Professional Documents
Culture Documents
Recommendations
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 Governments agenda of financial Inclusion. They have been to
some extent successful in filling the gap in offering 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 financial
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 field 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 (specifically 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 better understanding on NBFCs
role 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
Assocham Corporate Office: 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
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 Committees 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 Governments 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 classification 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 benefits on provisions made against NPAs.
This shall then bring the desired parity with banks and other financial institutions.
Fund raising has increasingly become difficult and challenging, specially, for the large
number of small and medium sized NBFCs.
It is indeed a matter 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
MESSAGE
For a large and diverse country like India, ensuring financial 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 financial 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 financing to small microfinance, the sector has innovated over time and found
ways to address the debt requirements of every segment of the economy. To its credit, the
industry has also responded positively to regulatory efforts to better 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 financing Indias 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 settled to a more healthy
understanding of the risks and rewards of a diverse financial system. For the industry, there are
some costs associated with greater regulations, but the opportunity of being a well regulated
participant in the financial 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 define 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 find it useful.
Shinjini Kumar
Partner, Leader - Banking and Capital Markets
PricewaterhouseCoopers P. Ltd
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
NBFC regulation, on the other hand, deriving broadly from the banking framework, has
been tweaked over time to ensure as good a fit as possible. The other pressure on the
regulatory approach has been the desire to conform to global standards, even when the
Indian economy and the demands of the services led, diverse, informal economy have been
very different from the global counterparts. This tension, between a highly differentiated
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 final 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 perception
of 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 concentration
norms 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 benefit attached to them, create barriers. Diluting the NBFCFactor 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 nondeposit accepting NBFCs that are not systemically important (NBFCs-ND), group holding
companies may have an incentive to continue as NBFCs and not get classified as CIC,
given that the leverage cap is higher for such NBFCs compared to CICs (although defined
differently under the two regulations). The Foreign Direct Investment (FDI) definition of
an NBFC is still not aligned with the RBI definition, causing pain to foreign investors in the
sector specifically in terms of investment activity.
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
2nd N at i o na l S u mm i t
Non-Banking Finance Companies The way forward
23rd January 2015, New Delhi
Programme Agenda
Registration (9:30am- 10:00am)
Inauguration
Keynote Address
NBFCs Perspective
SME Financing Perspective
Inaugural Address by Chief
Guest
Vote of Thanks
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Indicative Topics
Distinguished Speakers
a) NBFCs Promoting Financial Inclusion Mr. Hemant Jhajhria
Partner, PwC
b) NBFCs Converting to Banks/ Small
Ms. Vibha Batra
Finance Banks
Sr. VP, ICRA Limited
c) Realignment of Regulatory Regime
d) NBFCs The Challenge of Leverage
- Recovery
(Coverage under SARFAESI Act)
Mr. R. Pratap
Dy. Chief Finance Officer, SKS Micro
Finance
Question and Answer Session
Lunch (2:00 PM Onwards)
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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.
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
We are planning to set up a kind of a portal where information by various regulators who
are part of SLCC (state level coordination committee) can be put in and we would also
encourage people to file their complaints in that and so that the SLCC is quickly able to
look 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 offices 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-committees 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 Committee on Comprehensive Financial
Services for Small Businesses and Low Income Households popularly known as the
Nachiket Mor Committee, the RBI is moving move away from entity-based regulation to
activity-based regulation by doing away with different categories of NBFCs.
What this would mean is that you dont look at whether the company is an investment
company or an asset finance 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 different 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 finding 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, committees 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 significant role in bringing market
intelligence reports to the notice of the bank on an entity engaged in unauthorised deposit
taking or such other financial activity. The bank has strengthened this market intelligence
so as to gather information quickly and act on it.
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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 benefits against provisions made for NPAs. Empowering NBFCs with recovery tools
like coverage under SARFAESI Act, specially for Systematically Important NBFCs, are of
prime importance.
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Mr. Rakesh Singh Chief Executive officer, Aditya Birla Finance Ltd
Addressing the Summit
He recommended/Suggested that
1. Notification of NBFCs under SARFAESI Act
Unlike Banks and Public Financial Institutions, NBFCs do not enjoy the benefits 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 the
SARFAESI Act by Central Government.
Since the assets of the two financial 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 affects the
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
15
whole NBFC profitability 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 not
permitted 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 matter on Double Taxation issue in Pass Through Certificates 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 Refinance and Credit Insurance Schemes: Opening up of refinance
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 periodicity
of issue as the RBI has not yet come back with any changes to the existing
guidelines.
16
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
17
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 can
enlist 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 benefit of the
MSMEs.
Preferential Risk Weightage for MSME Exposure
Presently, credit quality of loans determines risk weights for capital allocation irrespective
of end-use of loaned funds. In such a scenario differential risk weights based on enduse can be used as a tool to encourage flow 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 flow of credit to
this sector would increase and at the same time be beneficial 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 significant 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 benefits of such extension would be greater
degree penetration of developmental schemes.
18
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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 regulations
will make the NBFC sector structurally stronger, increase transparency and improve their
ability to withstand asset quality shocks in the long run.
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
21
NBFC
Funds
Customer Segments
Products
Service Proposition
Regulations
Liquidity Support
Risk Weights
22
Bank
January 2015
6
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
The recent regulatory changes will have a significant impact on the NBFCs
and will result in a significant change in their operations and future
strategy
Regulatory Change
Impact
Corporate
norms
governance
and
disclosure
January 2015
7
The recent regulatory changes will have a significant impact on the NBFCs
and will result in a significant change in their operations and future
strategy
Regulatory Change
Impact
Introduction of leverage ratio of 7 for NBFCND having assets less than Rs.500 crore
January 2015
8
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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24
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Deposit Acceptance
Maximum deposit acceptance fixed at 1.5 times of NOF, against 4 times applicable to
investment grade NBFCs. Limited number NBFCs to be affect.
NBFCs remain at a disadvantage
While RBI has removed some of regulatory arbitrage BFCs have enjoyed vis--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
effectively 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 repo
window, NBFCs do not enjoy any such benefits.
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 diversified, the credit and market risk on specific
asset classes may be similar for both banks and NBFCs.
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Mr. Saurabh Bhat, Chief Executive Officer, Ambit Finevest Pvt Ltd.
He Highlighted Data Analysis
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
NBFC
NBFC-ND-SI
ND SI had a average Leverage ratio of 3
3.0
0 as on March 14
14 with total
assets of 12.7 lac crore and total advances of 8.45 lac crore.
As on March14, 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%).
In
I developed
d
l
d countries
t i thi
this ratio
ti iis >50%
27
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
PRIVATE & CONFIDENTIAL. NOT FOR CIRCULATION
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
given
i
PSL requirements
i
t tto bbe mett bby M
Marchh 31st.
Govt (State & Central) owned NBFCs form a significant part of total
NBFC assets (>35%) and are exempt from some prudential norms (RBI
has raised red flag on the issue)
They are levered 6.4x (industry leverage of 3x) and have bank borrowings of
over 38,500 cr
gold Finance
NBFCs
Sme focused
NBFCs
Wholesale
Lending
NBFCs
55%
(10%-100%)
43%
(36%-52%)
47%
(32%-93%)
HFCs
84%
(82%-91%)
53%
(43%-63%)
High
Medium
High
High
Medium
Low to Medium
High
medium
medium to
High
medium
medium
Low to med
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
0.5%-6%
1.8%
3.3%
0.7%
1.6%
2.1%
Concentration in Portfolio
Low
Low
Low
Low
Medium
High
V High
Low to Medium
Medium to
High
Low
Medium
Low to Medium
medium
Low to
medium
medium
Low
medium
medium to High
High
medium
medium
medium
Low
Nil
Leverage
50%
(20%70%)
28
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
mFIs
gold
Finance
NBFCs
Asset
Finance
NBFCs
HFCs
Sme ffocused
d
NBFCs
Wholesale
Lending
NBFCs
62%
56%
60%
31%
58%
51%
operating efficiency
Low
medium
Low
High
medium
medium to
High
Shortt Term
Sh
T
Borrowings
B
i
as % off
Total Borrowings
64%
74%
44%
28%
35%
50%
38%
7.4%
5%
4.2%
12%
7.1%
ALM Surplus
S l (Deficit)
(D fi it) iin < 1 year
category
7.7%
21%
2.3%
(6%)
5%
(0.3%)
overall Liquidity
High
medium
medium
high
medium to
High
Low to medium
8%
12%
5%
17%
18.8%
(14.4%(14
4%
27.3%)
16%
(9-19.5%)
15.0%
(10-19.6%)
22%
(15.5%-32%)
R e
Roe
14%
18.3%
(16.7%-20.2%)
9.9%
(5.5%-14%)
Banks
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
g Cost as compared
p
to p
public NCDs and largely
g y 3-4 y
year tenor
High
Rating Agencies - Difficult to get a >A+ level long term rating without
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
12
29
I t
Interest
t rates
t seen tto soften
ft by
b 100-150
100 150 b
bps iin nextt 12 mths
th
Would impact NBFCs in direct competition with banks like retail AFCs, HFCs , Gold Loan NBFcs
(margin squeeze)
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
market rates of second hand re-possessed vehicles would improve reducing losses
30
13
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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31
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. NonBanking 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 fill 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
32
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
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 financial
performance.
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 affordable
debt instruments.
2) Deposit Acceptance limit for Rated Companies should be enhanced and more time
be 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 affected 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.
Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
33
Ground realities of AFCs is totally different from Banks as they deal mainly with
rural/illiterate/ un-banked segment of society which is mainly self employed besides
deprived of the benefits of SARFESI & Debts Recovery Tribunal (DRTs). Installment is
normally delayed due to the peculiar circumstances of the borrowers. Even Nachiket
Mor committee recommended 365 days for some sectors of AFCs stating that one size
fits 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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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
Thus, this unique wholesaler/retailer collaboration model between the banks and
NBFCs has ensured increased flow of credit to under-served, credit starved sections of
society, which in turn has helped significantly in creation of Assets and Wealth in rural
and 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 a
cap whereby a maximum of 50% of total bank lending to priority sector may be routed through
NBFCs.
2. Asset Classification Norms
Classification 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 find it difficult to cope with the 90-day norm. The NPA norms are very relevant for
large corporate. But for business with irregular cash flow is so and who suffers a cascading
impact of all the delays in payments this is a constraint. If he does not get payment in a
cycle it will flow in the following cycle.
The Nachiket Mor committee recommendations were completely in conflict with the Usha
Thorat committee recommendations. He said that you should not have one-sizefits- all
for provisioning; it depends on the risk profile. For large entities it should be 60-days and
for the person at the bottom 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 RBIs 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 justification given by RBI for this change is that NBFCs are free to restructure
the repayment schedule depending upon the borrowers profile and earnings. However
often there are uncertainties in his cash flow/earnings which may arise due to both
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
companies, LIC, UTI, public financial institution etc. is exempted from the purview of
this Section.
NBFCs carry on the financing 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 flow 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 and
reduces the effective 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 certificates 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 difficult to
collect details from everyone.
b) Even if the TDS certificate is issued by the customer, if TDS return has not been filed
or not filed 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 benefits 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 benefit is already available to
Banks, Financial Institutions and State Financial Corporations. This benefit 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 financial sector denied this tax benefit.
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 classified by the RBI as doubtful assets or loss assets to the extent
of 10% (increased from 5%) of such assets. However, the benefits 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 financial institutions which inturn 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 RBIs role not only as a regulator but also as a
developer of NBFCs.
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward