Tag: Blog

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.