps and arbitrage. While the regulations, specially,
asset classication norms have been made more stringent so as to be at par with banks,what is now required is to equip NBFCs with tools like coverage under SARFAESI
Act to recover their dues and income tax benets on provisions made against NPAs.
This shall then bring the desired parity with banks and other nancial institutions.
Fund raising has increasingly become dicult and challenging, specially, for the large
number of small and medium sized NBFCs.
It is indeed a maer of great pleasure that ASSOCHAM along with PwC and with
valuable support from Finance Industry Development Council (FIDC), has prepared
this knowledge paper highlighting the key areas of concern for the sector and the future
prospects. I hope this study shall pave the way for a healthy growth of this important
sector of our economy so as to further the vision of our dynamic Prime Minister of
“Sabka Saath, Sabka Vikas”.
Raman Aggarwal
Co-Chairman
ASSOCHAM National Council for NBFCs
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MESSAGE
For a large and diverse country like India, ensuring nancial access to fuel growth and
entrepreneurship is a critical priority. Banking penetration continues to be low, and even as the
coverage is sought to be aggressively increased through programs like the Pradhan Mantri Jan
Dhan Yojana, the quality of coverage and ability to access comprehensive nancial services for
households as well as small businesses is still far from satisfactory.
In this scenario, the Non-Banking Finance Companies (NBFC) sector has scripted a story that
is remarkable. It speaks to the truly diverse and entrepreneurial spirit of India. From large
infrastructure nancing to small micronance, the sector has innovated over time and found
ways to address the debt requirements of every segment of the economy. To it’s credit, the
industry has also responded positively to regulatory eorts to beer understand risks and to
address such risks through regulations. Over time, the sector has evolved from being fragmented
and informally governed to being well regulated and in many instances, adopted best practices
in technology, innovation and risk management as well as governance.
There has been greater recognition of the role of NBFCs in nancing India’s growth in the recent
past, even as global debates on systemic risks arising from non-banks have travelled to Indian
shores and led to somewhat fundamental shifts in the policy environment governing NBFCs.
Much public discussion and regulatory action later, clarity regarding goals and signposts of
public policy have emerged. Scepticism about ‘shadow banks’ has seled to a more healthy
understanding of the risks and rewards of a diverse nancial system. For the industry, there are
some costs associated with greater regulations, but the opportunity of being a well regulated
participant in the nancial system is likely to outweigh the costs in the long run. We believe that
some shadow zones persist in the regulatory landscape, but there is enough clarity for NBFCs
to dene their way forward.
We congratulate The Associated Chambers of Commerce & Industry of India (ASSOCHAM)
for taking this dialogue forward when the country is looking forward to capitalizing on its
potential aggressively. Thanks are due to Amit, Varun, Dhawal, Bhumika and Aarti in the
PricewaterhouseCoopers (PwC) team for compiling the report. We hope you will nd it useful.
Shinjini Kumar
Partner, Leader - Banking and Capital Markets
PricewaterhouseCoopers P. Ltd
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Analyzing the Revised Regulatory Framework for NBFCs
Background
The roller coaster liquidity ride post the global nancial crisis witnessed Indian NBFCs
facing a predicament. Many of them had a favorable business opportunity to convert
the available liquidity into short-term, protable assets as the banking system and
infrastructure-focused NBFCs dealt with asset quality issues. On the other hand, global
regulatory aention on shadow banks brought the spotlight on their operations, governance,
liquidity management and most of all, linkages with the banking system.
Although the impact of the global nancial crisis on India was limited, it left its marks on theregulatory psyche. Prior to this, the NBFC regulation had evolved in phases. Some phases
were marked with great benevolence, such as the registration of all entities with minimum
capital and priority sector benets to portfolio origination for banks. In contrast, some were
marked with adverse business impact, such as restricting the ow of funds from banks to
NBFCs and expression of displeasure with ‘high growth’ and concerns of systemic risks.
The Working Group under the Chairmanship of Smt. Usha Thorat (hereinafter referred to
as the ‘Thorat Commiee) and the Commiee on Comprehensive Financial Services for
Small Businesses and Low Income Households under the Chairmanship of Dr. Nachiket
Mor (hereinafter referred to as the ‘Mor Commiee’) were landmarks in aggregatingconcerns and issues and throwing up ideas and recommendations for discussions.
In this context of high anxiety levels, the nal guidelines released in November 2014 by
Reserve Bank of India (RBI) came as a polite regulatory action. Few hoped for retaining the
status quo on classication of non-performing assets (NPA). Even to them, the extended
implementation timelines and one-time restructuring exemption will lessen the pain.
Apart from being a milestone in the NBFC regulations, these guidelines also mark an
interesting shift in the regulatory approach-that of activity-based regulation. The NBFC
sector has created for itself the type of dierentiation that was not possible within the
universal banking construct. The sector is thus, marked by remarkable diversity of players
and businesses that act as an eective layer of nancial intermediation between the
informal sector of the economy and the formal sector of nance. NBFCs can claim credit
for converting many Indians to rst time users of formal, regulated nancial system.
In the process, they have played a meaningful role in shaping borrower behavior, collecting
credit related data and deepening the footprints of nance where data and information can
be accessed by regulators and policymakers as well as other market participants.
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NBFC regulation, on the other hand, deriving broadly from the banking framework, has
been tweaked over time to ensure as good a t as possible. The other pressure on the
regulatory approach has been the desire to conform to global standards, even when theIndian economy and the demands of the services led, diverse, informal economy have been
very dierent from the global counterparts. This tension, between a highly dierentiated
sector and the natural tendency of regulation to drive to standards goes to the core of the
challenge of NBFC regulation in India. In what can be described as an optimal outcome,
the nal guidelines have addressed many fault lines without running into legal wrangles
or creating widespread pain to participants.
The segmentation of the market on deposit acceptance, customer interface, and liability
structure and consumer protection not only aligns regulation to current realities, but also
sets the direction of future growth, likely to be synchronized with regulatory perceptionof risk. For example, capping leverage of non-systemically important NBFCs, while also
exempting them from the Capital Risk Adequacy Ratio (CRAR), credit concentration
norms and revised NPA norms, will gradually lead to business models that can balance
that opportunity and constraint. Hopefully, the implementation of this risk-based
framework will also close the discussion on `regulatory arbitrage’ since major arbitrage
opportunities are getting addressed through harmonizing minimum capital benchmark,
setting one threshold for systemic importance and making it applicable on a group basis.
Similarly, deposit accepting NBFCs (NBFCs-D) and asset finance companies (AFCs) get
broadly aligned on deposit cap and rating requirements. Further, credit concentrationnorms for AFCs are aligned with those applicable to systemically important NBFCs
(NBFCs-ND-SI) and of course, the NPA classification and provisioning guidelines are
harmonized.
Another good move is resisting the formalization of NBFC classes. The unique advantage of
the NBFC business is the ability to adapt to market demand conditions. Formal categories, in
the absence of any regulatory benet aached to them, create barriers. Diluting the NBFC-
Factor asset-income requirement to 50% and not placing restrictions on Captive NBFCs are
all welcome. The other advantage of the approach is the continued ability of regulators to
address any temporary issues through activity-based regulation or guidance.
A few niggling issues remain. The debate on whether a Core Investment Company (CIC) is
or is not an NBFC rages on. Interestingly, with no more credit concentration norms for non-
deposit accepting NBFCs that are not systemically important (NBFCs-ND), group holding
companies may have an incentive to continue as NBFCs and not get classied as CIC,
given that the leverage cap is higher for such NBFCs compared to CICs (although dened
dierently under the two regulations). The Foreign Direct Investment (FDI) denition of
an NBFC is still not aligned with the RBI denition, causing pain to foreign investors in the
sector specically in terms of investment activity.
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2nd NATIO NA L SUMM IT“Non-Banking Finance Companies – The way forward”
23rd January 2015, New Delhi
PROGRAMME AGENDA
Registration (9:30am- 10:00am) Inaugural Session (10:00 am – 11:30am)
Inauguration Lamp Lighting by Chief Guest
Welcome Address & Opening
Remarks
Shri Raman Aggarwal, Co-Chairman, ASSOCHAM
National Council on NBFCs and Sr. Vice President,
SREI Equipment Finance Limited
Theme Address Mr. Mahesh Thakkar, Director General, Finance
Industry Development Council (FIDC)
Release of ASSCHOM Knowledge Report by Chief Guest
Address by Knowledge Partner Ms. Shinjini kumar, Partner, PWC
Keynote Address Ms Sunita Sharma, MD & CEO, LIC Housing
Finance Ltd
NBFCs’ Perspective Shri Rakesh Singh, Chief Executive Ocer, AdityaBirla Finance Ltd.
SME Financing Perspective Mr. Souvik Sengupta, Business Head, SME
Landing, Reliance Commercial Finance Ltd.
Inaugural Address by Chief
Guest
Shri N.S. Vishwanathan, Executive Director,
Reserve Bank of India
Vote of Thanks Shri D. S. Rawat, Secretary General, ASSOCHAM
Networking Tea/Coee Break: 11:30am – 11:45am
Technical Session-I (11:45AM-12:45PM)
Theme: “Long Term Vision for NBFCs as Integral Part of Our Financial System”
Session Chairman: Shri Raman Aggarwal
Co-Chairman, ASSOCHAM National Council on NBFCs
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Indicative Topics Distinguished Speakers
a) NBFCs – Promoting Financial Inclusion
b) NBFCs – Converting to Banks/ Small
Finance Banks
c) Realignment of Regulatory Regime
d) NBFCs – The Challenge of Leverage
Mr. Hemant Jhajhria
Partner, PwC
Ms. Vibha Batra
Sr. VP, ICRA Limited
Mr. V.P. Nandakumar
MD & CEO, Manappuram Finance Ltd.
Mr. Saurabh Bhat, Chief Executive Ocer,
Ambit Holding Pvt. Ltd.
Question and Answer Session
Technical Session-II (12:45PM-2:00PM)
Theme: “Challenges and Opportunities”
Session Chairman: Mr. Mahesh Thakkar
Director General, Finance Industry Development Council
Indicative Topics Distinguished Speakers
a) Revised Regulatory Framework Issued
by RBI
b) Small & Medium Sized NBFCs’
Perspective
c) Fund Raising Avenues
d) Level Playing Field with Banks & Other
FIs in
- Taxation
- Recovery
(Coverage under SARFAESI Act)
Mr. Ved Jain
Chairman, ASSOCHAM National Council
on Direct Taxes
Mr. Sankar Chakraborti
Chief Executive Ocer, SMERA Rating
Limited
Mr. Mukesh Gandhi
Co-founder & Director Finance, MAS
Financial Services Ltd
Mr. Alok SondhiCo-Chairman, FIDC & MD, PKF Finance
Ltd.
Mr. R. Pratap
Dy. Chief Finance Ocer, SKS Micro
Finance
Question and Answer Session
Lunch (2:00 PM Onwards)
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INAUGURAL SESSION
ASSOCHAM with valuable support from Finance Industry Development Council (FIDC)held its 2nd National Summit on “Non-Banking Finance Companies-The way forward”
on 23rd January 2015, in New Delhi. The idea behind this summit was to contemplate the
issues and challenges being faced by NBFCs (Specially considering the revised regulatory
framework) and suggest measures that can be taken to optimize their contribution
thereto.
Shri N S Vishwanathan, Executive Director, Reserve bank of India
Inaugurating the Summit Session
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Release of ASSOCHAM –PWC Knowledge Report by Chief Guest
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Shri N.S Vishwanathan, Executive Director, Reserve Bank of India
Addressing the Summit
For the summit Shri N S Vishwanathan, Executive Director, Reserve Bank of india was
the chief guest. He made informed the step being taken by RBI for the development of
NBFC Sector. He said that the Reserve Bank of India (RBI) is in the process of framing
comprehensive consumer protection regulations based on domestic experience and global
best practices in accordance with the recommendations of the Financial Sector Legislative
Reforms Commission (FSLRC).
“We already have fair practices courts for non-banking nance companies (NBFCs), we
will be strengthening that and then we have also put a draft charter for the customerservices,” informed Mr N.S. Vishwanathan, executive director, RBI while inaugurating the
2nd national summit on ‘Non-Banking Finance Companies-The way forward’.
“In the times to come the NBFC sector should get to becoming even more alive to the
issues of the customer rights and protection,” said Mr Vishwanathan.
He further informed that with a view to get greater vigilance to prevent frauds in the
NBFC sector, the RBI has enhanced the level of coordination of various agencies involved
in regulating the NBFC space.
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“We are planning to set up a kind of a portal where information by various regulators who
are part of SLCC (state level coordination commiee) can be put in and we would also
encourage people to le their complaints in that and so that the SLCC is quickly able tolook into them and take immediate necessary action,” said Mr Vishwanathan. RBI would
be the host of this portal as it being the convenor, he further said.
The SLCC as an inter-regulatory forum convened by the regional oces of the RBI has
been strengthened, it now is chaired by the chief secretary of the state so that all the state
entities are coordinated in that, it is meeting more frequently than it was in the past, there
are sub-commiees which are formed within that basically to see that timely actions are
taken, informed Mr Vishwanathan.
He also said that acting upon the suggestion of the Commiee on Comprehensive FinancialServices for Small Businesses and Low Income Households popularly known as the
Nachiket Mor Commiee, the RBI is moving move away from entity-based regulation to
activity-based regulation by doing away with dierent categories of NBFCs.
“What this would mean is that you don’t look at whether the company is an investment
company or an asset nance company but you look at the nature of assets in that company
and make the dispensations based on that,” said Mr Vishwanathan.
He also informed that considering the Companies Act 2013 has certain dierent provisions
with regard to the limit on private placement, the RBI is working on aligning the guidelines
with the new companies act requirements while at the same time nding ways to address
the issues raised by the sector.
On the issue of legislative changes, Mr Vishwanathan said, “In the backdrop of
recommendations made by the several working groups, commiees and also the FSLRC,
we are gaining access to identify the necessary legislative changes required to facilitate
more orderly growth of the sector and at the same time address the gaps that are there.”
He further informed that an online reporting for the registered, self-regulatory organisations
in the NBFC-MFIs sector is underway.
Talking of an informal sector of non-registered/regulated claiming to be NBFC entities whose
functioning has an impact on organised/recognised/registered NBFCs, Mr Vishwanathan
said there is a need to ensure that part of the segment is curbed so that the real regulated
NBFC sector is able to do its job the way it has to.
He also suggested that registered NBFCs should play a signicant role in bringing market
intelligence reports to the notice of the bank on an entity engaged in unauthorised deposit
taking or such other nancial activity. “The bank has strengthened this market intelligence
so as to gather information quickly and act on it.”
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Mr. Raman Aggarwal , Co-Chairman, AS SOCHAM National Council onNBFCs and Sr. Vice President, SREI Equipment Finance Limited
He Suggested:
19th Century was an era of “dependence” when world over the big and powerful
countries ruled the less powerful countries as their colonies. 20th century was an era of
“independence” when all these dependent countries gained freedom. 21st century is an era
of “inter-dependence” where all independent nations across the world are engaging witheach other on a regular basis. Perhaps it is time to draw a lesson from these developments
and develop a nancial structure in the country where various players like banks, NBFCs,
MFIs and FIs should engage with each other and develop healthy partnerships instead of
simply trying to compete with each other.
O late, NBFCs have been equated to the “shadow banks” operating in many of the
developed economies. However, it is important to understand that none of the so called
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shadow banks across the world are subject to such a developed and evolving regulatory
framework which is in place for NBFCs in India. NBFCs’ regulations have a history of 18
years and are today almost at par with banks. The Revised Regulatory Framework for
NBFCs enforced by RBI has plugged the so called regulatory arbitrage and brought parity
with banks.
It is therefore of utmost important and urgency that parity between banks and NBFCs is also
brought in areas of taxation and recovery. We therefore look forward to the forthcoming
Union Budget 2015 to address the issues relating to the taxation of income on NPAs and
tax benets against provisions made for NPAs. Empowering NBFCs with recovery tools
like coverage under SARFAESI Act, specially for Systematically Important NBFCs, are of
prime importance.
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Mr. Mahesh Thakkar, Director General, Finance Industry
Development Council (FIDC)
Mr. Mahesh Thakkar, Director General, Finance Industry Development Council (FIDC)
elaborated on various steps that need to be taken by various stakeholders so as to enable
the Non –Banking nance companies.
He suggested about industry requirements:
a) Government of India should include NBFCs in the government’s agenda/action plan
for promoting nancial inclusion
b) RBI bringing regulations in order to reduce the number of NBFCs, because there are
administratively dicult in NBFCs companies.
c) Reserve Bank of India should prepare a road map for the sector
d) the NBFCs sector need a stable policy for 5 years
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Mr. Rakesh Singh Chief Executive ocer, Aditya Birla Finance Ltd
Addressing the Summit
He recommended/Suggested that
1. Notication of NBFCs under SARFAESI Act
Unlike Banks and Public Financial Institutions, NBFCs do not enjoy the benets deriving
from the SARFAESI Act even though the borrowers/clients are similar or may be even
same. There is a good case for notifying of NBFCs under Section 2(1)(m)(iv) of theSARFAESI Act by Central Government.
2. At par Tax treatment with Banks & HFCs where applicable
Since the assets of the two nancial entities are similar, it is necessary that they be
subject to similar tax treatment as well. There are several provisions under the Income
Tax Act wherein a favorable treatment is provided to Banks but similar tax treatment
is not currently available to the NBFCs. One of the major tax issues which aects the
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whole NBFC protability and calls for man hours to ensure compliance is the deduction
of tax on interest receivable by NBFCs. Provisions norms have been made stringent
for NBFCs, but deduction of provisions while calculating the taxable income is notpermied by the tax laws for NBFCs but the same is allowed for Banks. Allowance of
provisions of expense will lead to lower creation of deferred tax assets and tax reversals.
Additionally, the maer on Double Taxation issue in Pass Through Certicates needs to
be resolved at the earliest.
3. Lack of Defaulter Database: NBFCs are not recipient of many defaulter list shared
being shared with Banks. Non-sharing of defaulter databases leave NBFCs vulnerable
to credit risk on account of absence of critical information.
4. Non-availability of Renance and Credit Insurance Schemes: Opening up of renance
windows and credit insurance support to NBFCs will help them raise low cost funds
and increase their lending penetration to the self-employed sector in rural and urban
areas.
5. For NBFCs to be eligible under CGTSME scheme of SIDBI for exposures to SME.
6. With respect to NCD Private Placements, clarification is sought on periodicityof issue as the RBI has not yet come back with any changes to the existing
guidelines.
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Mr. Souvik Sengupta, Business Head,
SME lending, Reliance Commercial Finance Ltd.
He Suggested that:-
Role played by NBFCs in MSME segment
NBFCs are a crucial link in nancial sector, delivering a diverse set of services – lending
and deposit mobilisation, distribution of nancial products, investment banking and
capital market operations. There are more than 12,000 NBFCs1 registered with RBI and
these NBFCs mainly cater to MSME segment of our economy. The central government has
been focussing on ensuring steady-state funds availability for MSMEs through multiple
funding and subsidiary schemes. In this regard there is also an urgent need for Central
Government support to buress NBFC’s MSME funding eorts. Specic support from
central government is felt in the following areas as elaborated below:
1 Source : RBI report on Financial Stability Dec.2014
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Support Required
Participation in Front-Ending Subsidies for MSME sector
Government of India has
elaborate set of subsidies
aimed towards MSME
funding. While banks
and other nodal agencies
like SIDBI frontend the
subsidy-dissemination,
central government canenlist support of NBFCs
and allow highly rated, large and credible NBFCs to frontend the subsidies; similar to
banks and nodal agencies. Allowing such NBFCs access to schemes such as CGTMSE,
CLCSS and others would also improve penetration of these schemes to the benet of the
MSMEs.
Preferential Risk Weightage for MSME Exposure
Presently, credit quality of loans determines risk weights for capital allocation irrespectiveof end-use of loaned funds. In such a scenario dierential risk weights based on end-
use can be used as a tool to encourage ow of credit to desirable sectors. Accordingly,
exposures to MSMEs could carry lower risk weight than say, large corporate, commercial
real estate or stock market exposures. It appears a win-win situation as ow of credit to
this sector would increase and at the same time be benecial to the lender (say Banks as
well as NBFCs) through savings in capital cost.
Participation in Central Government Developmental Fund(s)
Central government has formulated a variety of pro-development bodies like North
Eastern Development Finance Corporation Ltd. and others where signicant measures
are taken to ensure equitable development. Loans and grants are directly disbursed to
MSMEs – and at times at extended timelines. To ensure these funds reach MSMEs on
time, systemically important NBFCs can be allowed to act as business correspondents for
these developmental bodies. One of the major benets of such extension would be greater
degree penetration of developmental schemes.
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Skill and Capacity Building Initiatives
National Skill Development – the apex body for Skill and Capacity Development performs
this function pan-India. Parallel to the apex body, if NBFCs with in-house expertise can be
involved in imparting technical and nancial skill and capacity building training, it would
be of signicant help in reaching out to large pools of MSMEs. Well governed and highly
rated NBFCs can be designated as ‘Skill and Capacity Builders’ for MSMEs with a mandate
to reach out to cent-percent of their clientele thereby enhancing penetration.
Participation under SARFAESI Act
Post 2002-2004, bankers have been leveraging SARFAESI Act as eective tool for bad debts
recovery. This is possible since the act confers signicant powers on lenders with regards
to tangible security (except agricultural land) oered by the borrower in case of default.
The tangible security can even be sold / assigned / leased by the banker in satisfaction of
his valid claims without the intervention of court, post the specied 60days provided to
cure default. In a sense, the act confers limited judiciary powers upon the bankers.
Access to these provisions SARFAESI Act may be made available to larger systemically
important, highly rated NBFCs in view of their relatively stronger governance capabilities.
Such measures can infuse additional condence in NBFCs to widen and deepen the MSMEloan market.
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Ms. Sunita Sharma, MD & CEO, LIC Housing Finance Ltd
She Suggested that
The evolution and growth of Non-Banking Finance Company (NBFC) sector has been
signicant in the recent past. NBFCs form an integral part of the nancial sector and
therefore are exposed to similar risks and challenges that are faced by other players in
the nancial sector. Therefore, the need was felt to address the risks, and also to address
the concerns of NBFCs. The recommendations made by the Working Group on Issues and
Concerns in the NBFC Sector and the Commiee on Comprehensive Financial Services for
Small Businesses and Low Income Households were considered and the changes in the
regulatory framework have been introduced .
The cyclical stress on asset quality and protability of NBFCs is covered by strong capital
adequacy, secured lending and lower ALM risk. With increased importance of NBFC sector
Structural support expected from regulator is higher.
RBI regulations are in line with its desire to strengthen nancial system and reduce the
regulatory arbitrage between banks and NBFCs. Accordingly, the new regulatory framework
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will lead to strengthening of NBFCs balance sheet, with increase in loss absorbing Tier I
capital requirement for systemically important NBFCs and deposit accepting NBFCs and
restricting leverage for smaller NBFCs in line with higher core Tier I requirement for Banks
under Basel III guidelines. On NPA recognition norms and provisioning on standard assets
also, banks and NBFC will be at par.
The increase in disclosure requirement and corporate governance norms will improve the
transparency and increase the accountability of management and the board and improve
the investor awareness.
We believe that revised regulations to be Positive for the NBFC sector and the regulationswill make the NBFC sector structurally stronger, increase transparency and improve their
ability to withstand asset quality shocks in the long run.
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Mr. Hemant Jhajhria, Partner, PWC Addressing the Summit
He presented “Comparative Data Analysis”
PwCJanuary 2015
Banks had advantages over NBFCs in most areas, though relaxed regulations partially dented this advantage
Indian NBFCs At An Inflection Point •
6
Parameter Bank NBFC
Funds Banks have access to low cost public deposits NBFCs have to rely on Banks / financial
instruments to raise funds
Customer Segments Address customer segments in a completemannerQuite a few segments under – served
Cater to niche customer segmentsReach a function of the focus onparticular customer segments
ProductsService Deposits & lending requirementsTransaction banking productsLarge product suite for various banking needs
Lending is the primary focusTailored products based on specific
business needs
Service PropositionMultiple channels of service delivery to meetcustomer needsFocus on universal access
Service to customers based onrelationships and high degree of customization
Regulations Strict norms for asset quality, CRR, SLR, etc. Relaxed norms for NPAs, no CRR and
SLR
Liquidity Support Banks can raise short – term funds from RBI
via the repo mechanismNBFCs do not have access to the repomechanism
Risk WeightsBanks have a low risk weight structure forretail assets viz. vehicle loans, home loans,gold loans, etc.
NBFC have higher risk weightsprescribed for the retail assets
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PwCJanuary 2015Indian NBFCs At An Inflection Point •
7
Regulatory Change Impact
Increase in Tier I CAR (core CAR) to 10% forNBFC-D and NBFC-ND-SI
• To improve the loss absorbing capacity of systemically important financial institutions
• Will strengthen balance sheet with higher core capitalavailability with the NBFCs
• Capital requirement in the long run will increase
NPA recognition changes to 90 daysoverdue from 180 days overdue for loansand 360 days for hire purchase assets
• Brings about parity between NBFCs and banks, removesregulatory arbitrage
• In the short term may increase NPAs for NBFCs impactingprofitability – but will remain an accounting impact
• May impact short term bank borrowing / credit rating for new funds
Provision on standard assets increasedfrom 0.25% to 0.40%
• Balance sheet of NBFCs will become more robust with theincrease in loss absorption capacity
• Profitability will be impacted in the short run
Credit concentration norms for AFCs to bein line with other NBFCs
• No major impact – AFCs generally have a high retail loanportfolio
Corporate governance and disclosurenorms
• Will bring about accountability, transparency and trust inoperations of the NBFCs
• Will help to rein in parallel economy and keep a tab oninvestors
The recent regulatory changes will have a significant impact on the NBFCsand will result in a significant change in their operations and future
strategy
PwC
January 2015
The recent regulatory changes will have a significant impact on the NBFCsand will result in a significant change in their operations and futurestrategy
Indian NBFCs At An Inflection Point •
8
Regulatory Change Impact
All NBFCs, irrespective if date of registration to have Net Owned Funds(NOF) to Rs.2cr by March, 2017
• Ensures uniformity across funds – those registered before Apr’99 and those after
• Makes sure that only firms that aspire to be competitive exist inthe business
Deposit acceptance reduced to 1.5 times of Owned Funds for Deposit taking AFCs andmandatory investment grade credit rating
for accepting public deposits
• The limit and credit rating helps safeguard investor deposits –public or otherwise
Systemically Important NBFC limit revisedto asset size above Rs 500cr
• Release of bandwidth to focus on larger NBFCs• Simplified framework for smaller NBFCs allowing them to
focus on business
Asset value to be calculated at group leverrather than on standalone basis
• Ensuring regulatory compliance for groups with multiple smallNBFCs
Introduction of leverage ratio of 7 for NBFC-ND having assets less than Rs.500 crore
• Ensures non – systemically important NBFCs are not highly leveraged
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Ms. Vibha Batra, Sr. Vice President, ICRA Limited
She focused on Indian domestic credit and retail loans for NBFCs.
Realignment of Regulatory Regime Key changes:
NPA recognition norms: To migrate from 180+ day recognition norm to 90+ day by
March 2018.
Enhanced capital requirements
Minimum Tier I capital requirements enhanced from the current 7.5% to 10% by
March 2017.
In ICRA’s estimates, only two or three NBFCs would need to be mobilize additional capital
(of ~Rs. 5 billion, i.e. 8-10% of their net worth) to maintain a 2% buer over the revised Tier
I capital requirements.
Systemic Importance
Increase in asset-base cut-o for from Rs. 100 crore to Rs. 500 crore to facilitate focused
supervision while allowing smaller players exibility to innovate and cater for niche
segments.
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Deposit Acceptance
Maximum deposit acceptance xed at 1.5 times of NOF, against 4 times applicable to
investment grade NBFCs. Limited number NBFCs to be aect.
NBFCs remain at a disadvantage
While RBI has removed some of regulatory arbitrage BFCs have enjoyed vis-à-vis banks,
NBFCs remain at a disadvantage viz.a.viz banks.
Access to SARFAESI Act: NBFCs do no have access to SARFAESI Act, which has been used
eectively by banks to expedite recovery and has also served to improve credit behavior.
Liquidity support: While banks can raise short-term funds from the RBI through the repowindow, NBFCs do not enjoy any such benets.
Lower risk weights for some asset classes: The risk weights prescribed for retail assets
such as vehicle loans, home loans and gold loans are lower for banks than for NBFCs.
While banks’ balance sheets are more diversied, the credit and market risk on specic
asset classes may be similar for both banks and NBFCs.
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Mr. V.P Nandakumar, MD & CEO, Manappuram Finance Ltd
He Suggested:
1. RBI should consider permiing a holding company structure for the proposed SFB that
would allow the existing NBFC to continue for period of 5-7 years. This will serve toease the transition period for NBFCs converting to SFBs.
2. PSL target to be exibly phased in over a viable period. This may be decided on a case-
to-case basis by the regulators considering the practical issues faced by the individual
entity.
3. The denition of what constitutes PSL should be based on the socio economic prole/
status of the borrower and not on the characteristics of the product oered as is the
case now. All small loans coming under the scope of micro-credit should be given PSL
status.
4. On-tap licensing to set up NBFCs and SFBs (for eligible promoters) with a roadmap
towards harmonization of regulations. Further, greater transparency is required
regarding the criteria followed in the selection process. At present, transparency is
almost zero. Why were Bandhan and IDFC given banking licenses while the rest were
rejected is a question for which there is no clear cut answer.
5. RBI may also examine the concept of Specialised Banks who are allowed to focus on
certain activities like transport nance, gold loans etc.
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Mr. Saurabh Bhat, Chief Executive Ocer, Ambit Finevest Pvt Ltd.
He Highlighted Data Analysis
Ambit Finvest Pvt. Ltd.NBFC – Sector Highlights
• 12029 registered NBFCs of which 241 are NBFCs-D and 465 are NBFC-ND-SI
90% of NBFC Assets are accounted for by NBFC-ND-SI
‘- - .
assets of 12.7 lac crore and total advances of 8.45 lac crore.
• As on March’14, NBFC-ND-SI had a CAR of 27.8% and Gross NPA level of
2.25%
• NBFC Assets comprise 9% of total Financial Assets in India.
• Total NBFC Assets to GDP ratio is 14% (as against bank assets to GDP ratio of
over 95%).
n eve ope coun r es s ra o s
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Ambit Finvest Pvt. Ltd.NBFC – Sector Highlights
• RoA of NBFC-ND-SI was 2.3% and PAT Margin was 20.2% as of March
‘14 (2.0% and 18.3% respectively as on March ‘13)
• As on Sept 2014, banks’ exposure to top NBFCs was approx 1.5 lac
crore ,followed by AMCs with 90,000 cr and Insurance Companies with 1
lac crore
March ‘15 levels for banks NBFC exposure would be significantly higher
g ven requ remen s o e me y arc .
• Govt (State & Central) owned NBFCs form a significant part of total
NBFC assets (>35%) and are exempt from some prudential norms (RBI
They are levered 6.4x (industry leverage of 3x) and have bank borrowings of
over 38,500 cr
Ambit Finvest Pvt. Ltd.Industry Comparison – Key Leverage Ratios
Asset Wholesale
MFIsNBFCs
Finance
NBFCs
HFCsNBFCs
Lending
NBFCs
Bank Borrowing as % of Total 84% 53% 50% (20%- 55% 43% 47%
Borrowings (82%-91%) (43%-63%) 70%) (10%-100%) (36%-52%) (32%-93%)
Access to Bank Borrowings High Medium High High Medium Low to Medium
Dependence on Bank
BorrowingsHigh Medium
Medium to
HighMedium Medium Low to Med
Leverage
4.1x
(3.1x-4.8x)
5.3x
(3.1x-7.7x)
4.3x
(3.3x-6.5x)
9.1x
(5.3x-12x)
4.2x
2.5x-6.8x)
3.9x
(1.7x-6.4x)
Leverage Potential Medium High High V High Medium Low to Med
Observed Gross NPA % 0.5%-6% 1.8% 3.3% 0.7% 1.6% 2.1%
Concentration in Portfolio Low Low Low Low Medium High
Ex ected Loss on defaults V Hi h Low to MediumMedium to
Low Medium Low to MediumHigh
Overall Riskiness of Loan Assets MediumLow to
MediumMedium Low Medium Medium to High
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Ambit Finvest Pvt. Ltd.Wholesale Lending NBFCs – Leverage Challenge
• Seen by banks as direct competition
Concentration in their Portfolio is seen as high risk
D:E covenants by banks are far tighter compared to regulatory
Max tenors of 3-5 years (necessitates high ALM mismatch or low leverage for long term lending)
Risk Weightage not linked to rating of wholesale lending NBFC – natural disincentive
• Only Private Placement Market available
Min AA- and above rating
High Cost as compared to public NCDs and lar gely 3-4 year tenor
Fixed Income product so no benefit in falling interest rate scenario
• Rating Agencies - Difficult to get a >A+ level long term rating without a min size (500 cr + asset book) &
a min capitalisation of 200-250 cr &
a min 3-4 year track record or
Ambit Finvest Pvt. Ltd.Industry Comparison – Key Leverage Ratios
Gold Asset Wholesale
MFIs Finance
NBFCs
Finance
NBFCs
HFCsocuse
NBFCsLending
NBFCs
Cost to Income Ratio 62% 56% 60% 31% 58% 51%
Operating Efficiency Low Medium Low High MediumMedium to
High
or erm orrow ngs as o
Total Borrowings64% 74% 44% 28% 35% 50%
Cash and Cash Equivalents as %
of Total Advances38% 7.4% 5% 4.2% 12% 7.1%
urp us e c t n < year
category7.7% 21% 2.3% (6%) 5% (0.3%)
Overall Liquidity High Medium Medium highMedium to
HighLow to Medium
Tier II Capital as % of Tier I
Capital8% 12% 5% 17% 14%
18.8%16% 15.0% 22% 18.3% 9.9%
o . -
27.3%)(9-19.5%) (10-19.6%) (15.5%-32%) (16.7%-20.2%) (5.5%-14%)
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Ambit Finvest Pvt. Ltd.NBFC Outlook – Medium Term
• n eres ra es seen o so en y - ps n nex m s
Would impact NBFCs in direct competition with banks like retail AFCs, HFCs , Gold Loan NBFcs
(margin squeeze)
Drop in lending rates higher than benefit on borrowing cost
• Base rate linked bank borrowings would dominate as NBFCs would not like to
lock in higher cost NCDs
Share of Bank Borrowings in total Borrowings of NBFCs expected to reach 37-38% in next 2
years
Share of short term borrowings in form of CPs or NCDs with call options
• As CV and passenger vehicle demand is expected to grow, retail NBFC-AFCs
stand to benefit through improved asset quality
market rates of second hand re-possessed vehicles would improve reducing losses
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Mr. Shankar Chakraborti, Chief Executive Ocer, SAMERA Rating Limited
He suggested that:
1. NBFCs should have a strong focus on MSME-centric growth strategy as the MSME
segment still has a substantial funding gap and the opportunities are signicant. Some
of the ways to tap the opportunities include:
a. Cluster-specic product innovation.
b. Proactive sales eort to eectively deliver solutions.
c. Aligning strategy with government initiatives like ‘Make in India’, and devising
innovative ways to channelize funding to the participating MSMEs.
2. A credit protection mechanism like Credit Guarantee Fund Trust for Micro and Small
Enterprises (CGTMSE) should be extended to eligible NBFCs in order to facilitate
meaningful non-collateral lending to MSMEs.
3. NBFCs have to ensure strong systems and processes to ensure healthy credit quality.
They should strive for creating strong internal process for evaluation and monitoring
of credit.
4. As a strong risk mitigation measure, NBFCs should consider incorporating inputs from
external credit rating agencies.
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Mr. Alok Sondhi Co-Chairman, FIDC & MD, PKF Finance Ltd
Mr. Alok Sondhi Co-Chairman, FIDC & MD, PKF Finance Ltd said, ‘I am sure the RBI
would take note of the important issues discussed during the summit deliberations. Non-
Banking Finance Companies especially Asset Finance Companies play a very vital role in
the economic development of the country by helping in Employment Generation, Asset
Formation & ‘Financial Inclusion’. AFCs ll up a crucial gap by serving rural and that class
of masses who are unable to source Bank Finance.
He Suggested that:
Following are the important issues which are threatening the closure of the complete
MSME sector AFCs in view of the latest RBI directions dated 10.11.14 :
1) Credit Rating should not be Compulsory for Small NBFCs (AFCs) (vide Para 5.2):
Out of total existing 241 deposit taking NBFCs (AFCs), 184 are small, having deposits
less than Rs. 10 crores. It is an accepted fact that credit rating agencies follow the same
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model to rate NBFCs irrespective of their size. As a result, obtaining the minimum
Investment grade rating has become practically impossible and unaffordable for
small NBFCs, simply due to their small size & inspite of their satisfactory financialperformance.
These existing small Deposit taking NBFCs should be allowed to raise Deposits without
rating requirement up to 1/1.5 times of their NOF as before from their relatives, friends
and close associates without any public advertisement/agent and also other aordable
debt instruments.
2) Deposit Acceptance limit for Rated Companies should be enhanced and more timebe granted to reduce Deposits (Para 5.3): Rated AFCs holding Deposit in excess of
1.5 times (earlier allowed upto 4 times) of their NOF have been severely aected since
they have not been granted any time to regularize. A period of 3 years is allowed to
regularize the excess Deposit even in case of down grading of Credit Rating below
Investment Grade and even un-rated AFCs have been allowed to renew deposit upto
31.03.16.
It is requested that Rated AFCs be allowed to accept Public Deposits upto 3 times of
their NOF and a period of 3 years be given to the affected Rated AFCs to regularize
their excess deposit in a phased manner. In the mean time they may be allowed to
renew as well as accept fresh Public Deposits so as not to cause disruption in their
business.
3) More time required to increase capital for small NBFCs (vide Para 4): At present,
minimum requirement of NOF for registering new NBFCs is Rs. 2.0 crores, RBI had
allowed existing NBFCs with NOF below Rs. 2.0 crores and above Rs. 25 Lacs, who had
obtained RBI registration as per RBI Amendment Act (1997), to continue operations.
Now, these companies have also been asked to increase their NOF to Rs. 2 crores,
giving only 2 years time. It is our submission that 5 years time should be given instead
of 2 years for Deposit accepting Category-’A’ AFCs (NBFCs) and NOF requirement
for Category-’B’, Non-Deposit taking AFCs, minimum requirement may be retained at
Rs. 25 Lac only.
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4) Reduction in NPA Provisioning Norms (Para-8): Overdue period for classication of
an Asset as Non-Performing Asset has been brought down to 3 months in a phased
manner with the justication “In the interest of harmonization, the asset classication
norms for NBFCs-ND-SI and NBFCs-D are being brought in line with the Banks in a
phased manner”.
Ground realities of AFCs is totally dierent from Banks as they deal mainly with
rural/illiterate/ un-banked segment of society which is mainly self employed besides
deprived of the benets of SARFESI & Debts Recovery Tribunal (DRTs). Installment is
normally delayed due to the peculiar circumstances of the borrowers. Even Nachiket
Mor commiee recommended 365 days for some sectors of AFCs stating that “one size
ts all” approach for provisioning is not desirable.
Realization of default amounts through legal re-course takes years, making NPA
norms more stringent will only harm the cause of ‘Financial Inclusion’ as AFCs
would be very selective in lending thus forcing small borrowers to go to un-regulated
sector/Money Lenders making them vulnerable. The need of the hour is to introduce
measures to expedite recovery in the present times. We request that overdue period
for classification as an NPA be kept at 6 months.
Another big anomaly which needs to be got corrected and we request Reserve Bank of
India to kindly pursue with concerned authorities for allowance of NPA provisioning
under Income Tax as allowed to Banks/Financial Institutions since the same is mandated
by RBI.
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(Revised Regulatory Framework for NBFCs – Issues and
ASSOCHAM’s Suggestions & Recommendations)1. Fund Raising is Increasingly Geing Dicult
a) Acceptance of Public Deposits
RBI has categorically stated that public deposits should be accepted by banks only and as
such deposit acceptance norms for NBFCs have been further tightened.
Statistics show that the number of deposit taking NBFCs and quantum of public deposits
accepted have both reduced drastically over the last few years. Today there are only 240odd deposits taking NBFCs. Acceptance of public deposits by these companies is more due
to their rapport with the depositors and the need to sustain the investors’ base.
In the current scenario there is hardly a case for” soliciting” deposits and instead it is
merely” acceptance” of deposits. Moreover, this serves as a ready and perennial source of
fund raising.
With the increasing regulatory burden on deposit acceptance, these NBFCs are aggressively
trying to tap alternate sources of funding thereby reducing their dependence on public
deposits.
Suggestions:
Opening new avenues of fund raising like creating a “renance window” would go a long way
in reducing and ultimately exiting of NBFCs from deposit acceptance. Financial Institutions like
SIDBI & NABARD could be entrusted with these responsibilities.
b) Restrictions on End Use of External Commercial Borrowings (ECBs)
As per the RBI Circular dated July 8, 2013 Asset Financing NBFCs have been allowed toECBs under the automatic route.
As per para 3(i) of the above said circular, the end use of funds raised through ECBs
by NBFC-AFCs has to be “to nance the import of infrastructure equipment for leasing to
infrastructure projects”.
While we fully appreciate the condition that the funds have to be used for nancing to the
infrastructure sector, the restriction on the type of equipment and the mode of nancing is
what need to be broad based.
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Thus, this unique “wholesaler/retailer” collaboration model between the banks and
NBFCs has ensured increased ow of credit to under-served, credit starved sections of
society, which in turn has helped signicantly in creation of Assets and Wealth in ruraland semi urban parts of the country and at the same time deepening the credit delivery to
undeserved parts of the country.
The partnership between banks and NBFCs has not only helped the banks meet their
statutory priority sector lending target but has also provided NBFCs a regular and
dependable source of funds for onward lending to the priority sectors.
Suggestions:
We request that the priority sector status should be restored. However, RBI may stipulate acap whereby a maximum of 50% of total bank lending to priority sector may be routed through
NBFCs.
2. Asset Classication Norms
Classication of loan NPAs for NBFCs has also been brought in line with banks.
All NBFCs have to classify loans overdue for 90 days as NPAs. In respect of 90 days. Norm
it must be stated that since credit customers are mostly from the unbanked segment, they
may nd it dicult to cope with the 90-day norm. The NPA norms are very relevant for
large corporate. But for business with irregular cash ow is so and who suers a cascading
impact of all the delays in payments this is a constraint. If he does not get payment in a
cycle it will ow in the following cycle.
The Nachiket Mor commiee recommendations were completely in conict with the Usha
Thorat commiee recommendations. He said that you should not have” one-sizets- all”
for provisioning; it depends on the risk prole. For large entities it should be 60-days and
for the person at the boom of the pyramid, it should be even as long as 365-days.
Ultimately, these moves will have an impact on the cost of credit to the unbanked sector
which NBFCs link with credit. The RBI’s rationale is this will be a problem only once,
and says that we can educate the customer and make them pay on time. Notwithstanding
education or accounting the fact is that they need consideration which banks cannot give.
Another justication given by RBI for this change is that NBFCs are free to restructure
the repayment schedule depending upon the borrowers prole and earnings. However
often there are uncertainties in his cash ow/earnings which may arise due to both
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circumstantial and socio-economic reasons. These demand a greater exibility in the
repayment schedule.
It may not be out of context to mention that the KVKamath commiee has been formed
for redening the small-business nance architecture. It is supposed to give the what a
small business nance company should be and what are the various facilitators that the
regulators have to give for enhancing nance to that particular sector.RBI should await the
recommendations.
Suggestions:
The NPA classication norms should be based on the borrowers prole and the assets being nanced
instead or uniform system of asset classication.
3. NBFCS to Be Covered Under The SARFAESI Act
NBFCS to Be Covered under the SARFAESI Act One of the prime objectives of the revised
regulatory framework is to bring parity with Banks. While the asset classication norms
have been revised to be at par with banks, what is lacking are the tools for recovery at par
with banks. Today NBFCs do not have any statutory recovery tool available. They are left
to the mercy of using indirect methods of recovery like ling cheque bouncing cases under
The Negotiable Instruments Act, 1881.
Further, RBI has already enforced a “Framework for Revitalizing of Distressed Assets in
the Economy” on banks and NBFCs in order to check the rapid growth of NPAs.
Suggestions:
It is imperative that Systemically Important NBFCs (NBFC ND SD.and Deposit Taking NBFCs
(NBFC D) should be given coverage under the SARFAESI Act. This was also recommended by the
Usha Thorat Commiee and the Nachiket Mor Commiee.
4. Income Tax Benets Should Also be at Par with Banks
Income Tax Benets should also be at Par with Banks As mentioned above there is a need
to bring parity with banks in maers relating to recovery and taxation also in addition to
parity in regulation.
i) TDS on Interest (Sec 194A) - Request for Exemption
As per Sec 194A of the Act, TDS@10%is required to be deducted on the interest portion
of the installment paid to NBFCs under loan! Finance agreements whereas banking
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companies, LIC, UTI, public financial institution etc. is exempted from the purview of
this Section.
NBFCs carry on the nancing business mostly to retail customers who are in unorganized
sectors which includes large number of individuals, HUFs and SME sectors. Thus, single
point collection of tax by way of advance tax payments from NBFCs would mean greater
convenience to the department than collecting tax through large number of such customers
from all over the country by way of tax deduction at source.
Apart from this, the distinction in the provision puts NBFCs in a disadvantageous position
and creates severe cash ow constraints since NBFCs operate on a very thin spread/ margin
on interest which at times is even lesser than the TDS deductible on the gross interest andreduces the eective interest rate of the NBFCs on the loans given. NBFCs are bank-like
institutions. Therefore, NBFCs should also be given exemption under section 194A.
The additional limitations of the existing system are the following:
a) Follow up with every customer for TDS certicates every quarter (details of which
are mandatory for claiming the same in the I. T. return) becomes almost impossible.
NBFCs have clients who number in thousands and it is practically very dicult to
collect details from everyone.
b) Even if the TDS certicate is issued by the customer, if TDS return has not been led
or not led properly, the credit for such TDS would not be granted to the NBFC as the
details of such TDS would not appear in the NSDL system.
c) Once the TDS credit is disallowed, the NBFCs have a hard time following up with the
customers and the exchequer has a hard time clearing outstanding demands against
NBFCs which, in reality, do not exist.
ii) Tax benets for Income deferral u/s.43D of the Income Tax Act
Section 43D of the Income Tax Act recognizes the principle of taxing income on sticky
advances only in the year in which they are received. This benet is already available to
Banks, Financial Institutions and State Financial Corporations. This benet has also been
extended to Housing Finance Companies by the Finance Act, 1999.
In accordance with the directions issued by the RBI, NBFCs follow prudential norms and
like the above institutions are required to defer income in respect of their nonperforming
accounts. Since the directions are mandatory in nature, NBFCs have to adhere to the
said directions in preparing their accounts. However, the income tax authorities do not
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recognize these directions and tax such deferment of income on accrual basis. It is but
appropriate that the Income tax authorities accept this principle of income deferral in the
case of NBFCs also; who are the only segments of the nancial sector denied this tax benet.It is, therefore, suggested that Sec.43D of the Income Tax Act be extended to include in its
scope NBFCs registered with RBI, as in the case of other institutions.
iii) Allowability of Provision for Non-performing Assets (NPAs) u/s.36(1)(viia) of the
Income Tax Act
NBFCs are now subject to directions of RBI as regards income recognition and provisioning
norms. Accordingly, NBFCs are also compulsorily required to make provisions for NPAs.
Under the existing provisions u/ s.36(1)(viia) in the Income tax Act, provisions for bad
and doubtful debts made by banks are allowed as a deduction to the extent of 7.5% from
the gross total income and 10% of aggregate average rural advances made by them.
Alternatively, such banks have been given an option to claim a deduction in respect of any
provision made for assets classied by the RBI as doubtful assets or loss assets to the extent
of 10% (increased from 5%) of such assets. However, the benets u/ s.36(1)(viia) are not
available to NBFCs. It is appropriate, in all fairness, that the provision (or NPAs made by
NBFCs registered with RBI be allowed as deduction u/s.36(1)(viia) of the Income tax Act.
5. Leverage Ratio of 7 for NBFCs- ND with Assets Size of Less Than Rs. 500 cr.
RBI has acknowledged that small and medium NBFCs (not accepting deposits) do not pose
any substantial risk to the system. Further, they have been exempted from the requirement
of maintaining Capital Adequacy Ratio (CRAR). Under these circumstances capping their
leverage ratio to 7 seems to be imprudent and restrictive.
Further, these companies borrow largely from banks and nancial institutions which in-
turn carry out due diligence on the borrowing NBFCs. This mitigates the risk, if any, to the
banks/Pis to a great extent.
Suggestions:
The leverage ratio of 7 introduced (or NBFC-ND should be withdrawn
We hope that our concerns and suggestions shall be given their due consideration. We look
forward to receiving a positive response from your end which shall facilitate a healthy
growth of the NBFC sector and justify RBI’s role not only as a regulator but also as a
developer of NBFCs.
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