Tag: Blog

The context for Readers. This blog was first published in the year 2016.

With JAM trinity, the present Government is trying its all efforts to encourage financial inclusion through the use of (a) Jan Dhan Accounts (known as BSBDA accounts in banking parlance), (b) Aadhaar as a valid document, and (c) use of mobile as a tech enabler in reaching out to the nooks and corner of India, which is what Digital India campaign is all about.

The recent policies were vocal about initiatives undertaken for the under-banked population of the nation to full fill their banking needs through the Aadhaar authentication mechanism or liberalizing policy on credit to the unreserved population of India.

Now the question arises of how far banking has reached the unreserved population of India.

Let’s evaluate the various initiatives which the Reserve Bank of India (RBI) has undertaken to achieve the objectives of financial inclusion:

1. Allowed in-principle approval to set up Small Finance Banks with the requirement of 75% of the loan portfolio to be Priority Sector Lending advances as also stipulated requirement 50% of loans should be of small ticket size of 10 lakhs and below. Thereby ensuring the flow of credit to the underbanked sector.
2. Allowed in-principle approval to set up Payments Banks allowing the use of high-end technology with a low-cost model for remittances enabling the reach to low strata of the group.
3. Mandated setting up of 25% of branches in under-banked rural centers as per census 2011.
4. Allowed incentive branches for branches opened by banks in under-banked districts of under-banked states.
5. Issued special guidance on Self-help group lending, priority sector lending, and lending to ST/SC borrowers

We have witnessed that from a policy point of view, there is no dearth of opportunities. However, Banks will have to implement the same in order to boost the initiatives undertaken by Gov’t and RBI.

Also, States like Chhattisgarh, Jharkhand, Orissa, Bihar, North Eastern Region opens up a wide range of opportunities in terms of expansion of rural lending and inculcating saving habits for long-term growth.

Banks have been experimenting with technological innovation in acquiring the rural forum by enabling high-end technology with low-cost effectiveness such as Micro ATMs and using Business Correspondents to reach the far-flung areas of rural India.

To sum up, loads of ammunition is available I mean tools and measures to reach out to the rural and under-banked population of India, the only thing which is awaited is firing all cylinders I mean implementing the policies which need to be tracked by PMO office/RBI.

Abhishek R Sharma

(Views are personal)

GRC which stands for Governance, Risk & Compliance is a new way of setting up integrated internal controls mechanisms in Banks that would aid as facilitators in building a framework for better risk management.

Today, Banks are faced with varied Risks such as Compliance Risks, Operational Risks, Financial Reporting Risks, Reputational Risks, etc. The question which arises is how to manage and mitigate these risks. Is there any centralized and integrated framework that helps central monitoring and also helps from a cost-effectiveness perspective? If these are motives, then I would suggest the GRC framework as an answer to establishing a strong risk and control framework.

The objective of managing Compliance Risk is to achieve better regulatory compliance, likewise, for Operational Risk Basel compliance is the benchmark. For Finance, internal control over financial reporting in the form of SOx Compliance is the end objective. These objectives can be achieved if GRC is implemented by documenting the following:

1. Documenting process followed at the Bank-wide level
2. Documenting Risks at the Bank
3. Documenting controls, controls can be common as well to mitigate multiple risks
4. Preparing a mapping of risks and controls with processes. If one can aim to map products then that would be great.
5. Doing a risk assessment exercise.
6. Finally, preparing a dashboard for management on the overall performance of various risks.

The pertinent question which arises while implementing GRC is how do we achieve uniformity of objectives and cost-effectiveness? The simple answer to these questions are enumerated below:

• Risks such as Compliance, Operational, Financial Reporting, Reputation, etc. may be of unique nature. However, there can be common or unique control that would be mitigating these risks. Hence, the use of a common risk library would facilitate Banks in reducing audit fatigue.
• All the repositories of risks at the bank-wide level would be available in one place.
• Data to top management in the form of MI or a dashboard can be easily accessible.
• Feeds can be provided to Audit for Internet Audit purposes.
• Thematic reviews can be done as slicing and dicing of data in a GRC setup can be done smoothly.

Thus, there are many positives of implementing a GRC framework which definitely requires the Bank’s management sponsorship so that teams can dedicatedly work for a common goal and the project can be implemented in a time-bound manner.

Recently, Banks are faced penalties from RBI on account of lapsing internal control mechanisms. In order to avoid such instances, GRC can come handy. With in-depth analysis of processes and risks and controls mapping the changes of control gaps are mitigated which results in changes of no failure situation.

The next big question while implementing GRC, is whether big investment and support of knowledge and technological vendor would be required. The answer is yes, to a certain extent. With vast banking experience, an in-house team can be set up keeping the clear expectations of the management and with the internal team, the best technological vendor support can be sought for providing the off-the-shelf GRC module for suiting the immediate need.

Lastly, in the journey of GRC implementation, the following aspects should be kept in mind, which come to my mind basis prior experience:

1. The tone should be set at the top of my management. Management sponsorship is a must.
2. Dedicated project review team to be set up for timely review.
3. A specialized team from each workstream should be formed.
4. Timelines are to be tracked rigorously.

Thank you.

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)