Author: Abhishek R. Sharma

1.1 What is this all about?

Recently, the third edition of the Global Fintech Festival (GFF) got over in Mumbai. It was an august gathering of the best of minds from the financial services, tech, and business world including the rapidly growing start-ups of India (Bharat). The National Payments Corporation of India (NPCI), the Fintech Convergence Council (FCC), and the Payment Council of India (PCI) were the pioneers in organizing the event.

 In the context of “Fintech in Bharat”, we have seen Bharat emerging as the third-largest start-up ecosystem in the world after the US and China as per the latest Economic Survey 2021-22 released. To foster innovation and better alignment between industry stakeholders, the Reserve Bank of India (RBI), the Central Bank of India has set up a separate Fintech Department. Furthermore, the Reserve Bank of India Innovation Hub (RBIH) is another step towards promoting and nurturing the culture of innovative product development which goes a long way towards “Ease of Living” not just for Bhartiya but for the world as a whole. After all, the ethos of Bhartiyata is on Vasudev Kutumbakam which means “One World Family”.

 It is also ideal for Bharat to make in India (Atmanirbhar or Self Reliant) and make for the world, by sharing its open system-based technologies. The recent such examples which are the testimony of this statement are sharing of CoWin Application (which helps administer Covid 19 Vaccination) to many countries and the UPI (Unified Payment Interface) towards a smooth and precision-based payments platform. UPI can now be accepted in many countries including that France, Doha, etc.

 After the 2008 economic crisis, the world has seen a lack of confidence in the global financial ecosystem. The question which emerged after 2008 was fourfold:

 Q1 – Is the global financial system based on the right solid fundamentals and susceptible to the sway of hypes & bubbles and it can handle the stress scenarios posed by ever-changing business and geo-political dynamics?

 Q2 – Is there a need for a decentralized approach that could be an alternative to the existing set mechanism of dealing in the financial world?

 Q3 – Is the innovation of financial products can cater to customer centricity using the technology, thus the emergence of Fintech?

 Q4 – Does financial inclusion and serving the unserved be looked at differently and to give the momentum digitization is leading usage of fintechs as propellers?

 And, with the above comes a much more important argument.

 Is Fintech, which is envisioned as an accelerator for growth, and innovation, a Force Multiplier?

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 1.2 Bharat so far in the financial world.

 The answer to the question lies in facts about what Bharat was. & How it is taking innovative steps towards a new future by bringing in path-breaking tech-based solutions which are regulatory compliant as well?

 Let us delve into this further.

There has been an exponential growth of technological enablers in India. Telecom penetration, availability of internet services, adoption of technology in facilitating access to credit, more efficient payment systems, and deepening of financial inclusion have made significant progress and are continuing to progress further.

 As per the data from TRAI (the Telecom Regulator of Bharat), the total number of broadband internet users in India stood at 80.7 crore at the end of July 2022. With more than 46.5 crore Jan Dhan accounts (these are leveraged for direct benefits transfer schemes by the Government, thus no handing of cash in between. Hence, no corruption), 134 crore Aadhaar enrolments (this has helped eKYC so smoothly that many banks in Bharat are opening accounts in just 4 minutes) and 120 crore Mobile connections (now launched 5G), new opportunities are opening for implementing innovative ways of integrating and delivering services.

 This can be further gauged from the emergence of 100 unicorns in the country with record 44 unicorns established last year (per the latest PIB Press release dated May 6, 2022). Though due to global recession looming there have been ups & downs in the fundings into the eco-system. But these appear to be transitory and long term seems to be booming leaps and bounds.

 In the financial world, in recent times, Bharat has seen an enormous transformation. Products like internet and mobile banking, electronic funds transfer, UPI, Aadhaar e-KYC, Bharat Bill Payment System (BBPS), QR Scan & Pay, digital pre-paid instruments, and similar other initiatives have transformed traditional banking operations. Banking hours have been transcended.

Bharat has digital-mobile-anywhere-anytime banking. While several initiatives originated from the industry, the government and the regulators have created an enabling ecosystem to promote the FinTech sector. Initiatives like Start-up India, Digital India, India Stack, Account Aggregators, Peer to Peer (P2P) lending platforms, and 24×7 digital payment systems have proved to be key enablers.

 The Fintech ecosystem in India has indeed evolved and is poised for a giant leap.

 During an address to the GFF, Shri Shaktikanta Das, the Hon’ble Governor, of the Reserve Bank of India on September 20, 2022, mentioned this phrase – “Fintech as a Force Multiplier”.

 His address not only covered the steps, and initiatives that regulators, Government, have taken to incubate new ideas, foster innovation and accelerate growth but also touched upon the way forward for all the stakeholders in the financial ecosystem.

1.3 Fintech – the way forward & the road ahead.

 The recent efforts of fintech players in the lending space have been much appreciated in credit delivery in partnership with traditional lenders, especially in rural and semi-urban areas. Timely availability of credit at a reasonable cost, especially for agriculture and allied activities and MSMEs, is very crucial for our economic growth.

 It is well known that fintechs contribute to the objectives of Financial Inclusion by enhancing efficiency in terms of service delivery and in bringing down costs. By way of customized products and customer interfaces, new-age fintechs provide an enriching and seamless consumer experience.

During his address to the GFF, the Hon’ble Governor also added that “the emergence of FinTech players and the growing popularity of their innovative products have challenged the existing players in financial services in maintaining their market share, margins, and customer base. The incumbent firms are responding to these challenges by adopting various strategies, which include making investments in FinTech companies and partnering with them. They are also enhancing their in-house capabilities to adapt to the new realities.”

 While there has been tremendous positive news and growth prospects, the unheard and scrupulous saga of fake & predatory digital lending applications has surfaced which has raised eyebrows for the regulators as also for the enforcement agencies. Off late, we have seen many enforcement actions on such fake pseudo digital lending apps to the extent that RBI had to clearly articulate the clear regulatory regime and roles, and responsibilities of each participant in the digital lending space viz., Lenders like Banks, NBFCs, Loan Service Providers (LSPs) and Digital Lending Apps (DLAs).

 These digital lending apps which were operating and supported by elements across the borders were operating in Bharat without having proper authorization. Necessary regulatory compliances and adherence to the fair practices code for lending were not followed.

 With this, we also need to be cognizant of the Compliance Culture. The cost of compliance could be worse if one doesn’t follow the law of the land. The regulatory guidelines, circulars stipulated by the regulators is to ensure that firms operate effectively and efficiently. Compliance is not a speed breaker but rather an enabler for business success. This is what I see as a regulatory compliance professional.

 As a word of caution, it was pointed out by the regulator that while they continue to support technological advancement and innovation, it is equally important that adequate attention is also placed on governance and conduct issues. At the end of the day, the sustainability of any Fintech activity or business is about the following 4 aspects:

 1.    enhanced customer protection,

2.    better cyber security and resilience,

3.    managing financial integrity and

4.    strong data protection

 With the continued support of the government, regulators, and the environment to foster and propel the growth trajectory of fintech, fintech innovations are slated. This runway or the platform to achieve greater heights comes with caution of governance, ethics, compliance, and conduct.

 As the industry charter towards new milestones and new achievements which will make Bharat proud, fintech of course is a force to recon with. Yes, it is rightly said – “Fintech is a Force Multiplier”.

 Thank you,

Jai Hind!

Abhishek R Sharma

Regulatory Compliance Professional

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Disclaimers:

Views are personal. Views don’t represent the views of current or past employers.

Infographics Sources – Internet, Self-researched, or Research firms.

Let us ready this entire update as a story…

Adding a story tone to a topic like Anti-Money Laundering and Virtual Assets like Cryptos would give a new spin to learning. Isn’t? What do you say?

So, the story goes…

Once upon a time, there was a global organization called FATF (Financial Action Task Force) that wanted to tackle the problem of money laundering in the digital world. They knew that virtual assets and virtual asset service providers (VASPs) were becoming popular, but unfortunately, many countries were not doing enough to regulate them. (Remember – There are many member countries to FAFT, who have to abide by the FATF recommendations on AML and Terrorist Financing)

Four long years had passed since FATF had strengthened its standards to address this issue (of handling virtual digital assets), but the implementation of these measures was disappointingly low. It seemed like some jurisdictions hadn’t even bothered to implement the basic requirements! In fact, more than half of the survey respondents had taken no steps at all to enforce the Travel Rule, which was a crucial FATF requirement to prevent funds from ending up in the hands of sanctioned individuals or entities. (The Travel Rule for crypto states that all crypto companies must screen, record and communicate the information of both sender and recipient for crypto transactions that exceed a certain amount designated by FATF member states. This amount can differ by country).

This lack of regulation created huge loopholes that crafty criminals were quick to exploit. The situation was dire, and it was high time to close these gaps in the global regulation of virtual assets. FATF urgently called on all countries to apply anti-money laundering and counter-terrorist financing (AML/CFT) rules to virtual asset service providers, without any further delay.

To address the urgency, FATF announced that on the 27th of June, 2023, they would release a report urging countries to swiftly implement their Recommendations on virtual assets and VASPs, including the Travel Rule. This report would serve as a wake-up call to nations, emphasizing the importance of closing these loopholes. The report also highlighted emerging risks, such as the illicit virtual asset activities of the Democratic People’s Republic of Korea (DPRK), which they used to finance their weapons of mass destruction program. Additionally, it mentioned the risks associated with decentralized finance and peer-to-peer transactions.

FATF was determined to ensure global compliance. In the first half of 2024, they planned to publish a table showing the progress made by FATF member jurisdictions and other jurisdictions with significant VASP activities in implementing Recommendation 15. This table would serve as a measure of accountability, pushing countries to take the necessary steps to combat money laundering effectively.

And so, the fight against money laundering in the digital world continued, with FATF leading the charge to create a safer and more secure financial landscape for all.

About FATF?

The Financial Action Task Force (FATF) leads global action to tackle money laundering, terrorist, and proliferation financing.

The FATF researches how money is laundered and terrorism is funded, promotes global standards to mitigate the risks, and assesses whether countries are taking effective action.

Visit – https://www.fatf-gafi.org/

Source – FATF

Abhishek R Sharma

Views are personal and based on facts.

Thank you…

In today’s era of digitization, frauds have also been on the upswing. The single most factor which is fuelling fraud in the current scenario is “Technology”. Firstly, we need to understand, “Why does fraud occur?”.

Once the three factors perpetuate as a fraud triangle, fraud occurs. These factors are (a) Greed, (b) Chance, and (c) illogical reasoning.

Presently, in the Banking sector, the three most crucial frauds which occur are (a) Internet Banking and ATMs, (b) banking such as Credit and debit cards, and (c) Identity Theft. With the rise of the digital dream of India in the form of the commitment of the Government to spend INR 1.13 trillion in digitization, the chances will be on the rise for fraudsters to manipulate and succeed in doing fraud.

If you see the changes in the regulatory paradigm over a period of time from October 2008 to date, the Banking regulator, RBI has brought drastic changes in the regulations which facilitate modern-day banking through the use of technology. The series of reforms by the regulator include allowing mobile banking, internet banking, mobile wallets, and introducing the EMV chip and Pin based cards as well as ATMs.

With the recent technological development and evolution of the regulatory framework, the various typologies of fraud are on the rise such as Triangulation (use of a card for shopping on a fraudulent site and parting with card data), Phishing (email pushing you to a site which is cloned and a replica of original website), Vishing (combination of Voice and Phishing, voice call used to get hold of your card details by portraying as bank staff), Malware (malicious software code used to gain access of ATMs and get hold of cash) and many more (spoofing both email and SMS). With the rise of fraud due to new methods of fraud, it has become important to build strong internal controls to facilitate and to obviate, the occurrence of such events.

The key controls which a Bank need to build to tackle fraud are;

1. Governance function in place with a strong policy framework and committee to deal with such instances.
2. Setting up a team who can handle the prevention of fraud in an online scenario such transaction monitoring team.
3. Carrying out route cause analysis of frauds and understanding the point of compromise in all online cyber security frauds.
4. Reporting to regulatory authorities in time.
5. Last but not least, the prolific team understands and is quick to respond to such situations.

So to sum up, there are four pillars to describe the fraud in digital era and these are :

• Recent technological development
• Evolution of regulatory framework
• New cyberspace frauds typology and modus operandi
• Strong controls mechanism

Any organization looking to tackle fraud in cybercrime has to attend to the aforementioned reasons to address it appropriately.

Executive Summary – In recent times, it has been witnessed that many fintech players in India have approached RBI for registration as a Non-Banking Financial Company (NBFC). Besides the primary purpose of using the technology for digital lending for their own captive purposes, the NBFC vehicle also gives an opportunity to the fintech to leverage the potential of mass outreach with the digital-only model of lending for small and medium ticket-size loans.

 Needless to say, India has the highest fintech adoption rate which is around 87% (as research indicates). Also, India with 2nd largest fintech base in the world has huge potential for any kind of regulatory integration which could be a win-win for the entire ecosystem.

 Likewise, it is worthwhile to note that RBI recognizes NBFCs as an important pillar of the Indian financial ecosystem. However, we can also not undermine that post the IL&FS crisis, RBI has also tightened the regulatory regime covering specific areas such as corporate governance, liquidity management, etc.

 1)     Introduction

Before I start the discussion, let us see the above chart which outlines the three key areas of the financial ecosystem which are very important for the growth of the economy:

The facts and figures are a mixed bag. While the fintech growth rate is high and lending opportunities are getting utilized, RBI in the same time in recent past has canceled a large number of NBFC licenses due to non-compliance of regulatory norms such as non-maintenance of NOF, etc.

More and more fintech is approaching RBI for NBFC licenses to avail the advantage of serving their own customers for loan requirements as well as target the larger customer base using the technology to serve the unserved base and of course with better margins.

2)     Key indicators why fintech looks for NBFC Registration:

The first and foremost reason for fintech to approach RBI is to get access to an Investment and Credit Company (ICC) license to be able to offer and built their own book for lending rather than dependent on a few partner banks/NBFCs. This also gives the advantage in terms of sharing the margins. With this approach, the customer needs are channelized better. I have been told that there are cities (tier 3 o 6) that are not catered by partner banks and thus having a self-sufficient lending arm as an NBFC is highly advantageous.

The second advantage for fintech to have an NBFC license is to use technology features in lending space with “on the go” risk assessment and loan disbursement. There are advantages to the cost of capital as well. Recently, RBI has issued many NBFC licenses on “Digital Only” mode NBFCs with more of a digital footprint and less of the physical model. Similarly, many NBFCs are working on “phygital” model which is a hybrid of traditional modes of branches with a lot of technology specifications.

The third reason for fintech is to collaborate with banks in co-lending arrangements as a partner rather than just facilitate as a technology service provider.

The fourth most relevant advantage is to disrupt the existing traditional NBFC using advanced tech propositions and has vast outreach and delivery channels.

The last but not least reason could be the light-touch regulatory regime by RBI when managing the NBFCs.

Never to forget, the lending business has always been good in margins as compared to payments or other financial services, and thus, fintech would take this as an opportunity.

3)     Is this a viable option – from fintech to NBFC

While we have analyzed the various reasons and advantages of having the NBFC license, let us also look at factors that are the genesis of such a move by fintech. One thing which comes to my mind is the usage of consumer data and analytical tools for approaching prospective customers. Small-ticket to medium-ticket-size loans are still not fully catered to and addressed by Commercial Banks. Rather I would say, Banks are using fintech under collaboration for digital loans for mass outreach.

It is also said that the contribution of NBFCs to the overall balance sheet of banks is around 19% which is going to increase sustainably in the future.

The quality of product, innovation, and delivery strategy adopted by fintech is unparallel as well competitive to the existing set-ups. Hence, the advantage for customers for better customer-centricity and experience.

4)     Conclusion:

As there are numerous advantages, likewise there are challenges for fintech to address such as the availability of capital and issues relating to recovery mechanisms.

It has also been seen that compliance with regulatory matters of RBI requires professionals who are thoroughly equipped. Finding out the right manpower also requires thorough engagement by fintech/NBFC.

To conclude, we can form a view that due to the pandemic crisis, there has been a lull in the overall movement of resources but as the market slowly opens, there is an immense opportunity to cater to the need of businesses such as MSMEs, Individuals in a post-pandemic era.

In the end, we should also not forget the support that which regulatory landscape provides for such a business model where digitization is the fulcrum.

Abhishek R Sharma, Regulatory Affairs expert

PS. The content of the article is written based on industry research and personal professional experience.

(source of the chart in the article – RBI, Industry research, publicly available reports on fintech/NBFC. Position as on basis)

• Note – 1ST published on July 27, 2020, later re-published on this website.

Executive Summary – This is a simple step-by-step guide for all of those looking for Non-Banking Financial Company (NBFC) registration and license from the Reserve Bank of India (RBI). The guide covers basic concepts such as definition, types of NBFCs, principal business criteria, registration requirements, minimum documentation requirements, fees & charges.

Definition:

 A non-Banking Financial Company (NBFC) is a financial institution upon registration allowed to offer financial products and services to customers. NBFC is primarily concerned with the business of loans and advances, acquisition of shares, finance leasing, hire-purchase, chit fund, etc. It is important to note that an NBFC is different from the bank in ways like an NBFC cannot accept demand deposits, cannot issue cheques drawn on itself and its depositors do not get deposit insurance and credit guarantee coverage.

 Category of NBFCs:

 NBFCs in India can be basically categorized into (a) Deposit accepting NBFCs, (b) Non-deposit accepting NBFCs. Further, on the basis of activities, they can be further classified as below:

·        Investment & Credit Company (ICC)

·        Non-Banking Financial Company-Micro Finance Institution (NBFC-MFI)

·        Non-Banking Financial Company – Factors (NBFC-Factors)

·        Infrastructure Finance Company (IFC)

·        Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC)

·        Housing Finance Companies (HFCs)

·        Asset Finance Company (AFC)

·        Core Investment Companies (CICs)

·        Non-Operative Financial Holding Company (NOFHC)

·        Mortgage Guarantee Companies (MGC)

·        Peer to Peer Lending Platform

·        Account Aggregator

 Certain Exclusions:

 The NBFC business does not include businesses whose principal business is the following:

·        Agricultural Activity

·        Industrial Activity

·        purchase or sale of any goods excluding securities

·        Sale/purchase/construction of any immovable property

·        Providing any services

What are the Principal Business Criteria?

 Financial activity as a principal business is when a company’s financial assets constitute more than 50 percent of the total assets and income from financial assets constitutes more than 50 percent of the gross income. A company that fulfills both these criteria will be registered as NBFC by RBI.

The term ‘principal business’ is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank.

Interestingly, this test is popularly known as the 50-50 test and is applied to determine whether or not a company is in financial business.

Registration requirements for an NBFC

 ·        The entity should be registered under the Companies Act 2013/1956 as either a Private Limited or a Public Limited Company.

·        The minimum net owned funds of the Company should be INR 20 Million.

Minimum documentation requirements stipulated by RBI

 The indicative list of documentation required for registration of NBFC is as follows: There are possibilities that on case to case basis RBI may seek additional information.

·        Certified copies of Certificate of Incorporation.

·        Certified copies of extract of only the main object clause in the MOA relating to the financial business.

·        Board resolution stating certain compliance on norms & guidelines.

·        Copy of Fixed Deposit receipt of INR 2 Million & Bankers certificate of no lien indicating balances in support of NOF.

·        For companies already in existence, the Audited balance sheet and Profit & Loss account along with the directors & auditors report or for the entire period the company is in existence, or for the last three years, whichever is less, should be submitted.

·        Copy of the certificate of highest educational and professional qualification in respect of all the directors.

·        Copy of experience certificate, if any, in the Financial Services Sector (including Banking Sector) in respect of all the directors.

·        Banker’s report in respect of the applicant company, its group /subsidiary/associate/holding company /related parties, and directors of the applicant company having substantial interest in other companies. The banker’s report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

Note: Please provide bankers reports from all the bankers of each of these entities and provide the report for all the entities. The details of deposits and loan balances as of the date of application and the conduct of the account should be specified.

·        Specific Statements Company duly certified by the Statutory Auditor.

·        Specific Statements on Capital Funds certified by the Statutory Auditor.

·        Specific information on Promoters, Directors & CEO of the Company as per specified format with substantial interest details.

·        Any other documents, which RBI may deem fit.

Fees & Charges

The various fees and charges incurred towards the registration of NBFC are as follows:

·        There are no application fees to be paid to RBI for registration as NBFC.

·        Incorporation of Company, a fee based on the authorized capital of the company is to be paid to the Ministry of Corporate Affairs (MCA).

·        A company would also need to pay fees on the basis of the authorized capital and other factors for the MOA (Memorandum of Association) and AOA (Articles of Association) of the company.

·        For a Reserve Unique Number (RUN) and Director Identification Numbers (DIN), a predetermined fee is to be paid to the MCA towards the company.

·        A Digital Signature Certificate (DSC) is required for every director and thus its generation would require a payment of periodic fees.

Further, we would also like to bring to your notice that Fintechs, startups, Entrepreneurs, and Businessmen are looking for NBFC License as an opportunity to leverage technology in the digital lending space. NBFCs ascertain the loan eligibility of an applicant faster than the banks and are the preferable choice for customers unserved by Banks.

PS. The content of the article is written based on the RBI Instructions & industry experience.

NBFCs – On the growth trajectory[1]

Executive Summary

On December 24, 2019, the Reserve Bank of India (RBI) issued the “Report on Trend and Progress of Banking in India 2018-19”, the report presents the performance and salient policy measures relating to the banking sector including Non-banking financial companies (NBFC) during 2018-19 and 2019-2020 so far (till September 30, 2019). As per the report, although the NBFC sector grew in size from ₹ 26.2 lakh Crores in 2017-18 to ₹ 30.9 lakh Crores in 2018-19, the pace of expansion was lower than in 2017-18 mainly due to rating downgrades and liquidity stress in a few large NBFCs in the aftermath of the IL&FS event. This slowdown was witnessed mainly in the NBFCs- ND-SI category, whereas, NBFCs-D broadly maintained their pace of growth. However, in 2019-20 (up to September) growth in the balance-sheet size of NBFCs-ND-SI as well as NBFCs-D moderated due to a sharp deceleration in credit growth.

Also, as a forward-looking approach, the Government of India (GoI) along with RBI (Reserve Bank of India),  in order to revive the NBFC Crisis, has been taking numerous steps such as providing partial credit guarantees to public sector banks to buy high-rated pooled assets of financially sound NBFCs, including housing finance companies (HFCs) and credit through National Housing Bank (NHB). Further, RBI has strengthened the asset liability management framework for NBFCs which requires them to have a strong liquidity risk management approach with granular bucketing of inflows and outflows to monitor the fund flows minutely. Furthermore, the Finance Bill 2019 through amendments in the RBI Act, 1934 conferred powers on the Reserve Bank to bolster the governance of NBFCs. In order to maintain financial stability in the financial sector, RBI is constantly engaged with NBFCs are make all possible steps toward the betterment of credit growth without compromising governance issues.

NBFCs – a brief analysis

A) Role of NBFCs in the Financial System and contribution to growth

NBFCs are classified on the basis of (a) their liability structures, (b) the type of activity they undertake, and (c) their systemic importance. Under their liability structure, NBFCs are further subdivided into NBFCs-D which are authorized to accept and hold public deposits, and non-deposit-taking NBFCs (NBFCs-ND) which do not accept public deposits but raise

Debt from the market and banks.

NBFCs play a supportive role in the entire financial system by providing credit to the unbanked, un-served mass of the country. NBFCs are supplementing the banking system by ensuring access to credit to the population in the country who do not have access to mainstream financial products and services.

The NBFCs sector has been under strict regulatory measures in recent times. At the end of September 2019, the number of NBFCs registered with the RBI declined to 9642 from 9856 at the end of March 2019. NBFCs are required to have a minimum net owned fund (NOF) of ₹ 2 Crores.

In a proactive measure to ensure strict compliance with the regulatory guidelines, the RBI has canceled the Certificates of Registration (CoR) of NBFCs not meeting this criterion. The number of cancellations of CoRs of NBFCs has substantially exceeded new registrations in recent years. During FY 2018-19, Certificates of Registration (CoR) of 1851 NBFCs were canceled against the total CoR allowed which was 166.

The consolidated balance sheet of NBFCs expanded marginally in 2018-19 and in 2019-2020 (up to September), mainly because of the down-grading of ratings and the liquidity crisis. The slowdown was mainly witnessed in the NBFCs-ND-SI (non-deposit-taking systemically important NBFCs) category, whereas NBFCs-D (deposit-taking NBFCs), maintained their expansion but marginally.

As per the analysis, there has been a decline in the number of NBFCs as also a slowdown in credit expansion, mainly due to stress scenarios and the availability of credit from banks.

B)  Sectoral Credit of NBFCs

Credit extended by NBFCs continued to grow in 2018-19. The industry is the largest recipient of credit provided by the NBFC sector, followed by retail loans and services. Credit to industry and services were subdued in relation to the previous year. However, growth in retail loans continued its momentum. Over 40 percent of the retail portfolios of NBFCs are vehicle and auto loans.

C)  Asset Quality in the NBFC sector

In 2018-19, NBFCs registered a deterioration in asset quality. While the gross non-performing assets (GNPAs) ratio increased, the net non-performing assets (NNPAs) ratio edged up marginally, reflecting sufficient provisioning. In 2019-2020 (up to September), the asset quality of the sector showed deterioration with a slight increase in the GNPA ratio. In terms of asset composition, the proportion of standard assets declined, part of it being downgraded to the substandard category in 2018-19. In 2019-20 (up to September), while the proportion of sub-standard assets remained unchanged, an increase in the proportion of doubtful assets was observed.

D) Profitability

The profitability in the NBFC sector can be gauged by key indicators such as Net Interest Margin (NIM), Return on Asset (ROA), and Return on Equity (ROE). In the case of NBFCs-ND-SI, the overall profitability decreased in 2018-19. However, they posted an improvement in profitability indicators in the current financial year till September 2019, on the back of a decline in other expenses.

In the case of NBFCs-D, there has been an overall improvement if NIM and profitability have improved.

E)   Capital Adequacy

NBFCs are generally well capitalized, with the system-level capital-to-risk-weighted assets ratio (CRAR) remaining well above the stipulated norm of 15 percent. Despite an increase in the NPA levels, at the end of September 2019, the CRAR of NBFCs-ND-SI and NBFCs-D remained above the stipulated norm despite divergent trends.

F)   Fintech Revolution in India

The fintech revolution in India has not only benefitted the banking sector it also propelled the growth in digital lending for NBFCs too. Technology-enabled innovation in financial services challenges the traditional model by lowering costs and vastly expanding financial reach. P2P lending, aggregators, and the like have changed the way financial services are being offered, but it is critical to be mindful of the embodied risks. Due to the Fintech partners, there is tough competition to leverage the technology in lending and instant sanctioning process which would benefit customers in a long way.

With the involvement of Fintech partners, there have been advancements in the credit scoring methodology which are based on algorithms in an automated environment, thus resulting in better customer service and credit in an instant manner.

G) Growth in MSME Sector

In addition to banks, NBFCs were instrumental in providing credit support to the MSME sector as defined in the MSME Act. Recently, RBI has issued an interest subvention scheme for the MSME Sector to boost the credit flow to them with the subvention of interest up to 2%. SIDBI is the nodal agency to manage the subvention scheme at the behest of the Government of India. With these schemes, the credit flow to the MSME sector would get a boost.

H) Conclusion

With the increasing use of technology, involvement of Fintech partners, and more and more digital-based model usage, the growth of the NBFCs would be in accelerated manner. The performance of NBFCs though impacted due to debt defaults due to ALM mismatch in recent times, the financial performance including profitability especially for NBFCs-D has been showing improving trends. However, the NBFCs-ND-SI would be under constant vigil of RBI to boost the credit acceleration and ensure that the risk to the market is minimized. The intervention of RBI such as in the form of subventions would alleviate the fear of stagnancy in the days to come.

The NBFC sector is supplementing the growth of credit in parallel to banks in India and is a major catalyst to the development of the country’s financial system. RBI has been constantly focussing on the improvement in the regulatory space to ensure that systemic risk is taken care of well and credit crisis is well addressed to NBFCs including the intervention by the Government of India. Based on the analysis of the sector, it can be derived that there is a long way to go, and growth possibilities coupled with the technology can be achieved and NBFCs are on the growth trajectory, in that sense.

 

Best regards

CA Abhishek R Sharma

Dec 29, 2019, New Delhi

Interpretations/views are personal

 

PS – Key fact:

The NBFC sector is dominated by NBFCs-ND-SI, which constitute 86.3 percent of the total asset size of the sector. Within this segment, government-owned NBFCs (particularly the two largest NBFCs i.e., Power Finance Corporation Limited and REC Limited) hold around two-fifths of the total assets.

 

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[1] The article is based on the RBI Report on Trend and Progress of Banking in India 2018-19 and a relevant extract of the RBI Report is provided in the article to showcase the importance of the facts provided in the RBI report with respect to growth in NBFC Sector. (Source – RBI, 2019, RBI Report on Trend and Progress of Banking in India 2018-19)

Understanding Account Aggregator Framework (AA) from the end consumer’s perspective

 1.1 Introduction:

Mr Sampath, who was working as a manager in a factory and wanted to avail housing loan, had to run from pillar to post to collect his financial documents including bank statements from his multiple banking partners to arrive at his financial position. For the last many years, Mr. Sampath also had to approach all his bankers and mutual funds advisers to arrange for him his financial records to file his Income Tax return (ITR).

 Like Mr. Sampath, we also face similar situations in our day-to-day lives, where we have to approach our multiple financial services providers viz., Banks, NBFCs, Stock Brokers, Agents, etc. to consolidate our investments and loan position.

 This particular issue has been a pain point for many especially while accessing credit, making investments, and having a consolidated status of financial relationship across the financial eco-system. However, with the advent of the Account Aggregator Framework (AA), there has been a sigh of relief for many of us. Now, there will be a comprehensive data-sharing mechanism among the financial service providers such as banks, and NBFCs. This data sharing will be pure with your consent in order to facilitate easy availability of financial records (bank transactions etc.) which could be used to avail services such as credit etc.

 1.2. Do we need the Account Aggregator Framework in India?

The answer is Yes. Account Aggregator gives customers the potential to share data easily between different financial service providers, by consolidating data in one place and providing a single digital framework to share it in real-time. No more running around collecting documents to open accounts, file for taxes, and get loans.

 AA framework is a safe, consent-based framework giving you control over your data and quicker access to financial services, which means Mr. Sampath would no longer need to run door to door to his lenders to access his transaction data. Mr. Sampath can easily use the AA infrastructure to access his details of the transaction using the consent mechanism, which is very safe and secure and transact with much-needed ease.

 1.3 As a customer what are the advantages to the AA framework?

As a customer, you have the following advantage to access your financial records using the AA framework:

 1.      User-controlled data sharing

2.      Unified consent management

3.      Frictionless means to move data

4.      Real-time access to financial services

 1.4 As a customer what I should know about the AA framework?

As a customer, you should also know that under the account aggregator:

 1.      AA acts as a conduit and does not process the user’s data.

2.      AA is ‘data-blind’ as the data that flows through an AA is encrypted.

3.      AA can’t store any user’s data preventing potential leakage and misuse.

 In today’s world, when Regulators across the globe are harping on data localization and data privacy as important deciding factors in handling customer data, Mr. Sampath need not worry about using the AA framework. The AA is recognized by the Reserve Bank of India (RBI) and to operate as AA, it needs to meet certain data security standards stipulated by the regulator. Hence, the AA framework or mechanism is a safe and reliant mode of data sharing.

 1.5 How Account Aggregators Operate in India?

Account Aggregators are registered with the RBI (the Apex Bank in India) and they share customer data securely between Financial Information Providers (FIPs) and Financial Information Users (FIUs).

 ·      Financial Information Providers (FIPs): organizations that hold your financial data — e.g. banks, insurance companies, mutual funds, pension funds, etc.

 ·      Financial Information User (FIUs): organizations that consume financial data to provide consumer services — e.g. banks, lending agencies, insurance companies, personal wealth management companies, etc.

 An Account Aggregator will facilitate the process of consent. Account Aggregator will be used to transfer financial data from FIPs to FIUs. Mr. Sampath can very well construe that the Account Aggregator is very much like a central data registry that helps share between two parties under consent without storing it.

 Source – MoF, GOI, India

 1.6 Do I get empowered as a Customer If I use the Account Aggregator framework?

The answer is Yes. the Account Aggregator (AA) network, a financial data-sharing system that could revolutionize investing and credit, giving millions of consumers greater access and control over their financial records and expanding the potential pool of customers for lenders and fintech companies. Account Aggregator empowers the individual with control over their financial data, which otherwise remains in silos.

 As per the Ministry of Finance, Government of India, the Account Aggregator framework is a first step towards bringing open banking in India and empowering millions of customers to digitally access and share their financial data across institutions securely and efficiently.

 It is not to be forgotten; the Government has taken up numerous steps to facilitate digital transactions under Digital India initiatives. There are numerous examples of it such as UPI (a virtual payment address, bank-to-bank smooth transfer mechanism), extending the Central KYC (cKYC) for non-individuals, etc. Account Aggregator is one of such concrete steps to ease the exchange of financial information of customers among the financial service providers to facilitate credit and investment decisions.

 Source – MoF, GoI, India

 1.7 The Seven key takeaways from the Account Aggregator Framework:

Here are the top 7 takeaways Mr. Sampath and we all as a customer should know about the Account Aggregator Framework. It could be a revolution in the banking and fintech space as it will enable smooth digital loan and investment possibilities, especially moving from traditionally based credit evaluation to a Cash flow-based credit evaluation and loan disbursements.

 1) Is my data safe – Account Aggregators cannot see the data; they merely take it from one financial institution to another based on an individual’s direction and consent. Contrary to the name, they cannot ‘aggregate’ your data. AAs are not like technology companies that aggregate your data and create detailed profiles of you.

 The data Account Aggregator share is encrypted by the sender and can be decrypted only by the recipient. The end-to-end encryption and use of technology like the ‘digital signature’ makes the process much more secure than sharing paper documents.

 2) Registering with an AA is fully voluntary for consumers.

 3) How do I register with an Account Aggregator – You can register with an Account Aggregator through their app or website. Account Aggregator will provide a handle (like a username) that can be used during the consent process. Today, four apps are available for download (Finvu, OneMoney, CAMS Finserv, and NADL) with operational licenses to be Account Aggregators. Three more have received in-principle approval from RBI (PhonePe, Yodlee, and Perfios) and may be launching apps soon.

 4) A customer can register with any Account Aggregator to access data from any bank on the network.

 5) Is Account Aggregator services chargeable – This will depend on the Account Aggregator. Some may be free because they are charging a service fee to financial institutions. Some may charge a small user fee.

 6) An Account Aggregator is a type of RBI-regulated entity (with an NBFC-AA license) that helps an individual securely and digitally access and share information from one financial institution they have an account with to any other regulated financial institution in the Account Aggregator network. Data cannot be shared without the consent of the individual.

 7) The Account Aggregator framework was introduced to make sharing financial data easier, quicker, and more secure. It is the RBI that issues the master direction for the Account Aggregator framework and later the entire data flow infrastructure was designed keeping in mind customer centricity at its core.

 1.8 Conclusion:

So, do check out the applications of the Account Aggregators and register yourself to access the large pool of consented, and controlled data-sharing platforms that could help you do business or access credit with ease, comfort, and in a timely manner.

Remember that, it is not only easy of doing business but also easy to live.

Thank you,

Abhishek R Sharma

Regulatory Compliance Professional

In the financial world, trust is everything. Customers need to trust that their money is safe and that their Banks, Payment Settlement Agencies such as Payment Aggregators, Credit Information Companies, Wallet providers, Pre-paid Instrument Providers, Token based service providers such as networks etc.,(“here in referred as financial institutions) are acting in their best interest. Regulators (like in that of Banking, Insurance, Securities, and Payments) need to trust that financial institutions are following the rules and not taking unnecessary, uncalculated risks which are beyond the regulatory framework. And financial institutions need to trust each other to keep the system running smoothly i.e., healthy competition.

One of the ways to build trust is through regulatory compliance. Regulatory compliance means abiding by the statutes, rules, regulations, and stipulations as per the law of the land. By following the rules and regulations set forth by governing bodies, financial institutions can demonstrate their trustworthiness to all parties involved.

But, how do you measure trustworthiness?

One equation suggests that
“Trustworthiness = Credibility + Reliability + Intimacy ÷ Self-Orientation.”

Credibility refers to the expertise and knowledge of the financial institution. Are they knowledgeable about the regulations and able to comply with them?

Reliability refers to their ability to consistently follow through on their promises and meet expectations.
Intimacy refers to the level of understanding and connection between the financial institution and its customers or regulators. and;

Self-Orientation refers to the degree to which the financial institution puts its interests ahead of others.
The Trust Equation was first introduced in 2000 by author David Maister.

Financial institutions can increase their trustworthiness and build stronger relationships with customers, regulators, and other institutions by focusing on building credibility, reliability, and intimacy while minimizing self-orientation.

In this way, regulatory compliance is not just about following the rules – it’s about building trust and creating a stronger, more stable financial system for everyone.

Don’t you agree with me on this?

To illustrate further, the different components of the trustworthiness equation in the context of regulatory compliance in the financial world are as follows:

Credibility: A financial institution can demonstrate its credibility by deeply understanding the regulations and how to comply with them. For example, a bank might have a team of regulatory compliance experts who specialize in regulatory compliance and have compliance acumen to guide businesses to run effectively without disruptions and external events.

Reliability: A financial institution can demonstrate its reliability by consistently following through on its promises and meeting expectations. For example, a bank might have a strong track record of submitting accurate and timely reports to regulators, or of resolving customer complaints promptly and satisfactorily.

Intimacy: A financial institution can build intimacy by developing a deep understanding of its customers’ needs and concerns, and by being transparent and open in its communications. For example, a bank might have a dedicated customer service team that takes the time to listen to customers and address their concerns, or it might regularly publish reports on its website that explain its regulatory compliance efforts in plain language.

Self-Orientation: A financial institution can minimize its self-orientation by putting the interests of its customers and regulators ahead of its own. For example, a bank might choose to invest in additional compliance measures even if it means sacrificing short-term profits, or it might voluntarily disclose potential conflicts of interest and take steps to mitigate them.

By focusing on these four components, a financial institution can build trust with customers, regulators, and other institutions, and demonstrate its commitment to regulatory compliance.

Overall, measuring trustworthiness is a complex task that can involve multiple approaches and metrics. By focusing on key elements of trust and taking a holistic view of the situation, regulators can assess the trustworthiness of financial institutions and ensure that they are complying with regulations.

Abhishek R. Sharma
Regulatory Compliance Professional

Picture courtesy – Internet.