FIDC September 2018Fidcindia.org/wp-content/uploads/2019/09/FIDC-NEWSLETTER-VOL-10-NO-2.pdfdrivers for the growth of NBFCs going forward. Driving Financial Inclusion, within a regulatory

VOLUME – 10 NO. – 2 JULY - SEPTEMBER – 2018

FIDC News • 1

F i n a n c e

I n d u s t r y

Development

C o u n c i l

AT A GLANCE EDITORIAL COMMITTEE

Recognisiton By Leading International BodiesThe impressive growth of the NBFC sector over the last few years has not only ensured recognition by the regulator and the government but also leading international body like International Monetary Fund (IMF). IMF in their report on The Financial System Stability Assessment (FSSA) for India, issued in December 2017,have made the following important observations/ statements relating to NBFCs:1. The Indian financial system is undergoing a gradual structural shift, with a greater role for nonbank intermediaries and higher recourse to market funding for large corporates.2. The financial system is diversifying, with market shares of nonbank intermediaries (notably, mutual funds and nonbank financial companies—NBFCs) and private sector players increasing gradually—albeit from a low base.3. Risks from NBFCs are limited, but concentrations and growing reliance on debt financing should be monitored closely4. The entry of foreign capital could be enhanced by allowing the application of the SARFAESI regime to all investors acquiring secured claims. Loosening the NBFCs’ concentration limit on investment into one target would support future investment. Tax rules and practices could also be enhanced to ensure tax neutral treatment of NPA restructuring.The plenary session was addressed by the CGM DNBS RBI Mr Vijayakumar, who stressed the need for NBFCs to grow responsibly within the regulatory structure and improvement of risk management skills in the industry to ensure sustainable growth and development of the sector.All in all, it was a very fruitful and professionally rewarding seminar. Participants particularly appreciated the topical agenda, quality of

speakers and the overall arrangements. The excellent work put in by the Secretary General FIDC, and Chairman IMC’s NBFC Committee Mr M a h e s h T h a k k a r w a s acknowledged by one and all.During the year, India’s sovereign rating was upgraded by Moody’s. Moody’s have stated that one of the important factors for this rating upgrade has been the government’s effort to formalize economic activity. NBFCs have played a significant role in this effort by providing financial services to the unbanked segment of the population in the rural, semi urban and urban areas across the country. This has enabled these people to move away from the money lenders and become a part of the formal economy. Economic Survey For 2017-18

FOR PRIVATE CIRCULATION

MR. RAMAN AGGARWAL ...Chairman, FIDC

MR. K. V. SRINIVASAN ... Co-Chairman

MR. T. T. SRINIVASARAGHAVAN

MR. ALOK SONDHI

MR. MAHESH THAKKAR ... Director General

MR. MUKESH GANDHI

MR. N M MUKHI ... Editor

NBFC Sector: Outlook, Challenges and OpportunitiesHiring activity in NBFC sector likely to go up by 30-40% in 1 year: ExpertsImplications of Indian Accountancy Standard on NBFCs.........................................................................by Manish ShethRegulatory PerimeterFarmer income grew 37 percent between FY13 and FY16 : NABARD SurveyNew Credit Guarantee Scheme For NBFCsRegulatory Agenda For NBFCs 2018-19 How Have MSME Sector Credit Fared?............................................................................- Harendra Behera, Garima WahiNBFCs eye stressed SMEs for lending opportunities.................................................................................- Malvika JoshiNBFCs – The Leaders In BFSI Landscape..........................................................................................- Rashi Aditi GhoshMovesLegal EagleSEBI MOVESPeriscopeFIDC's Growth Promoting Knowledge SharingFIDC In Action

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NBFC Sector: OUTLOOK, CHALLENGES AND OPPORTUNITIESDuring a brief span of 14 years FIDC has with ceaseless efforts and imaginative programmes with Regulatory and other Government Authorities and with all concerned /related agencies like banks, credit rating agencies, Indian Banks Association, Society for Indian Automobile Manufacturers, Chambers of Commerce and Industries as well as International agencies and media has successfully created new positive image for NBFCs. It has earned the respect as a growing, dynamic, healthy and nation building sector caring for down trodden with financial inclusion endeavors. This has brought a respectful place for the NBFC Sector in the mainstream of financial community of India, entrepreneurial communities and Government authorities facilitating rapid strides for the sector in recent years.

Raman AggarwalChairman, FIDC

K V SrinivasanCo-Chairman, FIDC

Mahesh ThakkarDirector General, FIDC

Ø The flow of non bank resources to the corporate sector, which includes bond market borrowing and lending by NBFCs has increased by 43% from April t o D e c e m b e r 2 0 1 7 substituting in part for weak bank credit.Ø NBFCs bring in diversity and efficiency to the financial sector and make it more responsive to the needs of the customers.

Enhanced supply of export credit from private banks, foreign banks and NBFCs could offset the potential adverse impact on trade credit.

Disintermediations underway from bank to non-bank finance are inevitable, given the circumstances but need to be monitored carefully.Ø NBFCs were the largest net borrowers of fund from the financial systemØ 35% of the pension funds exposure was to NBFCsFinancial Intelligence Unit (FIU) India, Ministry of Finance, issued a list of 9500 (appx) NBFCs which they coined as “High Risk”. This sent ripples through the NBFC sector and drew attention of the media. However, on our follow up discussion with FIU, it was clarified that the only reason for issuing the list was non-registration of those NBFCs with FIU India in compliance to The PML Act, 2002. Based on our discussion with FIU, the term “High Risk” was considered inappropriate and later changed to “Non-Compliant”.

Resilience, flexibility and innovative thinking were the key to the NBFCs not only surviving in a challenging environment but also efficiently filling the credit gaps arising out of the increasing stress in the banking system. These efforts were aptly supported by aggressive refinancing provided by domestic financial institutions like NABARD and SIDBI. NABARD went a step further in refinancing small and medium NBFCs through its subsidiaries NABSAMRUDDHI and NABKISAN.The increasing role of technology by way of Blockchain and Artificial Intelligence has suddenly brought the Fintech companies in limelight. NBFCs are once again showing greater acceptability and adaptability to this new technology, which is likely to play a key role going forward. The demand for consumer durables, including automobiles, has been on the rise. Government of India is giving a big thrust to infrastructure development, especially, roads and highways. Further, the government is clearly focused on the growth and development of MSMEs in order to promote and encourage entrepreneurship with the motive of creating “job providers” instead of “job seekers”. All these developments shall be the drivers for the growth of NBFCs going forward. Driving Financial Inclusion, within a regulatory regime which is harmonized with that for banks and other FIs, NBFCs are now better geared to contribute in a big way in realizing the Hon’ble Prime Minister’s vision of a New India by

th2022. [Source: FIDC 14 Report for 2017-18]

RBI’s Financial Stability Report

Innovations and efficiency: key to the NBFCs big thrust

Implications of Indian Accountancy Standard on NBFCs

Implications of Indian Accountancy Standard on NBFCs

By Manish Sheth

The adoption of Indian Accounting Standard – (IndAS) has catapulted India to the centre stage of high quality and transparent financial reporting. It will also ensure comparability between the financial statements in accordance with the global accounting standards and more importantly, it will synchronize the financial statements to economic reality. While the IndAS implementation has been deferred for banks by a year, the journey of convergence initiated by NBFC's has already begun. Some of the key accounting implications to NBFC's are as under.

As against existing methodology of rule-based provisions for credit losses, IndAS expects NBFCs to follow an expected credit loss model (ECL model), wherein the loan loss provision is calculated on the basis of the loan book's historical loss experience and future expected credit loss depending on the credit quality assessment. The introduction of IndAS may lead to a significant increase in the charge to Profit and Loss account for the NBFCs having higher track record of past NPAs. Newly-formed companies will find the process of adoption of IndAS quite challenging as they don't possess historical credit risk data and may have to rely on the industry data.The model should not only build the historical data but should also consider the forward-looking information based on the customers expected recovery patterns, time of recovery, probability of default (PD) and recovery expected from collaterals (LGD). Variety of ingredient used by NBFCs while following ECL model poses a challenge to the users in terms of its analysis and benchmarking performance amongst the peers.

Commercial understanding at the time of any lending is always based on the concept of XIRR, which gets split between upfront fees and the yield. Under Indian GAAP, fees were getting accrued to P&L upfront whereas yield was accruing over the tenure of the loan. Under IndAS, accounts will now start reflecting the commercial understanding and hence fees generated on loans will have to be amortized over the life of the loan. This will result in a temporary deferral of revenue recognition. For the NBFCs, it means a negative impact on its profits and hence, in its net worth. Profit and Loss account will get normalize over the period.

On the date of transition, all financial assets have to be recorded in the balance sheet at fair value. The impact of fair valuation of financial assets, post initial recording in the balance sheet may have to be accounted through the statement of profit and loss (FVTPL). FVTPL could have a positive or a negative impact on the profitability of a company. More importantly, the mark to market gain or losses as on every reporting period will result in a volatility in the Profit and Loss account.

Some of the NBFCs have formed joint ventures (JVs) with partners. Most of them are having a shareholders agreement covering a variety of rights including veto over certain matters. These may be in the nature of protective rights. Under IndAS, one will have to evaluate the definition of “Control” based on the agreement between the partners. These may lead to some extreme situations - either consolidation of the entire balance sheet and P&L of a JV or de-consolidation of the same, as the case may be. These, in fact, will change the entire top line or the balance sheet size of an entity on a consolidated basis. In some of the extreme situations, even some of the SPVs will have to be treated as subsidiaries and need to be consolidated for e.g. securitizations trusts floated by Asset Reconstruction Companies (ARCs), over which it has “control”.

As opposed to the existing requirement of segmenting the operations of the group based on similarities of “risks and rewards”, IndAS expects financials to disclose the segments based on the management's evaluation of financial information for allocating resources and assessing performance. This is a welcome change, as it ensures that user of financial information views the exact information, which chief operating decision maker (CODM or management) uses for the purpose of strategy formulation and resource allocation.

Overall, it's a welcome change but it comes with lots of challenges to the NBFCs as they will have to muddle with certain non-rule based management estimates. It also poses challenges to the entire community of the users of financial information like regulators, investors, analysts, credit rating agencies and lenders as they will have to analyse information, recreate models and take decisions based on the non-conventional reporting. [Economic Times, July 30. Manish Sheth is Group CFO at JM Financial]

Expected Credit Loss (ECL)

Amortization of fee income under effective interest rate (EIR)

Fair value implications on financial assets

Consolidation of Subsidiaries

Segment reporting

Conclusion

FIDC News • 2FIDC News • 2

Hiring activity in NBFC sector likely to go up by 30-40% in 1 year: ExpertsHiring activity in the NBFC sector is likely to expand by up to 35-40 per cent in the next 12 months driven by rising innovation and growth, according to industry experts. The ability of NBFCs to tap ‘unbanked’ customer base at a time when the banks are facing headwinds in coming out of the NPA mess is driving the growth in the sector, they explained. Experts see increased hiring in tier-II cities for roles in sales, collection underwriting and risk. TeamLease head, recruitment services, Ajay Shah said, NBFCs are in a sweet spot of growing consumer demand. “Ability to tap the unbanked customer base is the key reason behind this growth. Rising innovation and growth in the sector has resulted in new business models like Peer to Peer (P2P) lending platforms.”The demand for customer service, operations and credit and collection is quite high, where the focus is on getting quality people, he said. Other key segments that would be in focus would be information security and cybersecurity, he added. Echoing the view, specialist staffing company Xpheno co-founder Kamal Karanth said NBFCs will create around 2,50,000-3,00,000 jobs approximately. “Most of these positions exist in sales, collections, underwriting and risk. There has been an increase in demand for technology professionals by some NBFCs too. Some roles that have opened up are CTOs, Digital marketing, App development, UI/UX developers,” he added. [Business Standard/PTI, Aug. 26]

FIDC News • 3

RBI NOTIFICATIONS & CIRCULARS :Diversification of activities of Standalone Primary Dealers-Foreign Exchange Business: RBI/2018-2019/27; D N B R ( P D ) CC.No.094/03.10.001/2018-

19; 27.7.2018. [All Standalone Primary Dealers]

Co-origination of loans by Banks and NBFCs for lending to priority sector: RBI/2018-19/49; FIDD.CO.Plan.BC.08/04.09.01/2018-19; September 21, 2018; [The Chairman / MD/ CEO All Scheduled Commercial Banks (excluding RRBs & SFBs) and All NBFC-ND-Sis]

As part of the policy on co-origination of loans by banks and NBFCs to the priority sector announced in August Credit Policy, the RBI releasing its guidelines on Sept. 21 said NBFCs can recommend to banks proposals as found relevant for joint lending, with each being given the flexibility to price their part of the loan exposure. As per the RBI’s directive on co-origination of priority sector loans, a minimum of 20 per cent of the credit risk by way of direct exposure will be on the NBFC’s books till maturity and the balance will be on the bank’s books. The move is aimed at leveraging the reach of NBFCs to help banks meet their priority sector lending targets, leveraging the reach of NBFCs.Under co-origination, the RBI expects the benefit of low-cost funds from banks, and lower cost of operations of NBFC, to be passed on to the beneficiary through a blended rate or weighted average rate. The NBFC has to give an undertaking to the bank that its contribution towards the loan amount is not funded out of borrowing from the co-originating bank or any other group company of the partner bank.Under the guidelines for co-origination of priority sector loans by all scheduled commercial banks (excluding regional rural banks and small finance banks) and NBFC-ND-SIs (non-banking financial companies - non-deposit taking - systemically important), based on the respective interest rates and proportion of risk sharing, a single blended interest rate should be offered to the ultimate borrower in the case of fixed rate loans. In the scenario of floating interest rates, a weighted average of the benchmark interest rates in proportion to the respective loan contribution should be offered.The lenders will be entitled to independently assess the risks and requirements of the applicant borrowers. The loan agreement would be tripartite in nature, wherein, both the bank and the NBFC will be parties as lenders to the loan agreement with the customer. The bank and the NBFC will open an escrow type common account for pooling their respective loan contributions for disbursal as well as to appropriate loan repayments from borrowers, without holding the funds for usage of float.

Regarding loan balances, the NBFC/bank will maintain individual borrower’s accounts and should also be able to generate and issue a single unified statement to the customer, through appropriate sharing of required information with the bank/NBFC.With regard to grievance redress, any complaint

RBI announces norms for co-origination of priority sector loans by banks, NBFCs

Information sharing:

REGULATORY PERIMETERREGULATORY PERIMETERregistered by a borrower with the NBFC/bank will also be shared with the bank/NBFC. In case the complaint is not resolved in 30 days, the borrower would have the option to escalate the same with the concerned banking/NBFC ombudsman. [Business Line, Sept. 21]

RBI deputy governor Viral Acharya said there is a need to enact a new law to bring the public credit registry (PCR) under its purview. A new PCR Act will ensure transparency in data acquisition and dissemination through access rights by various users, Acharya said. “It is desirable to have a special comprehensive legislation overriding the prohibitions contained in all other legislations on sharing of information required for PCR. Otherwise, all such legislations will have to be amended separately, providing an exemption for sharing of information with PCR,” said Acharya. [Live Mint, Aug 20]

The RBI has indicated that amendment to the relevant statute is on cards for facilitating access of credit bureaus. However, no timeline has been indicated for making amendment. The RBI has stressed on the importance of credit bureaus to improve financial inclusion, especially after it decided to set up a Public Credit Registry (PCR) in April. Deputy Governor N S Vishwanathan said the RBI has taken several measures to strengthen credit information companies (CIC). “Some of these are in terms of expanding the database that credit bureaus require, certain legal amendments, which is a work in progress,” Vishwanathan added while addressing a national banking summit.The amendment is expected to enable credit information bureaus to access information from utilities like telecom and GSTN. [Business Standard, Aug. 22]

The RBI has cancelled licences of 368 NBFCs in the six months ended June, more than double the number of such cancellations in the whole of 2017, for failing to meet regulatory norms. The move is being seen as an attempt to clean up the sector, which has more than 11,402 entities, of which 222 are non-deposit taking NBFCs.Industry experts say a majority of the licences belong to NBFCs, which had failed to meet RBI’s requirement of net owned fund of Rs. 2 crore. In fact, some NBFCs had surrendered their certificates of registration.According to the amendment in the RBI Act of 1997, the central bank had mandated the minimum capital requirement for NBFCs at Rs. 25 lakh. The requirement was increased to Rs. 2 crore for new NBFCs. However, the old ones were allowed to continue with the earlier capital requirement until RBI issued a revised regulatory framework in 2014. Under this, it had set a deadline for all NBFCs to reach the minimum net owned fund of Rs. 2 crore before 31 March 2017.“There are still a large number of NBFC that have not been able to reach that level, and RBI is cancelling their registrations. However this should not be seen as any risk to the sector,” said Raman Aggarwal, chairman, Finance Industry Development Council. “Most of these NBFCs with a net owned fund of less than Rs. 2 crore are not economically viable.” [Live Mint Aug. 8]

Enact new law to enable public credit registry, says RBI’s Viral Acharya

Credit Bureaus may soon be allowed access to data from utility providers

RBI cancels licences of 368 NBFCs in first half of 2018

Use of Financial Instruments:

Regional Disparities :

Sources of earnings :

Incidence of indebtedness :

More than 88% of rural households now have bank accounts, but only about 24% of them use ATM services at least once in three months, according to a survey by Nabard. Just 7.4% of these households use debit or credit card and 7.5% use cheque to make a payment at least once in three months. According to the All India Financial Inclusion Survey (NAFIS), the annual income of farmers increased 37.4% between 2012-13 and 2015-16. In 2015-16, the annual income was Rs. 1,07,172 while the NSSO’s last survey (in 2012-13) had put it at Rs. 77,977. The average monthly income of India’s rural households was Rs. 8,059 in 2015-16 while the average expenditure stood at Rs. 6,646, leaving them with surplus of Rs. 1,413 to save or invest. For farmer households which invested more than Rs. 10,000 in the year, 60% was funded through borrowings from either institutional or informal source.

Among states, Punjab, Haryana and Kerala are the top three having average monthly income of Rs. 23,133, Rs.18,496 and Rs. 16,927, respectively, for rural households. Uttar Pradesh is at the bottom at Rs. 6,668 per month. Due to high expenditure vis-a-vis income in Andhra Pradesh, a rural household gets an average surplus of measly Rs. 95 a month. After meeting all expenditure (as defined by the NSSO which excludes expenses like purchase of land, construction of building, interest and insurance premium payment), a family in Bihar retains Rs. 262/month. For Uttar Pradesh, the figure is Rs. 315/month. The Nabard survey was conducted in 2016 in 245 districts of 29 states covering 40,327 households. The survey had considered 2015-16 as the reference year and all data are pertained to that year, Nabard said.

Contrary to the perception that a large number of rural population depends on agriculture, the survey found 48% of rural families are agricultural households. A farm household has been defined on the basis of a family earning over Rs. 5,000 (value of produce) from agricultural operations. According to the NAFIS, only 12.7% of farmer households have income from one source while the remaining families earn from multiple sources. In contrast, 79.4% of non-agricultural households in rural areas have income from a single source. Agricultural households earned 35% of their income from cultivation while earnings from wage contributed 34%. Other sources of income include government/private service (16%), livestock (8%) and other activities (7%). A farmer family earned 23% more (at Rs. 8,931/month) than a household dependent on non-agricultural income (Rs. 7269/month), the survey said.The increase in income of agriculture household despite decrease in the average landholding is significant as it underlines the decrease in absolute poverty, said NITI Aayog vice-chairman Rajiv Kumar, who released the survey. The farm income will further increase if they are able to develop value chain and are provided with marketing facilities at farm gate, he said. The survey results prove that the vision of doubling of farmers’ income is achievable.

measured as proportion of households reporting outstanding debt on the date of the survey, is 52.5% for agricultural households and 42.8% non-agricultural households. The average amount of outstanding debt for indebted agricultural households was Rs. 1,04,602 as on the date of the survey while outstanding debt of a non-agricultural household was lower at Rs. 76,731. [FE Bureau, Aug. 17]

Farmer income grew 37 percent

between FY13 and

FY16 : NABARD Survey

NEW CREDIT GUARANTEE SCHEME FOR NBFCS

Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) has been set up jointly by Ministry of MSME, Government of India and Small Industries Development Bank of India (SIDBI) to catalyze flow of institutional credit to Micro & Small Enterprises (MSEs). Over the past 17 years, CGTMSE has been instrumental in providing guarantee cover amounting to Rs. 1.50 lakh crore covering 30 lakh guarantees extended by eligible Member Lending Institutions [MLIs] to MSEs. Pursuant to announcement made by the Hon’ble Prime Minister, CGTMSE has framed a new Credit Guarantee Scheme (CGS-II) for NBFCs as a measure towards hassle free access to credit by MSE sector.CGTMSE has revised guidelines for NBFCs, pursuant to FIDC Meetings with them. The members are requested to take maximum advantage of this Guarantee Scheme.

CGTMSE have accepted the demand for covering trading sector – for loans up to Rs.1 cr Trust now has the right to extend guarantee to even loans with secondary collateral. Scheme also covers unsecured loans.

Effective interest rate cap is now for the Trust to decide.One of the conditions is that the member lending institution (MLI) has to do internal rating of the borrower and that rating should be of

“investment grade” – this investment grade is not defined in the scheme.75% of the guarantee amount will be paid within 30 days of claim and balance on conclusion of recovery proceedings by the NBFC.

There is a “claw back” if the Trust finds deficiency in credit appraisal by the NBFC.Any recovery of the defaulted loan must be shared pari passu by the NBFC with the Trust within 30 days of receipt – else 18% interest will

be charged.Securitisation/sale of guaranteed loans must need Trust approval and the buyer must be an MLI.

FIDC proposes to seek capital charge waiver from Reserve Bank of India – CGTMSE has supported us and has written to RBI.

IMPORTANT TAKEAWAYS:

For further details, please visit www.cgtmse.in

Systemically Important NBFCs; Profit making for last three years;Type of NBFCs

BBB & aboveCredit Rating

Experience of minimum 5 years having MSE loan portfolio of at least Rs. 100 croreLending to MSEs

Less than 5%Net NPA Level

Over 90% for the MSE portfolioAverage Recovery Ratio Features of CGS-II

Portfolio based Guarantee Each portfolio built-up would be on quarterly basisGuarantee Type

New and existing Micro and Small Enterprises [MSE] in manufacturing, service andretail trade segment.

Eligible borrowers for coverage under CGS II

Collateral free and third party guarantee free loansPartially collateralised loansUnsecured business loans

Coverage

Upto 200 lakh extended to the MSEs (For retail trade it is upto Rs. 100 lakh)Loan amount

Upto 75% (option of 50% (or) 60 % (or) 75% available) of the amount in defaultExtent of coverage

Fulfilling RBI guidelines or any other rate as prescribed by the Trust from time to time.Interest Rate cap on loans

Eligibility Criteria

Salient Features of Credit Guarantee Scheme for NBFCs (CGS-II)

FIDC News • 4

REGULATORY AGENDA FOR NBFCs 2018-19 Though implementation of Indian Accounting Standards (Ind AS) in case of SCBs has been postponed for one year due to lack of necessary legislative amendments, NBFCs with net worth of Rs.5 billion and above are required to implement Ind AS from April 1, 2018.

VI.43 NBFCs have evolved as an important alternate source of credit in the Indian economy. The Department of Non-Banking Regulation (DNBR) is entrusted with the responsibility of regulation of NBFCs.

VI.44 The Reserve Bank issued the NBFCP2P Directions in October 2017. While the online platform itself does not undertake any financial activity, it provides a platform for credit intermediation, bringing together borrowers and lenders. Regulations have been framed to ensure customer protection, data security and orderly growth.

VI.45 With the objective of bringing the outsourced activities of NBFCs within the regulatory purview as well as ensuring sound and responsive risk management practices by NBFCs, the Reserve Bank issued directions to NBFCs on managing risks arising from outsourcing activities associated with financial services provided by them.

Non-Banking Financial Companies (NBFCs): Department of Non-Banking Regulation (DNBR)

Agenda for 2017-18: Implementation Status Peer to Peer Lending Platforms (NBFC-P2P)

Outsourcing Guidelines for NBFCs

Prudential Regulation of Government NBFCs

Other Initiatives

VI.47 Government-NBFCs cater to various social obligations and, in the process, their overexposure to certain sectors may have adverse financial implications depending upon the scale of operations. Further, as entities raising public funds, they have high level of interconnectedness with the formal financial sector. In order to strengthen and ensure ownership-neutral regulations, government-owned NBFCs will now be required to adhere to the Bank’s prudential regulations in a phased manner.

VI.48 Systemically Important Non-Deposit taking Non-Banking Financial Companies (NBFCND-SIs) have been allowed to undertake Point of Presence (PoP) services for National Pension Scheme (NPS), subject to certain conditions.VI.49 In order to promote investments in infrastructure by Systemically Important Core Investment Companies (CIC-ND-SI), CIC-ND-SIs have been permitted to hold Infrastructure Investment Funds (InvIT) units only as sponsors provided such exposure does not exceed the minimum holding and tenor limits as prescribed under SEBI regulations for a sponsor. These holdings will be reckoned as investments in equity shares in group companies, for the purpose of compliance with the norms for investment in group companies applicable to CIC-ND-SI.

[Continued on Page-11]

How Have MSME Sector Credit Fared?Harendra Behera

Garima WahiAssistant Adviser

Research Officer Monetary Policy Department, RBI.

Credit growth in the MSME sector had started decelerating even before demonetisation, and declined further during the demonetisation phase. In contrast, GST implementation does not seem to have had any significant impact on credit. Overall, MSME credit and especially micro credit to MSMEs, including loans by banks and NBFCs, shows a healthy rate of growth in recent quarters. During the quarter April-June 2018, bank credit to MSMEs increased on average by 8.5 per cent (y-o-y), mirroring the level of growth during April-June 2015, with credit to micro and small enterprises growing at an even healthier rate.

Contribution of MSMEs

Credit to MSME Sector

Globally, the Micro, Small and Medium Enterp¬rises (MSMEs) segment plays a crucial role in employment generation and contributes significantly to overall economic activity. In India, the MSME sector constitutes a vast network of over 63 million units and employs around 111 million people. The share of MSMEs in overall GDP is around 30 per cent (GOI, 2018). The MSME sector accounts for about 45 per cent of manufacturing output and around 40 per cent of total exports of the country. However, the sector faces operational problems due to its size and nature of business, and is, therefore, relatively more susceptible to various shocks to the economy. MSMEs largely operate in the informal sector and comprise a large number of micro enterprises and daily wage earners.The MSME sector has witnessed two major recent shocks, viz., demonetisation and introduction of goods and services tax (GST). For instance, contractual labour in both the wearing apparel and gems and jewellery sectors reportedly suffered as payments from employers became constrained after demonetisation (RBI, 2017). Similarly, the introduction of GST led to increase in compliance costs and other operating costs for MSMEs as most of them were brought into the tax net. In a recent survey conducted by SMERA Ratings Ltd. (SMERA, 2017), more than 60 per cent of respondents felt that their systems were not ready for the new tax regime. A study by Small Industries Development Bank of India (SIDBI) indicates that post-demonetisation and post-GST introduction, the relative credit exposure initially declined for most MSMEs but had recovered fully by March 2018 (SIDBI 2018a, SIDBI 2018b). During demonetisation, many smaller districts, which were witnessing higher growth, felt greater shock compared to larger centres.

Despite significant contribution to economic growth, MSMEs face several bottlenecks inhibiting them from achieving their full potential. A major obstacle for the growth of MSMEs is their inability to access timely and adequate finance as most of them are in niche segments where credit appraisal is a major challenge. According to International Finance Corporation (IFC) estimates, the potential demand for India's MSME finance is about US$ 370 billion as against the current credit supply of US$ 139 billion, resulting in a finance gap of US$ 230 billion (equivalent to 11 per cent of GDP) in comparison to a finance gap of US$ 5.2 trillion (19 per cent of GDP) for the group of developing countries (IFC, 2017a; 2017b).MSMEs face constraints in accessing credit through formal channels because of their nature of operations. About 97 per cent of MSMEs operate in the informal sector. In value terms, the share of informal sector in gross output of MSMEs is about 34 per cent. As per National Accounts Statistics 2012, the share of informal (unregistered) sector

manufacturing MSMEs in total GDP is estimated at around 5 per cent. A large number of these firms depend on informal channels because of easy accessibility and ava i lab i l i ty o f c red i t w i thout any documentation hassles and mortgages, even though the rate of interest on such loans may be very high. The challenges faced by MSMEs in accessing finance are due to lack of comprehensive formal documentation relating to accounts, income and business transactions. As a result, loans are provided to the MSMEs mainly through appraisal of their collaterals rather than assessing their true business potentials (Ayadi and Gadi, 2013). Further, banks do not trust start-ups, view such loans as risky and thus do not prefer extending finance to MSMEs (Biswas, 2014).2 All these observations suggest that there could be potentially large long-run benefits from formalisation of MSMEs.

The year-on-year (y-o-y) growth of bank credit to the MSME sector decelerated gradually during 2015 to 1.6 per cent in April 2016 before exhibiting some recovery till October 2016 . The deceleration in credit growth during 2014-16 was partly due to overall slowdown in economic activity, rising non-performing assets (NPAs) and reclassification of food and agro-processing units from MSME category to agriculture sector (as per the revised priority sector lending guidelines, issued to banks in April 2015). Credit growth fell significantly and turned negative during November 2016-February 2017. Therefore, it seems that demonetisation accentuated the slowdown in credit growth, particularly to industrial sector. However, the growth in credit to the MSME sector recovered after February 2017 to reach an average of 8.5 per cent during January-May 2018. This slowdown in bank credit to MSMEs beginning late 2016 and its recovery since mid-2017 broadly mirrors the trends in overall bank credit. Furthermore, micro-credit i.e., small loans amounting to less than Rs. 10 lakhs (including credit by banks, non-banking financial companies (NBFCs) and others), fell the most during demonetisation but has been growing rapidly since September 2017 (Chart 1).

Within the formal financial sector, MSMEs receive loans mainly from banks (around 90

Evolution of MSME Credit

FIDC News • 5

per cent). The share of credit provided by banks has declined since September 2016 partly reflecting the risk aversion of banks due to deterioration in their asset quality (Chart 2). In contrast, loans extended by NBFCs to MSMEs grew strongly at an annual average rate of 35 per cent during the same period and their share in total credit almost doubled from around 5.5 per cent in December 2015 to around 10 per cent by March 2018. Lower NPAs of NBFCs in MSME credit as compared to banks might have helped them in extending credit to the sector.

The share of credit extended to MSMEs in overall bank credit declined steadily to around 14 per cent by end-March 2018 from about 17 per cent in 2007; this could partly be due to over-lending to large corporates (now stressed) in the second half of 2000s. Additionally, within the credit to industrial sector, the share of credit to medium enterprises has dropped significantly as compared to the share of micro and small enterprises. While the share of public sector banks (PSBs) in overall bank credit has fallen since 2015, it has increased for private sector banks (PVBs).NPAs of both PSBs and PVBs pertaining to the MSME sector have increased over time, with the level being much higher in the case of PSBs (Chart 6). Despite rise in NPAs, credit to MSMEs by PSBs recovered in the second half of 2017-18. As against this, the growth in credit to MSMEs by PVBs decelerated during this period, although credit growth of PVBs remains higher than that of PSBs. Also, NPAs related to industrial sector MSMEs were higher compared to that of the services sector and the overall NPA level of the banking sector. Thus, asset

FIDC News • 6

quality deterioration might also have impacted the supply of bank credit, especially to MSMEs.

Given the difficulties faced by MSMEs in debt repayments after demonetisation, the Reserve Bank announced a series of measures to provide some relief. The prudential norms were relaxed (on November 21, 2016) by providing an additional 60 days for repayment of dues, beyond what is applicable for loans to be considered as sub-standard for running working capital account, for accounts with sanctioned limit of Rs. 1 crore or less. The relaxation was extended (on December 28, 2016) by providing additional 30 days for repayment of dues. On December 29, 2016, the RBI advised banks to use the facility of providing ‘additional working capital limit’ to their MSME borrowers to overcome the cash flow mismatches. This was a one-time measure valid up to March 31, 2017.Recognising the potential gains from transition of MSMEs to the formal sector, the Reserve Bank announced relief measures for GST-registered MSMEs with aggregate exposure of less than Rs. 250 million (as on January 31, 2018), which were standard as on August 31, 2017. Loans of such borrowers were to be declared NPA only if the dues (outstanding as on September 1, 2017 and payments due between September 1, 2017 and January 31, 2018) to the banks/NBFCs were more than 180 days past original repayment date. The measure is expected to have provided respite to 0.14 million borrowers whose accounts were standard in August 2017 but would have become NPA in January 2018. This is also estimated to have reduced the gross NPA amount of the banks by Rs. 129 billion (SIDBI, 2018).Further, having regard to the input credit linkages and ancillary affiliations and to encourage formalisation of the MSME sector, the Reserve Bank in i ts developmental and regulatory policies of June 2018, temporarily allowed banks and NBFCs to classify their exposure as per the 180 days past due criterion, to all MSMEs, including those not registered under GST, as a ‘standard asset’. From January 1, 2019 onwards, the 180-day past due criterion in respect of dues payable by GST registered MSMEs would be aligned to the extant norm of 90-day past due criterion in a phased manner, whereas for entities that do not get registered under the GST by December 31 , 2018 , t he asse t classification in respect of dues payable from January 1, 2019 onwards would immediately revert to the 90-day norm. In February 2018, RBI also announced to remove the credit cap for loans between Rs. 50 million and Rs. 100 million for MSME services sector borrowers for consideration under priority sector.

Reserve Bank measures to support MSME credit

[Extract from Mint Street Memo-13 published by Reserve Bank of Ind ia . Some modifications were made in this presentation to facilitate readers and space limit of this issue. The views and opinions expressed in the study are those of the authors and not necessarily represent the views of the RBI]

NBFCs eye stressed SMEs for lending opportunitiesNBFCs eye stressed SMEs for lending opportunitiesNBFCs are seeing an accelerated pace of growth as banks grapple with a huge pile of NPAs and financial frauds

- Malvika Joshi

Non-banking financial companies (NBFCs) in India have started to explore funding opportunities for distressed small and medium enterprises (SMEs). While some NBFCs would be looking to help the promoters of such firms by helping them with one-time settlements, others will be looking to fund the promoter at the bidding stage, as the government is looking to allow SME promoters to participate as resolution applicants.To be sure, on 23 May, the Union Cabinet approved an ordinance to amend the insolvency and bankruptcy code allowing promoters of micro, medium and small enterprises to submit their resolution plans during the resolution process under the IBC in accordance with suggestions made by a 14-member insolvency law committee to the ministry of corporate affairs. The ordinance, which secured the president’s assent on 6 June, however, bars wilful defaulters from bidding.“Most SMEs will be pitching for one-time settlement, as resolution through IBC will be long-drawn and at the same time many suitors may not be available for the firm on the block. Considering the SME universe is large, NBFCs with a strong SME focus will be looking at funding opportunities in the distressed SME segment as well. Their decision, however, will largely be decided by the quality of assets and collateral along with the Reserve Bank of India’s view on such refinancing,” said Nachiket Naik, managing director at IREP Credit Capital Pvt Ltd, a Mumbai-based NBFC.Naik said one-time settlements will also be more beneficial for the lenders as the haircut may be less than what they may have to take in a resolution through the IBC route. “The NBFCs will also be keen on assisting the SME promoters at this stage with respect to providing funding for bidding,” said Naik.NBFCs are seeing an accelerated pace of growth as public sector banks and the Indian banking system on the whole grapples with a huge pile of non-performing assets and financial frauds.Additionally, NBFCs are seeing a robust growth in their loan book due to their growing aided by a more adaptable and flexible operating model than that of banks.“ICRA expects the NBFC-retail credit, which stood at Rs.7.5 trillion as on March 31, 2018, to expand at 19-21% during fiscal 2019… On the other hand, SME credit, driven by sizeable unmet demand, increased working capital requirement post GST implementation and, limited credit availability from banks, is expected to grow at 23-25% in fiscal 2019,” ICRA Ltd said in a note on 28 June.IIFL Finance is also exploring the business opportunities presented by the amendment. “We have already started discussions internally on the kind of funding we can provide to distressed SMEs who have reasonable models and quality collateral to offer. Considering the current environment, it is a good idea to be in the distressed assets business. While we are discussing both equity and debt funding opportunities, we will be biased towards debt funding as this is something we have been doing traditionally,” said G.L. Kumar, head of MSME business at IIFL Finance.Differential treatment for SMEs for the resolution has been suggested by multiple stakeholders as the firms may not see much interest from bidders and may end up in liquidation, thereby defeating the objective of

IBC. “For an SME, resolution under the IBC can prove to be very long-drawn and expensive. Hence, it is advisable to resolve them outside the NCLT through one time settlement,” said R.K. Bansal, managing director at Edelweiss Asset Reconstruction Co. [Live Mint, July 17]

NBFCs – The Leaders In

BFSI Landscape- Rashi Aditi Ghosh

NBFCs are emerging as a preferred partner in the Banking, Financial Services and Insurance [BFSI] sector on account of three main factors – Innovation, Customisation and Technology. Today, NBFCs are innovating new solutions and novel financial products which are gaining acceptance from the market. These innovative solutions encompass every aspect of the partnership – from holistic credit profiling, to flexible repayment options, from integrating multiple information resources to entering new markets – NBFCs are innovating their way to the top. These innovations have helped NBFCs to build customised products for their customers. The Indian BFSI sector has evolved considerably and is no longer a homogeneous market. Thus, the conventional one-size-fits-all approach adopted by the banks has encouraged market players to pilot customised products and solutions offered by NBFCs and work with them to co-create products that meet their requirements.These innovations and customisations are possible only because NBFCs have aggressively updated their technology stacks and have integrated technology as a fundamental enabler in their processes – both external as well as internal ones. As a result, NBFCs have shortened the cycle of product development considerably and are capturing the analytics required to build more efficient customisations faster. Technology has enabled NBFCs to become faster, innovative and agile.“Today, most NBFCs are gaining momentum in the BFSI space owing to their robust business model, strong support from equity investors, low Non-Performing Assets (NPAs), low credit to Gross Development Product (GDP) ratio, customer centric approach and digital innovations. Large NBFCs have developed a business model that provides them the flexibility to grow their retail book and deliver credit to customers at competitive and reasonable costs.NBFCs are focussing on panIndia presence with a larger, localised marketing and distribution network to enhance customer reach and accessibility. Legacy driven and experienced NBFCs have specialised credit underwriting competencies tailored for target audiences that facilitate quicker turnaround. As a result, NBFCs have been successfully driving customer satisfaction, delivering value to all stakeholders and thus, serving India’s vibrant economy. [Excerpts from article titled “NBFCs the new Innovators “ inThe Banking & Finance, May 4]

MovesMoves

CBDT to I-T Department: Curb high-pitched assessments; take action against erring assessing officers

Centre hikes threshold limits for Tax Dept appeals

Companies under bankruptcy resolution face fraud check

Government may clip wings of wilful defaulters soon

Govt may soon fix retirement age for commercial vehicles at 20 years: Report

The CBDT has issued a stern directive to Income Tax Department (ITD) offices in the country, asking them to curb “high-pitched” assessments against taxpayers and ensure that assessing officers who issue such irrational orders are transferred and face disciplinary action. CBDT Chairperson Sushil Chandra, in a recent three-page directive to all regional ITD chiefs, expressed disappointment that a special drive launched in this regard in 2015 had failed to achieve its mandate of resolving taxpayers’ grievances and was under-utilised.CBDT had four years ago sought the creation of local committees in every tax region headed by a principal chief commissioner to “expeditiously deal with taxpayers’ grievances arising from high-pitched scrutiny assessment”. A high-pitched scrutiny assessment case is one where it is found that the addition of income was made on frivolous grounds, non-observance of principles of natural justice, or non-application of mind and gross negligence by the assessing officer in deciding a case.The tax department has taken action against at least 10 assessing officers (AOs) till now as part of this drive, but still enough is not being done, a senior official told PTI. [Financial

Express/PTI, July 26]

In a bid to minimise litigations pertaining to tax matters, the Centre has decided to increase the threshold monetary limits for filing departmental appeals at various levels, be it Appellate Tribunals, High Courts and the Supreme Court. The move is expected to reduce taxpayer grievances and also facilitate ‘ease of doing business’.The threshold monetary limit for the department to file appeal before ITAT/CESTAT has been raised to Rs. 20 lakh, from Rs. 10 lakh earlier. In the case of High Courts, the threshold monetary limit has been revised up to Rs. 50 lakh, from Rs. 20 lakh. For the Supreme Court, the enhanced limit is Rs. 1 crore, from Rs. 25 lakh now. This is a major step in the direction of litigation management of both direct and indirect taxes as it will effectively reduce minor litigations and help the department to focus on high value litigations, an official release said. [Business Line, July 11]

About 10-12 companies undergoing insolvency resolution are being probed by banks and Serious Fraud Investigation Office (SFIO) for fraudulent practices including diversion of funds, as per a report in Economic Times. The SFIO, which arrested the former promoter of Bhushan Steel for an alleged diversion of funds raised through PSBs, is looking into the books of other companies and has asked banks to provide transaction details of these companies for the last five years. The investigation is being carried out on the basis of specific inputs provided by the ministry of corporate affairs. [CMIE-Economic Outlook,

Aug. 11]

India may stop wilful defaulters with loans exceeding Rs. 50 crore from travelling overseas without prior approval as part of a crackdown on promoters looking to leave the country without meeting repayment obligations. The recommendation has been made by a committee headed by financial services secretary Rajiv Kumar that was formed to suggest ways of preventing this from happening. “It was recommended that Section 10 of the Indian Passport Act may be amended to provide that persons who are in wilful default of loans above a specified limit of debt may be treated as financial and economic risk in public interest,” said a government official, adding that the specified limit may be set at Rs. 50 crore. “This is still being discussed.” Section 10 deals with the impounding and revocation of passports. In March, the central government had directed banks to seek the passport details of borrowers taking loans of Rs 50 crore and more. [Economic Times, Aug. 8]

The cabinet is soon expected to approve a proposal to take thousands of polluting commercial vehicles (CVs) off the road by limiting their

FIDC News • 7

retirement age to 20 years. Top government officials told The Economic Times that the retirement age rule will come into effect in 2020. This will help push demand for new vehicles up and curb emissions. Over 7 lakh commercial vehicles registered before 2000 are currently running on Indian roads. The government has proposed making the owners of these vehicles eligible for incentives if they replace them with new ones. Incentives for buying new vehicles include a reduction in GST at the time of purchase, a fair value for the

scrap and various discounts from manufacturers. The government expects these measures to reduce the value of new vehicles

by 15 percent on average. [Moneycontrol News, July 24]

In an attempt to improve the ease of doing business in India, the corporate affairs ministry is set to decriminalize offences of a less serious nature under the Companies

Act, 2013. The ministry said in a statement that it has set up a 10-member panel led by its secretary Injeti Srinivas to

review penal provisions in the Companies Act, 2013, as some of the offences may be required to be decriminalized and handled by an in-house system of adjudicating officers, where a penalty could be levied in cases of default.It added that compoundable offences—or the less serious ones—in the Companies Act, 2013 which are punishable with fine only or punishable with fine or imprisonment or both will be reviewed to decide whether these may be considered as ‘civil wrongs’ or ‘defaults’ where a penalty by an adjudicating officer may be imposed in the first place. Only non-compliance of the order of the officer will be deemed as offence warranting a trial by a special court.The panel will also review if any non-compoundable offences—the more serious ones—which are punishable with imprisonment only, or punishable with imprisonment and also with fine under the Companies Act—may be made compoundable. [Live Mint, July 16]

Special courts under the National Company Law Tribunal (NCLT) are likely to be set up by November to deal with an increasing number insolvency cases. The Ministry of Corporate Affairs is working on this proposal. Officials in the ministry said 30 judges might be recruited. Eight courts would be set up for this, three in Mumbai, two in New Delhi, and one each in Chennai, Kolkata, and Hyderabad. The NCLT deals with company law cases and mergers and acquisitions, apart from insolvency and bankruptcy cases. Apart from the government working towards a cross-border insolvency framework that will require the upgrade of infrastructure at the NCLT, e-courts will be set up so that in the jurisdictions that sign an understanding with the Indian government, cross-border insolvency proceedings can take place. [Business Standard, Sept. 12]

Govt plans to decriminalize less serious Companies Act violations

Govt plans special courts under NCLT by Nov to deal with insolvency cases

Access Assist is a not for profit organisation working in the area of financial inclusion, FPO etc. Their work includes handholding of entrepreneurs, advisory, consultancy etc. The annual summit on the theme of financial inclusion organised by Access Assist is very well attended. As a part of the summit best performing micro finance institutions, individuals and others are recognised by honouring them with Awards. Niti Ayog will be co-hosting the summit of 2018. One of the new awards that would be introduced this year is for Non-Banking Finance Companies Lending to Micro and Small Enterprises. This Award will recognize the performance of the NBFC which has shown commitment in lending to the Micro and Small Enterprise segment through products, processes or outreach strategies that help bring these important underserved segments into the fold of formal finance. The process for the Award will involve inviting self-nominations from eligible NBFCs through completed application forms. A Technical Committee comprising of experts will evaluate the nominations based on information shared by NBFCs in application forms and short list Top 5 nominations, which will be considered by the Jury for identifying the winner. This is the first time an award for NBFC financing Micro and Small Enterprises has been initiated. FIDC has decided to be a Technical Partner in the facilitation of “Best NBFC Award”.

INCLUSIVE FINANCE INDIA AWARDS- NOMINATION INVITED

Legal

Eagle

Legal

Eagle

Parliament passes Negotiable Instruments Amendment Bill with provision for Interim Compensation

Govt introduces legislation to tackle ponzi, unregulated deposit schemes

IBC wins against taxman, yet again

In case of ambiguity, assessee must prove eligibility for tax exemption: SC

In a bid to reduce the number of cheque dishonour cases pending in courts, the Parliament passed the Negotiable Instruments (Amendment) Bill, 2017. The bill aimed to counter the delaying tactics employed by people who want to avoid paying cheques issued by them. The amendment introduces a new provision, Section 143A in the Act, which gives power to the Court to order payment of interim compensation by the drawer of the cheque to the complainant. As per this provision, interim compensation not exceeding twenty percentage of the cheque amount can be ordered to be paid in cases where the accused does not plead guilty in a summary trial or summons case. The interim compensation has to be paid within a period of sixty days of the order. It can be recovered in the manner of recovery of fine as provided in Section 421 of the Code of Criminal Procedure. The provision further states that the interim compensation so received has to be returned by the complainant along with interest at bank rates as prescribed by RBI, if accused is acquitted after trial.The amendment also introduces Section 148 in the Act, empowering the appellate court to direct deposit of a minimum of 20% of the cheque amount in appeal by the drawer against conviction, within a period of sixty days. This amount can be released to complainant and has to be returned to the accused, if the appeal is allowed. [Live Law News Network, July 27]

In an effort the curb the menace of ponzi schemes, the government introduced a Bill which proposes a ban on unregulated deposits, and a 10-year jail term for perpetrators of such schemes. The ‘Banning of Unregulated Deposit Schemes Bill, 2018’ has three key elements — punishment for promoting or operating an unregulated deposit scheme, stringent punishment for fraudulent default in repayment to depositors, and designation of a competent authority by the State government to ensure repayment of deposits in the event of default by a deposit-taking. Non-banking entities are allowed to raise deposits from the public under various laws enacted by the Central as well as State governments. The Bill prescribes monetary penalty and jail term of up to 10 years for duping gullible depositors. The monetary penalty could be as high as Rs. 50 crore. [Business Line, July 18]

The Supreme Court has ruled that the Insolvency and Bankruptcy Code (IBC) will override Income-Tax rules on claims. “Given Section 238 of the Insolvency and Bankruptcy Code, 2016, it is obvious that the Code will override anything inconsistent contained in any other enactment, including the Income-Tax Act,” the Bench comprising Justice R F Nariman and Justice Indu Malhotra ruled recently, in a case between the PR Commissioner of Income Tax-6, New Delhi, and Monnet Ispat & Energy Limited. The court relied on the Dena Bank vs Bhikhabhai Prabhudas Parekh and Co & Ors (2000) 5 SCC 694 and its progeny, making it clear that income-tax dues, being in the nature of Crown debts, do not take precedence even over secured creditors, who are private persons. “We are of the view that the High Court of Delhi, is, therefore, correct in law,” the apex court said.Earlier, the Hyderabad High Court had ruled that government agencies don’t have rights on the encumbered property of a company facing liquidation under the Insolvency and Bankruptcy Code. [Business Line, Aug. 20]

In a judgment that will benefit the revenue department, a Constitution bench of the Supreme Court on said tax assessees will have to show clear proof to the Revenue Department that they are eligible for availing a tax exemption and the benefit of any ambiguity in exemption provision/notification would fall in the favour of the tax man. The five-member bench was constituted to look into what is the rule to be applied while interpreting a tax exemption provision or notification when there is an ambiguity. The bench put responsibility on the assessee to prove a tax exemption where the guidelines aren’t clear and said he cannot claim the benefit of any such ambiguity in provisions.While overruling a judgment in the Sun Export case that had held a contrary view, the bench, in an 83-pages judgement, said “exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption

FIDC News • 8

notification”.“When there is ambiguity in exemption notification, which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee, and it must be interpreted in favour of the revenue,” the court held in the case of Commissioner of Customs, vs Dilip Kumar Company and others. Times report quoted indirect taxes leader at PwC, Pratik Jain as saying. [Business Standard, July 31]

The Supreme Court ruled that banks can sell off assets of personal guarantors even when corporate resolution proceedings are on against the corporate debtor under the Insolvency and Bankruptcy Code. Setting aside the order of the NCLAT that held that the personal guarantors, who are generally promoters, are also entitled for protection like corporate guarantors under the moratorium declared against the ‘corporate debtor’ under IBC Section 14, a bench led by Justice RF Nariman said Parliament specifically didn’t provide for any moratorium along the lines of Section 22 of the Sick Industrial Companies (Special Provisions) Act, 1985 while enacting the Code’s Section 14. Under SICA, now repealed, creditors couldn’t proceed against guarantors after the company had been declared sick without permission from the BIFR.While clearing the confusion, the SC referred to the March 26 report of the Insolvency Law Committee, appointed by the ministry of corporate affairs, that recommended that “all assets of such guarantors to the corporate debtor shall be outside scope of moratorium imposed under the Code,” as a broad interpretation of the moratorium may curtail significant rights of the creditor which are intrinsic to a contract of guarantee. The judgment came on a few appeals led by SBI seeking the SC’s view on whether the liability of a personal guarantor of a company under insolvency resolution process can be enforced. [Financial Express, Aug. 15]

Parliament today passed a bill proposing to grant a party the right to seek damages from the other side in case of a breach of a business contract and to reduce discretion of courts in such matters. The Specific Relief (Amendment) Bill, 2018, which was passed in the Lok Sabha in March, was cleared in the Upper House. The bill aims at the exact fulfilment of an obligation or specific performance of the contract rather than grant of a general relief or damages or compensation. The Specific Relief Act has not been amended since its inception. The law has been made tough, Ravishankar Prasad said,

adding this was because “we are trying to make in India the execution of contracts more sobre and more responsible.” “We had consulted the state governments and they have come on board. The notification, which we will issue, will also be applicable to the state governments,” he added. A provision for special courts has also been made as “infrastructure is important then faster adjudication of disputes becomes a pre-condition.” [moneycontrolcom, July 23]

It has been seen, of late, that the Income Tax Department is re-characterising various hybrid instruments issued by banks and NBFCs—like perpetual debentures, perpetual bonds, etc—as ‘equity’ since there is no obligation on the issuer to repay the principal amount. This has resulted into dis-allowance of interest paid on such instruments while computing taxable income of banks and NBFCs. These perpetual debt instruments (PDIs) have become more popular with banks and NBFCs since last few years after RBI permitted such instruments to qualify as tier-1 capital base under the capital adequacy norms. Thus, various banks and NBFCs have issued PDIs for meeting these requirements and strengthening their balance sheets.The Income Tax Department has started contending that since PDIs do not provide the subscriber with any means to enforce repayment of the principal amount, it is akin to ‘equity’ and not ‘borrowings’ or ‘debt’. It is frightening to ponder whether after considering PDIs as equity and disallowing interest expense, the department would treat these periodic coupon payments made to lenders as dividend and subject them to the dividend distribution tax? Additionally, it can be pointed out to the Income Tax Department that interest paid to subscribers of PDIs is subject to tax in the hands of subscribers as interest income, and disallowing the corresponding expense in the hands of the issuer would lead to double taxation, says Ashish Agrawal & Raj Chheda, Agrawal of Dhruva Advisors LLP. [FE Bureau, July 17]

Lenders can sell assets of personal guarantors under IBC: Apex court

Parliament passes bill on damages for breach of contract

The income tax dilemma for banks, NBFCs

SEBI cuts listing time for debt securities

SEBI moots ‘on tap’ bond market

SEBI plans consultation paper on secondary bond market: Tyagi

SEBI Decisions of 18 Sept. Board Meeting in Nutshell

SEBI cut the time for listing of debt securities to six days from 12 days at present with effect from October 1, 2018. This the regulator said will make the existing process of issuance of such securities simpler and cost effective. SEBI said that Application Supported by Blocked Amount (ASBA) will be mandatory for all the investors for making payment while applying in a public issue of debt securities. This will reduce the time taken for collecting banks to commence clearing of payment instruments, forwarding application forms along with bank schedules to registrar and undertaking of technical rejection test. [Indian Express, Aug. 17]

Indian corporates will soon be able to cut through the red tape in raising capital from the bond market. The Securities and Exchange Board of India (SEBI) is working on a blueprint mechanism that would allow ‘tap issue of bonds’. Bond tap gives corporates more leeway in obtaining funds at every point in their business cycle. It also gives them the advantage of cutting down on ancillary costs and reducing the paperwork involved in raising money. If market participants get the nod from the SEBI, corporates will be able to sell bonds directly to investors multiple times during a financial year on filing a single prospectus. Retail investors will also be able to buy corporate bonds through stock exchanges. A single tap bond issue prospectus can be used by corporates to enter the market multiple throughout the financial year depending on their requirement for funds and also market appetite. It also expedites the process of raising capital as a prospectus need not be issued every time. The shelf-prospectus currently in use comes with a host of formalities including documentary approval from a registrar and merchant banker. For a tap issue, there is no need to make a fresh advertisements and issue new application forms, thus helping firms save time and money. [Moneycontrol News, Aug. 28]

As liquidity still continues to be a problem in the bond market, markets watchdog SEBI said it will soon come out with a consultation paper on developing a robust secondary market for the debt market. The domestic corporate bonds market is worth USD 287 billon, which is around 14 per cent of GDP only, way lower than the equity markets that is around 80 per cent of GDP.There clearly is an opportunity and need to deepen the bond market given the crisis in the banking system due to the pile of bad loans, which is feared to cross 12.6 per cent by March. And this cannot be achieved without a robust secondary market, as liquidity is of paramount importance.“The bond market has a huge potential to grow, which will need a robust secondary market. We will soon come out with a consultation paper on developing a secondary market for the debt segment. The final guidelines will be drafter in consultation with all the stakeholders,” Ajay Tyagi, Securities and Exchange Board of India (SEBI) chairman said. [Business Line/PTI, July 11]

The SEBI board mandated that from April next year, large listed companies must raise 25% of their incremental long-term borrowings in a year, in the bond markets. Long-term borrowings are those having a maturity period of more than one year. These are companies that have outstanding borrowings of Rs 100 crore or more and command a credit rating of AA or better. With respect to the new framework, SEBI said that such borrowings would exclude external commercial borrowings and inter-corporate borrowings between a parent and its subsidiaries.For the first two years — 2019-20 and 2020-21 — the entities concerned would be subject to “comply or explain” mechanism. In case of failure to raise 25 per cent of the long term borrowings through corporate bonds, then the same has to be disclosed by the large corporate to the stock exchange. “At the end of two years block, if there is any deficiency in the requisite bond borrowing, a monetary penalty/ fine of 0.2 per cent of the shortfall shall be levied,” SEBI said.

Framework For Large Corporates To Tap Bond Market:

SEBIMOVES

Overhaul of Consent Mechanism:

Amendments to PIT:

IPO Listing Time cut to 3 Days From 6:

Interoperability Among Clearing Corporations:

Voluntary Delising:

Review of Processes for Credit Rating Agencies:

SEBI accepted the overhaul of consent framework and changes to inside trading regulations based on expert panel recommendations. The regulator will take a “principle-based approach” to enable settling violations such as insider trading through the consent route. However, any cases that impact the integrity of the market or create huge loss to investors will be kept out. The changes will help reduce the pending case burden at SEBI as earlier even small violations under insider trading were kept out of consent framework. The new consent regime has kept out fugitive offenders and wilful defaulters out of the ambit. SEBI also barred such entities from raising public funds. SEBI introduced a new provision to deal with ‘Settlement with Confidentiality’ or concept of ‘approver’ for offenders in the security market who could help the regulator blow the lid of major fraud or scam.

SEBI will amend the so-called prohibition of insider trading (PIT) and prohibition of fraudulent and unfair trade practices (FUTP) based on recommendations made by TK Viswanathan committee to give itself more teeth crackdown against fraudulent activity. The new definition of “dealing in securities” will include employees, agents and also curb use of front entities for insider trading. Listed companies will also have to put in place

systems to prevent misuse of price-sensitive information. More importantly, SEBI said it will seek powers from the government to intercept calls and electronic communication under the Telegraph Act. At present, such powers are only with central agencies like CBI and Income Tax department.

Tyagi said there are privacy issues with this proposal and the powers will have to be handled with outmost care.

SEBI gave an in-principle nod to a new unified payment interface (UPI)-based framework for IPOs to allow listing of a security in three days, down from six days at present. The regulator also approved a new framework for reclassification of promoter entities as ordinary shareholders. The move will require board and shareholder approvals. SEBI said it will introduce a new framework, which will be operational next fiscal onwards, that will push large corporate towards the bond market for their funding requirements. The move will help reduce the load on the banking system and help deepen the corporate bond market.

SEBI approved interoperability among clearing corporations which will lead to better margin utilisation and help reduce cost of trading. The regulator said it will allow a “peer-to-peer” framework for interoperability.

SEBI allowed promoters to give a counter-offer in a case of voluntary delisting, if the price discovered through the reverse book-building process is not accepted by them. However, the counter-offer should not be less than the book value and delisting will be successful only if it is accepted by such number of public shareholders that the post offer promoter shareholding reaches at least 90%. It has been decided to amend the regulations to provide that promoters will have to give the exit to public shareholders within three months of delisting from recognised stock exchanges.

SEBI said it will soon review the processes for credit rating agencies and soon issue a circular on the issue. The move comes after default rating issued to IL&FS within months after assigning a AAA-rating. “Despite all the checks and balances and inspections, these issues keep emerging,” Tyagi said when asked it was looking into the practices adopted rating agencies.

FIDC News • 9

Maheshbhai Thakkar Confered 'Great CFO Award 2017-18'

Mahesh Thakkar receiving “Great CFO Award 2017-18” at the hands of charismatic Karishma Kapoor at The Asia One 10th edition of Business & Awards Summit and 3rd Edition of India’s Greatest Brands & Leaders 2017-18, Pride of the Nation Series on 10th September 2018 at Taj Lands End, Bandra, Mumbai.

HEARTY CONGRATULATIONSHEARTY CONGRATULATIONS

Lending by banks to MSMEs via NBFCs a win-win for all stakeholders: FIDC

GST@1: It’s been a mixed bag for financial services

Centre may ease MUDRA refinance norms to rope in smaller NBFCs

Active bank funding of NBFCs for onward lending to MSMEs can be a win-win situation for all stakeholders, the FIDC has suggested. Besides the banks being able to lend to the desired segment (MSMEs), this would ensure a steady fund flow to small and medium NBFCs, that are facing a funding crunch, FIDC said in a letter to Finance Minister Piyush Goyal. The FIDC is a representative body of asset-financing NBFCs. The letter comes on the heels of Goyal’s remarks last week that public sector banks (PSBs) will identify and speed up lending to “genuine” and “performing” companies whose total borrowings are less than Rs. 2,000 crore.

Routing the money through NBFCs would help channelise the funds to the targeted segment (MSME) in a coordinated manner and the recovery from the ultimate borrower would be the responsibility of the NBFCs who have a proven track record in this regard, FIDC Chairman Raman Aggarwal said in the letter. Aggarwal said that NBFCs by virtue of their deep rooted understanding of the local market dynamics relating to various assets, geographies and class of borrowers, coupled with the flexibility of their operations, have mastered the art of funding MSMEs who may not have any track record to prove their credit worthiness. This has been further boosted by adoption of latest technological advances, the FIDC has said.FIDC is of the view that bank lending to NBFCs for onward lending to MSMEs is an ideal model that would have a multiplier effect. As compared to a bank lending to one company, if a bank lends to one NBFC, the NBFC then lends to a number of entities, thereby creating a multiplier effect. This expands the reach to a larger section of the MSMEs, spread across the country. This will significantly reduce the operating costs for banks, which is the need of the hour, the FIDC letter said. [ Business Line, June 24]

For the financial services sector, the Goods and Services Tax (GST) implementation has been a mixed bag. The positives of implementing the biggest ever indirect tax reform outweigh the negatives or the continuing pain points, say experts and finance industry players.The crucial and significant aspect of GST implementation has been the fact that the Government has been “receptive” to suggestions of industry. The Government’s move to form sectoral working groups to address the challenges faced by industry was an excellent one and worked well, especially the one set up for financial services, Raman Aggarwal, Chairman, FIDC, told Business Line. One major challenge that still remains for pan-India players including banks, insurers and NBFCs is the requirement of multiple registration. “For a pan-India player like a bank or NBFC, they need to register in every State. That is a challenge and a bit of cost. When the objective is ease of doing business, this could have been looked into and tackled,” he said. [Business Line, July 1]

The Centre may relax the eligibility criteria for NBFCs under the MUDRA, which could help increase the uptake of loans under the scheme. Experts believe the existing norms are focussed on large NBFCs whereas it is the small- and medium-sized ones that would be more suited for refinancing under the Micro Units Development and Refinance Agency (MUDRA) scheme.

“The cap on margin makes MUDRA unattractive for large NBFCs. But there are over 11,000 small and medium NBFCs that can be harnessed for the scheme,” said Raman Aggarwal, Chairman, FIDC.The Finance Ministry and MUDRA are understood to have held discussions with stakeholders as well as the RBI on the norms. “There are two issues that need review: the internal norms for NBFCs and the RBI provisions for the sector,” said an official, adding that discussions are on to explore how wider margins can be given to NBFCs for refinancing under MUDRA. At present, there is a 6 per cent interest cap for NBFCs over the MUDRA refinance rate. The Centre is looking to ease norms for registering NBFCs under the scheme as well. Officials said a decision is likely in a few months.Noting that NBFCs can be a “powerful vehicle” for delivering loans under the MUDRA scheme, Union Minister Arun Jaitley had, in his Budget speech, said the Centre would review the refinancing policy and eligibility criteria for them under the scheme. However, NBFCs have played only a small part under MUDRA. According to the Agency’s annual report, of the total loans worth Rs. 3,783.20 crore sanctioned under the scheme in FY16, refinance assistance to NBFCs amounted to

FIDC view:

Cap on margin:

just Rs. 250 crore. Similarly, in FY17, refinance through NBFCs was just Rs. 549 crore compared to the Rs. 3,708.94 crore sanctioned under the scheme. [Business Line, July 15]

Certain parts of the NBFC sector, particularly those in the business of consumer finance, have grown faster than their banking peers in the last few years. That has raised concerns about a potential build-up of asset quality concerns. Data provided by the RBI, however, shows that at an aggregate level, the NBFC segment remains healthy. According to the June edition of the RBI’s Financial Stability Report, the aggregate balance sheet size of the NBFC sector stood at Rs 22 lakh crore as on March 2018. Loans and advances rose 21 percent in 2017-18, after a 14.6 percent increase in the previous year. The gross NPA ratio fell to 5.8 percent at the end of March 2018, compared to 6.1 percent a year ago. [Bloomberg, Sept. 5]

FIDC was the Partner Association at ASSOCHAM Conference on Construction Equipment Industry with the theme “Builders of Tomorrow’s Infrastructure -Today”. It was held on 25th July, 2018 at New Delhi. Raman Aggarwal chaired and moderated the Panel Discussion in the said conference.

At the Induction Program for 23rd Batch of MBA Students at New Delhi Institute of Management (NDIM), Raman Aggarwal shared thoughts on “Career - Building vs Disruption”. He also spoke about the impressive growth and the great work being done by the NBFC sector which provides a good career opportunity to MBA students.

“Udyam Sanagam 2018 - National Conclave on MSMEs” organized by Ministry of MSME to celebrate United Nations MSME Day on 27th June, 2018 at the Vigyan Bhawan, where Hon’ble President of India Mr. Ram Nath Kovind was the Chief Guest. Raman Aggarwal, Chairman FIDC Chaired the technical session on “MSMEs - Engine for Employment Growth”.

How GST is playing a very important role in providing access to

finance by MSMEs, FIDC chairman Raman Aggarwal said that GST data can be great for credit assessment. He shared his views with ASSOCHAM TV at the World Entrepreneurs Day 2018 in New Delhi on 21st August.

FIDC Chairman, Raman Aggarwal talked about the recent developments on stricter NPA

norms for NBFC’s. Raman Aggarwal further added, “PSU and NBFC’s must adhere to Prudential Norms in a phased manner.’ He

spoke at ET Now TV on Aug. 29.

Reimagining Digital; Panel Discussion on Retail & Digital Financing as well as on Ease of Lending: Banks & FinTech New Technology & Digital Expertise. This session was chaired by Raman Aggarwal, chairman of FIDC; Dynamic Tech: Disrupting Solutions for the BFSI; Inclusive Session; Presentation on Taking SaaS beyond the cloud and adopting robotics/AI; Panel Discussion on Time to realize the Value: Analytics in Banking; Panel Discussion on BFSI sector - The key target for cybercrimes; Panel Discussion on Moving towards a Cashless Economy - The CEO’s Perspective.

To tackle the menace of forged certifications of financial statements and documents, the CA Institute has introduced an innovative concept of Unique Document Identification Number (UDIN). The unique number will be generated for every document certified by a practicing CA and registered with the UDIN portal. Regulators and banks can use the portal to check the authenticity of the documents.The new system has gone live from July 1, but is only recommendatory to start with. This is expected to become mandatory in the coming days, sources said. It has come to the notice of the CA Institute that financial statements and documents are getting certified by “third persons” who are not actually CAs. This could mislead authorities/other stakeholders who rely upon them, it was felt. The portal — https://udin.icai.org — offers the facility to various regulators /banks/ authorities/other stakeholders to check the authenticity of the documents certified by practising Chartered Accountants who have registered on the said portal. [Business Line, July 16]

Health-Check of NBFC Sector

Now, unique number to check authenticity of CA-certified documents

ASSOCHAM Conference on Construction Equipment Industry:

MBA Students at New Delhi NDIM addressed by Chairman FIDC:

National Conclave on MSMEs organized by Ministry of MSME:

GST data can be great for credit assessment: Raman Aggarwal:

Adhere to Prudential Norms:

The Economic Times BFSI Innovation Tribe Summit:

Summit was held on 20th Sept. at Mumbai where FIDC was the Association Partner. Summit had Presentation on

FIDC Chairman Mr. Raman Aggarwal was the member of the Jury for the Awards at the Summit.

FIDC News • 10

FIDC News • 11

FIDC'S GROWTH PROMOTING KNOWLEDGE SHARING

Mr. Satish Mehta, Consultant World Bank Group is felicitated by FIDC

Fintelkt-FIDC Executive briefing for NBFCs on FIU & PMLA at Mumbai

Session on “Funding & Rating” at Chennai

Interactive Session with Affil iated Association Members at Chennai

FIDC and World Bank Group collaborated for promoting growth of NBFC Sector with supplementing knowledge inputs through training programmes on “Commercial Credit Reporting”. Mr. Satish Mehta, Founder & Promoter of CIBIL and currently Consultant World Bank Group, as a faculty successfully conducted programmes at Chennai, Kolkata and Mumbai was felicitated at Chennai meet by Raman Aggarwal, Chairman, FIDC:

FIDC Members were explained and educated about the importance of complying with the FIU Regulations, particularly pertaining to Registration, Appointment of Principal Officer and periodic reporting by Mr. Ashok Kumar, Additional Director, Financial Intelligence Unit [FIU]. It was conveyed to the members that any laxity on their part in this regard may invite stringent action including cancellation of their RBI Registration Certificate. It was informed that due to FIDC follow-ups, the nomenclature on FIU Website was changed from List of “High Risk” to “Non-Compliant” NBFCs. Also, the number of such NBFCs has come down drastically.

FIDC crusade for sustainable lending resources for NBFC Sector, especially for small NBFCs is gradually meeting success and it started trickling with PM announcing access of Credit Guarantee Scheme for NBFCs, followed by FM announcement in his Budget speech that “NBFCs can be very powerful vehicle for delivering loans under MUDRA. Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs.” FIDC takes initiative to let the members know latest trend, facilities etc and have interaction with the authorities engaged in the field, organized a Session on “Funding & Rating” at Chennai on June 22.

FIDC actively interacts not only with Authorities and Regulator but also have active dialogue with NBFC sector members and Regional Affiliated Association. Such Interactive Session with Affiliated Association

ndMembers is scheduled at Chennai on 22 June. Interaction was carried out with the Executive Committee Members of FCA, FIHPA, SIHPA and MAHA. The regional and local issues pertaining to RTO, repossession, credit bureaus, Rs. 2 Crores net worth etc. were raised and discussed in detail.

Fintelekt 8th Annual Anti-Money Laundering Summit is to be organized on October 25-26, 2018 at President by Taj Vivanta, Mumbai. FIDC is Support Partner of the said Summit. Mr Pankaj Kumar Mishra, Director, Financial Intelligence Unit (FIU-IND) will deliver the Keynote Address at this conference. The Valedictory Address will be delivered by Mr Sanjeev Singh, ADG Systems, Directorate of Income Tax. Mr Tom Keatinge, Director - Centre for Financial Crime & Security Studies, Royal United Services Institute for Defence and Security Studies (RUSI), London, will make a presentation on Countering Proliferation Financing. In addition, the summit will feature a number of local and international speakers who will share their thoughts on this critical subject.With a strong cross-sectoral focus, the summit will also have a dedicated session for NBFCs, which makes it very relevant for NBFCs’ senior compliance, finance and audit designations for this event.

Fin te lek t 8 th Annua l Ant i -Money Laundering Summit on October 25

At a Session on “Commercial Credit Reporting” by World Bank Group

Consultant, World Bank Group being felicitated

Mr. Satish Mehta

Session on “FIU & PMLA” (from l to r)

Mr. Shirsh Pathak, M D, Fintelekt Advisory Serv P Ltd.,

Mr. Ashok Kumar, Additional Director, FIU,

Mr. Raman Aggarwal, Chairman, FIDC

Mr. Ashok KumarAdditional Director, FIU addressing the Members

Session on “Funding & Rating” (from l to r)Mr. Sunil Aggrawal, M D, Paisalo Digital Ltd.,Mr. Sukanta Nag, Infomerics Rating Agency,

Mr. V.Gopalakrishnan, Chairman, FCA,Mr. Raman Aggarwal, Chairman, FIDC,

Mr. Hemant Songadkar, M D, Nabsamruddhi Finance Ltd.Ms. Kirti Bangar, Manager, CGTMSE

Interactive Session with Affiliated Association Members (from l to r)

Mr. Mahesh Thakkar, Director General, FIDC

Mr. Dinesh Kothari, Chairman, SIHPA,

Mr. T R Achha, President, FIHPA,

Mr. Raman Aggarwal, Chairman, FIDC,

Mr. V.Gopalakrishnan, Chairman, FCA

[Continued from Page-4]

Agenda for 2018-19: DNBR

NBFCs: Department of Non-Banking Supervision (DNBS)

Agenda for 2017-18: Implementation Status

Agenda for 2018-19

VI.50 As per the Ministry of Corporate Affairs notification, NBFCs/Asset Reconstruction Companies (ARCs) with a net worth of Rs.5 billion and above are required to implement Ind AS with effect from April 1, 2018.

VI.51 With a view to strengthening the ARCs, the Reserve Bank will issue guidelines on ‘fit and proper criteria’ for their sponsors.

VI.52 The Reserve Bank is planning to extend the harmonised and simplified generic framework

for resolution of stressed assets put in place for banks to NBFCs as well.

VI.53 The transition of government-NBFCs to the prudential regulations will be closely monitored.

VI.54 The Reserve Bank has been aligning its policies to the changing dynamics in FinTech sector and has already issued guidelines for two new types of IT based NBFCs, viz., NBFC Account Aggregator (NBFC-AA) and NBFC-Peer to Peer (NBFC-P2P). During the year, the Bank will examine applications from companies which propose to conduct NBFC business through virtual modes, without a brick and mortar presence.

VI.70 DNBS supervises 11,174 NBFCs of which 249 are NBFC-Non Deposit taking Systemically Important ones. During the year, NBFC sector witnessed higher asset growth. Two new types of NBFCs, viz., Account Aggregators and P2P lending platforms have been allowed to operate, which added to the diversity of the sector.

VI.71 The ‘Sachet’ portal for NBFCs has been refurbished for improved user interface and functionalities. The new version will be operationalised once the translation into regional languages is complete. A supervisory rating framework for ARCs has been devised by the Bank and since been operationalised from the inspection cycle 2018-19. The Reserve Bank has initiated supervisory action against those

NBFCs which are non-compliant, inactive and not meeting the minimum net owned fund (NOF) criteria, thereby tightening the supervisory regime. During the last round of inspections, the risk-focused model was tried out in parallel to the existing inspection report format and the same has been finalised and is being implemented from the current inspection cycle 2018-19.

The number of supervisory returns under XBRL format has been rationalised to avoid duplication of data as also to capture granular sectoral credit data and financial aspects of interconnectedness. The modified returns being developed in XBRL are currently in testing phase. The on-site inspection and off-site surveillance framework has also been extended to government-owned NBFCs and supervisory returns with effect from the quarter ending December, 2017 are being called for.

VI.72 The government-owned NBFCs will be subjected to on-site inspection from the inspection cycle 2018-19. Supervisory returns for NBFC-Account Aggregators and NBFC-P2P lending platform will be developed. An on-line portal for reporting of cyber security incidents of NBFCs will be put in place. [Source: RBI Annual Report-2017-18]

FIDCIn

Action

FIDCIn

Action

Include deposit-taking NBFCs in co-origination model: FIDC to RBI

FIDC’s RESULT ORIENTED ACTIONS

Compliance Committee

AFSA’s General Assembly Meeting likely in New Delhi

FIDC has pitched for inclusion of deposit-taking NBFCs in the co-origination model proposed by the RBI. All NBFCs with an asset base of over Rs. 500 crore (both deposit-taking and non-deposit-taking) should be allowed in this model, Raman Aggarwal, Chairman, FIDC

said. “FIDC welcomes the RBI’s initiative towards co-origination of loans by banks and NBFCs. However, we do not see any logic in restricting it to only non-deposit-taking NBFCs. This shall deny some of the leading deposit-taking NBFCs the chance to participate,” Aggarwal told BusinessLine.He said that the prevailing regulatory framework of the RBI is the same for both deposit-taking and non-deposit-taking systemically important (having asset base of Rs. 500 crore and above) NBFCs. “We have requested the RBI to consider allowing all NBFCs with an asset base of Rs. 500 crore and above (both deposit-taking and non-deposit-taking) to participate in co-origination. This will give a big boost to this model as deposit-taking NBFCs have very large customer bases that would fit in the definition of priority sector,” he said.The RBI is expected to issue the guidelines on co-origination of priority sector loans by end-September 2018. Aggarwal said that the RBI had shared draft guidelines on co-origination and that the FIDC has given its feedback. “Such collaborative models are the need of the day as they leverage on the strengths of both entities and also allow both to price their shares independently,” he said. The RBI, on Aug. 1, in a bid to give a leg-up to priority sector lending, said all scheduled commercial banks would be allowed to co-originate loans with non-banking financial companies (NBFCs) for creating eligible priority sector assets. Further, only NBFCs classified as non-deposit-taking systemically-important can get into co-origination arrangements with scheduled commercial banks, the RBI has said. [Business Line, Aug. 3]

Likely levy of G S T on Securitization including direct assignments was causing uncertainty for NBFCs as well as for banks. FIDC chairman had a meeting with Jt. Commissioner, GST, Policy Wing on 23 05 18 on the need to exempt Securitisation from GST and very soon thereafter, it met with success, when the exemption was given on these transactions, as clarified in the FAQs on Banking and Financial Services issued by CBIC. The follow-up on other issues is going on.

A meeting was held with CGTMSE on15 05 18 at Mumbai on reworking the Scheme for NBFCs. FIDC made various suggestions to make it more user-friendly. CGTMSE has finalised the revised guidelines. Revised Scheme for NBFCs is placed on Page-4.

The Chairman said that a meeting was held with Jt Secretary, TPL, North Block, New Delhi on TDS u/s 194A and Income recognition u/s 43D of Income-Tax Act held on 24 05 18. This is likely to fetch positive result, particularly on TDS (since no legislative amendment is required).

FIDC has set up “Compliance Committee” consisting of legal and compliance officers from the member NBFCs. It would guide the members from time to time about the various compliance requirements and its importance.

Exemption for Securitisation from GST:

Reworking of Scheme for NBFCs:

TDS u/s 194A and Income recognition u/s 43D of Income-Tax:

Published by :Raman Aggarwal, Chairmanfor and on behalf ofFinance Industry Development Council,

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FIDC News • 12

Asian Financial Services Association is likely to hold their next General Assembly Meeting at New Delhi in early 2019. FIDC is proposing to host AFSA’s such meet.

The key changes under IndAS which will impact NBFCs are Expected Credit Loss, Effective Interest Rate (wherein the total returns from an exposure will be amortised over the tenure of the loan), treatment of preference capital as debt, de-recognition norms for securitisation, fair valuation of investments, treatment of financial liabilities measured at amortised cost, etc. said Shri Mahesh Thakkar, Director general, FIDC in a note to Chairman, Accounting Standards Board of The Institute of Chartered Accountants of India [ICAI] and Chairman, NACAS. We do not have any clear understanding with regard to the methodology of computing CRAR and related ratios considering the distinctly different accounting and presentation treatments for various transactions / balances as aforementioned, he added.

stAs it became clear that NBFCs are to implemented from 1 April this year Ind AS, FIDC took up the issues relating to Ind AS with Chairman, Accounting Standards Board of and Chairman, NACAS. FIDC had also earlier sought certain clarity on issues relating to Ind AS from RBI. These were about over riding effect of Regulatory guidelines over Accounting standard issued by ICAI. More over there are issues needing clarifications relating to Securitisation undertaken by NBFCs. As also the final notification has not been issued yet relating the exposure draft on Ind AS – compliant Schedule III to the Companies Act, 2013.

In this regard, Secretary, Accounting Standards Board of ICAI responded with following clarification:

"This has reference to your letter dated July 27, 2018 regarding the captioned subject. In this regard, we may like to inform you that the Institute of Chartered Accountants of India (ICAI) has considered the issue in context of NBFCs regarding the provisions of Reserve Bank of India (RBI) Regulations pertaining to accounting aspects which are at variance with the principles prescribed under Ind AS. Considering the importance of the matter, the ICAI has raised the issue to Ministry of Corporate Affairs (MCA) for considering issuing a circular in consultation with the RBI to direct the NBFCs to follow Ind AS in their entirety for preparing General Purpose Financial Statements and to follow RBI’s Regulations for regulatory purposes only.

Further, regarding an issue as to whether the Trust through which securitisation transactions is done needs to be consolidated by the NBFCs who securitise their assets. In this regard, it may be noted that this issue needs to be considered on case to case basis based on facts and circumstances of each individual case.

Further, regarding Ind AS compliant Schedule III to the Companies Act, 2013 for NBFCs, it may be noted that the ICAI and NACAS have submitted the aforementioned Schedule III to MCA, but the same is yet to be notified by MCA."

FIDC seeks clarity on Ind AS from ICAI and NACAS

FIDC Managing Committee Meeting in progress at Chennai

From Self Reliance to Shelf RelianceFrom Self Reliance to Shelf Reliance

Courtesy: Times of IndiaCourtesy: Times of India