NBFC 21 Jan Report 2015 Final

8/18/2019 NBFC 21 Jan Report 2015 Final

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2nd National Summit

Non-Banking Finance Companies“The way forward”

PROCEEDINGS &

RECOMMENDATIONS

THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY OF INDIA

23rd January, 2015 – New Delhi


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MESSAGE

NBFCs are emerging as an alternative to mainstream banking. Besides, they are

also emerging as an integral part of Indian Financial System and have commendable

contributions towards Government’s agenda of nancial Inclusion. They have been to

some extent successful in lling the gap in oering credit to retail customers in underserved

and unbanked areas.

NBFCs in India have recorded marked growth in recent years. After their existence, they

are useful and successful for the evolution of a vibrant, competitive and dynamic nancial

system in Indian money market. The success factors of their business has been by making

the most of their ability to contain risk, adapt to changes and tap demand in markets that

are likely to be avoided by the bigger players. Thus the need for uniform practices and

level playing eld for NBFCs in India is indispensable.

ASSOCHAM along with PwC have come out with this knowledge paper with the objective

to contemplate the issues and challenges being faced by NBFCs (specically considering

the revised regulatory framework) and suggest measures that can be taken to optimize

their contribution thereto.

We hope that this study would help the regulators, market participants, Government

departments, and other research scholars to gain a beer understanding on NBFCsrole in promoting ‘Financial Inclusion’ for our country. I would like to express my

sincere appreciation to ASSOCHAM-PwC team for sharing their thoughts, insights and

experiences.

D. S. Rawat

Secretary General, ASSOCHAM

THE ASSOCIATED CHAMBERS OF COMMERCE AND INDUSTRY OF INDIA

ASSOCHAM Corporate Ofce: 5, Sardar Patel Marg, Chanakyapuri, New Delhi - 110 021

Phone: +91-11-46550555 (Hunting Line) • Fax: +91-11-23017008-9 • E-mail: [email protected] • Website: www.assocham.org


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MESSAGE

NBFCs form an integral part of the Indian Financial System. They have been providing

credit to retail customers in the underserved and unbanked areas. Their ability to

innovate products in consonance to the needs of their clients is well established. They

have played a key role in the development of important sectors like Road Transport

and Infrastructure which are the life lines of our economy. This role has been well

recognized and strongly advocated for, by all the Expert Commiees and Taskforces

setup till date, by Govt. of India & RBI. It is an established fact that many unbanked

borrowers avail credit from NBFCs and over the years use their track record with

NBFCs and mature to become bankable borrowers. Thus, NBFCs act as conduits and

have furthered the Government’s agenda on Financial Inclusion

NBFCs are today passing through a very crucial phase where RBI has issued a revised

regulatory framework with the objective to harmonize it with banks and Financial

Institutions and address regulatory gaps and arbitrage. While the regulations, specially,

asset classication norms have been made more stringent so as to be at par with banks,what is now required is to equip NBFCs with tools like coverage under SARFAESI

Act to recover their dues and income tax benets on provisions made against NPAs.

This shall then bring the desired parity with banks and other nancial institutions.

Fund raising has increasingly become dicult and challenging, specially, for the large

number of small and medium sized NBFCs.

It is indeed a maer of great pleasure that ASSOCHAM along with PwC and with

valuable support from Finance Industry Development Council (FIDC), has prepared

this knowledge paper highlighting the key areas of concern for the sector and the future

prospects. I hope this study shall pave the way for a healthy growth of this important

sector of our economy so as to further the vision of our dynamic Prime Minister of

“Sabka Saath, Sabka Vikas”.

Raman Aggarwal

Co-Chairman

ASSOCHAM National Council for NBFCs


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MESSAGE

For a large and diverse country like India, ensuring nancial access to fuel growth and

entrepreneurship is a critical priority. Banking penetration continues to be low, and even as the

coverage is sought to be aggressively increased through programs like the Pradhan Mantri Jan

Dhan Yojana, the quality of coverage and ability to access comprehensive nancial services for

households as well as small businesses is still far from satisfactory.

In this scenario, the Non-Banking Finance Companies (NBFC) sector has scripted a story that

is remarkable. It speaks to the truly diverse and entrepreneurial spirit of India. From large

infrastructure nancing to small micronance, the sector has innovated over time and found

ways to address the debt requirements of every segment of the economy. To it’s credit, the

industry has also responded positively to regulatory eorts to beer understand risks and to

address such risks through regulations. Over time, the sector has evolved from being fragmented

and informally governed to being well regulated and in many instances, adopted best practices

in technology, innovation and risk management as well as governance.

There has been greater recognition of the role of NBFCs in nancing India’s growth in the recent

past, even as global debates on systemic risks arising from non-banks have travelled to Indian

shores and led to somewhat fundamental shifts in the policy environment governing NBFCs.

Much public discussion and regulatory action later, clarity regarding goals and signposts of

public policy have emerged. Scepticism about ‘shadow banks’ has seled to a more healthy

understanding of the risks and rewards of a diverse nancial system. For the industry, there are

some costs associated with greater regulations, but the opportunity of being a well regulated

participant in the nancial system is likely to outweigh the costs in the long run. We believe that

some shadow zones persist in the regulatory landscape, but there is enough clarity for NBFCs

to dene their way forward.

We congratulate The Associated Chambers of Commerce & Industry of India (ASSOCHAM)

for taking this dialogue forward when the country is looking forward to capitalizing on its

potential aggressively. Thanks are due to Amit, Varun, Dhawal, Bhumika and Aarti in the

PricewaterhouseCoopers (PwC) team for compiling the report. We hope you will nd it useful.

Shinjini Kumar

Partner, Leader - Banking and Capital Markets

PricewaterhouseCoopers P. Ltd


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Proceedings & Recommendations – 2 nd National Summit “Non-Banking Finance Companies – The Way Forward” 4

Analyzing the Revised Regulatory Framework for NBFCs

Background

The roller coaster liquidity ride post the global nancial crisis witnessed Indian NBFCs

facing a predicament. Many of them had a favorable business opportunity to convert

the available liquidity into short-term, protable assets as the banking system and

infrastructure-focused NBFCs dealt with asset quality issues. On the other hand, global

regulatory aention on shadow banks brought the spotlight on their operations, governance,

liquidity management and most of all, linkages with the banking system.

Although the impact of the global nancial crisis on India was limited, it left its marks on theregulatory psyche. Prior to this, the NBFC regulation had evolved in phases. Some phases

were marked with great benevolence, such as the registration of all entities with minimum

capital and priority sector benets to portfolio origination for banks. In contrast, some were

marked with adverse business impact, such as restricting the ow of funds from banks to

NBFCs and expression of displeasure with ‘high growth’ and concerns of systemic risks.

The Working Group under the Chairmanship of Smt. Usha Thorat (hereinafter referred to

as the ‘Thorat Commiee) and the Commiee on Comprehensive Financial Services for

Small Businesses and Low Income Households under the Chairmanship of Dr. Nachiket

Mor (hereinafter referred to as the ‘Mor Commiee’) were landmarks in aggregatingconcerns and issues and throwing up ideas and recommendations for discussions.

In this context of high anxiety levels, the nal guidelines released in November 2014 by

Reserve Bank of India (RBI) came as a polite regulatory action. Few hoped for retaining the

status quo on classication of non-performing assets (NPA). Even to them, the extended

implementation timelines and one-time restructuring exemption will lessen the pain.

Apart from being a milestone in the NBFC regulations, these guidelines also mark an

interesting shift in the regulatory approach-that of activity-based regulation. The NBFC

sector has created for itself the type of dierentiation that was not possible within the

universal banking construct. The sector is thus, marked by remarkable diversity of players

and businesses that act as an eective layer of nancial intermediation between the

informal sector of the economy and the formal sector of nance. NBFCs can claim credit

for converting many Indians to rst time users of formal, regulated nancial system.

In the process, they have played a meaningful role in shaping borrower behavior, collecting

credit related data and deepening the footprints of nance where data and information can

be accessed by regulators and policymakers as well as other market participants.


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NBFC regulation, on the other hand, deriving broadly from the banking framework, has

been tweaked over time to ensure as good a t as possible. The other pressure on the

regulatory approach has been the desire to conform to global standards, even when theIndian economy and the demands of the services led, diverse, informal economy have been

very dierent from the global counterparts. This tension, between a highly dierentiated

sector and the natural tendency of regulation to drive to standards goes to the core of the

challenge of NBFC regulation in India. In what can be described as an optimal outcome,

the nal guidelines have addressed many fault lines without running into legal wrangles

or creating widespread pain to participants.

The segmentation of the market on deposit acceptance, customer interface, and liability

structure and consumer protection not only aligns regulation to current realities, but also

sets the direction of future growth, likely to be synchronized with regulatory perceptionof risk. For example, capping leverage of non-systemically important NBFCs, while also

exempting them from the Capital Risk Adequacy Ratio (CRAR), credit concentration

norms and revised NPA norms, will gradually lead to business models that can balance

that opportunity and constraint. Hopefully, the implementation of this risk-based

framework will also close the discussion on `regulatory arbitrage’ since major arbitrage

opportunities are getting addressed through harmonizing minimum capital benchmark,

setting one threshold for systemic importance and making it applicable on a group basis.

Similarly, deposit accepting NBFCs (NBFCs-D) and asset finance companies (AFCs) get

broadly aligned on deposit cap and rating requirements. Further, credit concentrationnorms for AFCs are aligned with those applicable to systemically important NBFCs

(NBFCs-ND-SI) and of course, the NPA classification and provisioning guidelines are

harmonized.

Another good move is resisting the formalization of NBFC classes. The unique advantage of

the NBFC business is the ability to adapt to market demand conditions. Formal categories, in

the absence of any regulatory benet aached to them, create barriers. Diluting the NBFC-

Factor asset-income requirement to 50% and not placing restrictions on Captive NBFCs are

all welcome. The other advantage of the approach is the continued ability of regulators to

address any temporary issues through activity-based regulation or guidance.

A few niggling issues remain. The debate on whether a Core Investment Company (CIC) is

or is not an NBFC rages on. Interestingly, with no more credit concentration norms for non-

deposit accepting NBFCs that are not systemically important (NBFCs-ND), group holding

companies may have an incentive to continue as NBFCs and not get classied as CIC,

given that the leverage cap is higher for such NBFCs compared to CICs (although dened

dierently under the two regulations). The Foreign Direct Investment (FDI) denition of

an NBFC is still not aligned with the RBI denition, causing pain to foreign investors in the

sector specically in terms of investment activity.


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2nd NATIO NA L SUMM IT“Non-Banking Finance Companies – The way forward”

23rd January 2015, New Delhi

PROGRAMME AGENDA

Registration (9:30am- 10:00am) Inaugural Session (10:00 am – 11:30am)

Inauguration Lamp Lighting by Chief Guest

Welcome Address & Opening

Remarks

Shri Raman Aggarwal, Co-Chairman, ASSOCHAM

National Council on NBFCs and Sr. Vice President,

SREI Equipment Finance Limited

Theme Address Mr. Mahesh Thakkar, Director General, Finance

Industry Development Council (FIDC)

Release of ASSCHOM Knowledge Report by Chief Guest

Address by Knowledge Partner Ms. Shinjini kumar, Partner, PWC

Keynote Address Ms Sunita Sharma, MD & CEO, LIC Housing

Finance Ltd

NBFCs’ Perspective Shri Rakesh Singh, Chief Executive Ocer, AdityaBirla Finance Ltd.

SME Financing Perspective Mr. Souvik Sengupta, Business Head, SME

Landing, Reliance Commercial Finance Ltd.

Inaugural Address by Chief

Guest

Shri N.S. Vishwanathan, Executive Director,

Reserve Bank of India

Vote of Thanks Shri D. S. Rawat, Secretary General, ASSOCHAM

Networking Tea/Coee Break: 11:30am – 11:45am

Technical Session-I (11:45AM-12:45PM)

Theme: “Long Term Vision for NBFCs as Integral Part of Our Financial System”

Session Chairman: Shri Raman Aggarwal

Co-Chairman, ASSOCHAM National Council on NBFCs


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Indicative Topics Distinguished Speakers

a) NBFCs – Promoting Financial Inclusion

b) NBFCs – Converting to Banks/ Small

Finance Banks

c) Realignment of Regulatory Regime

d) NBFCs – The Challenge of Leverage

Mr. Hemant Jhajhria

Partner, PwC

Ms. Vibha Batra

Sr. VP, ICRA Limited

Mr. V.P. Nandakumar

MD & CEO, Manappuram Finance Ltd.

Mr. Saurabh Bhat, Chief Executive Ocer,

Ambit Holding Pvt. Ltd.

Question and Answer Session

Technical Session-II (12:45PM-2:00PM)

Theme: “Challenges and Opportunities”

Session Chairman: Mr. Mahesh Thakkar

Director General, Finance Industry Development Council

Indicative Topics Distinguished Speakers

a) Revised Regulatory Framework Issued

by RBI

b) Small & Medium Sized NBFCs’

Perspective

c) Fund Raising Avenues

d) Level Playing Field with Banks & Other

FIs in

- Taxation

- Recovery

(Coverage under SARFAESI Act)

Mr. Ved Jain

Chairman, ASSOCHAM National Council

on Direct Taxes

Mr. Sankar Chakraborti

Chief Executive Ocer, SMERA Rating

Limited

Mr. Mukesh Gandhi

Co-founder & Director Finance, MAS

Financial Services Ltd

Mr. Alok SondhiCo-Chairman, FIDC & MD, PKF Finance

Ltd.

Mr. R. Pratap

Dy. Chief Finance Ocer, SKS Micro

Finance

Question and Answer Session

Lunch (2:00 PM Onwards)


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INAUGURAL SESSION

ASSOCHAM with valuable support from Finance Industry Development Council (FIDC)held its 2nd National Summit on “Non-Banking Finance Companies-The way forward”

on 23rd January 2015, in New Delhi. The idea behind this summit was to contemplate the

issues and challenges being faced by NBFCs (Specially considering the revised regulatory

framework) and suggest measures that can be taken to optimize their contribution

thereto.

Shri N S Vishwanathan, Executive Director, Reserve bank of India

Inaugurating the Summit Session


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Release of ASSOCHAM –PWC Knowledge Report by Chief Guest


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Shri N.S Vishwanathan, Executive Director, Reserve Bank of India

Addressing the Summit

For the summit Shri N S Vishwanathan, Executive Director, Reserve Bank of india was

the chief guest. He made informed the step being taken by RBI for the development of

NBFC Sector. He said that the Reserve Bank of India (RBI) is in the process of framing

comprehensive consumer protection regulations based on domestic experience and global

best practices in accordance with the recommendations of the Financial Sector Legislative

Reforms Commission (FSLRC).

“We already have fair practices courts for non-banking nance companies (NBFCs), we

will be strengthening that and then we have also put a draft charter for the customerservices,” informed Mr N.S. Vishwanathan, executive director, RBI while inaugurating the

2nd national summit on ‘Non-Banking Finance Companies-The way forward’.

“In the times to come the NBFC sector should get to becoming even more alive to the

issues of the customer rights and protection,” said Mr Vishwanathan.

He further informed that with a view to get greater vigilance to prevent frauds in the

NBFC sector, the RBI has enhanced the level of coordination of various agencies involved

in regulating the NBFC space.


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“We are planning to set up a kind of a portal where information by various regulators who

are part of SLCC (state level coordination commiee) can be put in and we would also

encourage people to le their complaints in that and so that the SLCC is quickly able tolook into them and take immediate necessary action,” said Mr Vishwanathan. RBI would

be the host of this portal as it being the convenor, he further said.

The SLCC as an inter-regulatory forum convened by the regional oces of the RBI has

been strengthened, it now is chaired by the chief secretary of the state so that all the state

entities are coordinated in that, it is meeting more frequently than it was in the past, there

are sub-commiees which are formed within that basically to see that timely actions are

taken, informed Mr Vishwanathan.

He also said that acting upon the suggestion of the Commiee on Comprehensive FinancialServices for Small Businesses and Low Income Households popularly known as the

Nachiket Mor Commiee, the RBI is moving move away from entity-based regulation to

activity-based regulation by doing away with dierent categories of NBFCs.

“What this would mean is that you don’t look at whether the company is an investment

company or an asset nance company but you look at the nature of assets in that company

and make the dispensations based on that,” said Mr Vishwanathan.

He also informed that considering the Companies Act 2013 has certain dierent provisions

with regard to the limit on private placement, the RBI is working on aligning the guidelines

with the new companies act requirements while at the same time nding ways to address

the issues raised by the sector.

On the issue of legislative changes, Mr Vishwanathan said, “In the backdrop of

recommendations made by the several working groups, commiees and also the FSLRC,

we are gaining access to identify the necessary legislative changes required to facilitate

more orderly growth of the sector and at the same time address the gaps that are there.”

He further informed that an online reporting for the registered, self-regulatory organisations

in the NBFC-MFIs sector is underway.

Talking of an informal sector of non-registered/regulated claiming to be NBFC entities whose

functioning has an impact on organised/recognised/registered NBFCs, Mr Vishwanathan

said there is a need to ensure that part of the segment is curbed so that the real regulated

NBFC sector is able to do its job the way it has to.

He also suggested that registered NBFCs should play a signicant role in bringing market

intelligence reports to the notice of the bank on an entity engaged in unauthorised deposit

taking or such other nancial activity. “The bank has strengthened this market intelligence

so as to gather information quickly and act on it.”


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Mr. Raman Aggarwal , Co-Chairman, AS SOCHAM National Council onNBFCs and Sr. Vice President, SREI Equipment Finance Limited

He Suggested:

19th Century was an era of “dependence” when world over the big and powerful

countries ruled the less powerful countries as their colonies. 20th century was an era of

“independence” when all these dependent countries gained freedom. 21st century is an era

of “inter-dependence” where all independent nations across the world are engaging witheach other on a regular basis. Perhaps it is time to draw a lesson from these developments

and develop a nancial structure in the country where various players like banks, NBFCs,

MFIs and FIs should engage with each other and develop healthy partnerships instead of

simply trying to compete with each other.

O late, NBFCs have been equated to the “shadow banks” operating in many of the

developed economies. However, it is important to understand that none of the so called


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shadow banks across the world are subject to such a developed and evolving regulatory

framework which is in place for NBFCs in India. NBFCs’ regulations have a history of 18

years and are today almost at par with banks. The Revised Regulatory Framework for

NBFCs enforced by RBI has plugged the so called regulatory arbitrage and brought parity

with banks.

It is therefore of utmost important and urgency that parity between banks and NBFCs is also

brought in areas of taxation and recovery. We therefore look forward to the forthcoming

Union Budget 2015 to address the issues relating to the taxation of income on NPAs and

tax benets against provisions made for NPAs. Empowering NBFCs with recovery tools

like coverage under SARFAESI Act, specially for Systematically Important NBFCs, are of

prime importance.


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Mr. Mahesh Thakkar, Director General, Finance Industry

Development Council (FIDC)

Mr. Mahesh Thakkar, Director General, Finance Industry Development Council (FIDC)

elaborated on various steps that need to be taken by various stakeholders so as to enable

the Non –Banking nance companies.

He suggested about industry requirements:

a) Government of India should include NBFCs in the government’s agenda/action plan

for promoting nancial inclusion

b) RBI bringing regulations in order to reduce the number of NBFCs, because there are

administratively dicult in NBFCs companies.

c) Reserve Bank of India should prepare a road map for the sector

d) the NBFCs sector need a stable policy for 5 years


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Mr. Rakesh Singh Chief Executive ocer, Aditya Birla Finance Ltd

Addressing the Summit

He recommended/Suggested that

1. Notication of NBFCs under SARFAESI Act

Unlike Banks and Public Financial Institutions, NBFCs do not enjoy the benets deriving

from the SARFAESI Act even though the borrowers/clients are similar or may be even

same. There is a good case for notifying of NBFCs under Section 2(1)(m)(iv) of theSARFAESI Act by Central Government.

2. At par Tax treatment with Banks & HFCs where applicable

Since the assets of the two nancial entities are similar, it is necessary that they be

subject to similar tax treatment as well. There are several provisions under the Income

Tax Act wherein a favorable treatment is provided to Banks but similar tax treatment

is not currently available to the NBFCs. One of the major tax issues which aects the


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whole NBFC protability and calls for man hours to ensure compliance is the deduction

of tax on interest receivable by NBFCs. Provisions norms have been made stringent

for NBFCs, but deduction of provisions while calculating the taxable income is notpermied by the tax laws for NBFCs but the same is allowed for Banks. Allowance of

provisions of expense will lead to lower creation of deferred tax assets and tax reversals.

Additionally, the maer on Double Taxation issue in Pass Through Certicates needs to

be resolved at the earliest.

3. Lack of Defaulter Database: NBFCs are not recipient of many defaulter list shared

being shared with Banks. Non-sharing of defaulter databases leave NBFCs vulnerable

to credit risk on account of absence of critical information.

4. Non-availability of Renance and Credit Insurance Schemes: Opening up of renance

windows and credit insurance support to NBFCs will help them raise low cost funds

and increase their lending penetration to the self-employed sector in rural and urban

areas.

5. For NBFCs to be eligible under CGTSME scheme of SIDBI for exposures to SME.

6. With respect to NCD Private Placements, clarification is sought on periodicityof issue as the RBI has not yet come back with any changes to the existing

guidelines.


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Mr. Souvik Sengupta, Business Head,

SME lending, Reliance Commercial Finance Ltd.

He Suggested that:-

Role played by NBFCs in MSME segment

NBFCs are a crucial link in nancial sector, delivering a diverse set of services – lending

and deposit mobilisation, distribution of nancial products, investment banking and

capital market operations. There are more than 12,000 NBFCs1 registered with RBI and

these NBFCs mainly cater to MSME segment of our economy. The central government has

been focussing on ensuring steady-state funds availability for MSMEs through multiple

funding and subsidiary schemes. In this regard there is also an urgent need for Central

Government support to buress NBFC’s MSME funding eorts. Specic support from

central government is felt in the following areas as elaborated below:

1 Source : RBI report on Financial Stability Dec.2014


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Support Required

Participation in Front-Ending Subsidies for MSME sector

Government of India has

elaborate set of subsidies

aimed towards MSME

funding. While banks

and other nodal agencies

like SIDBI frontend the

subsidy-dissemination,

central government canenlist support of NBFCs

and allow highly rated, large and credible NBFCs to frontend the subsidies; similar to

banks and nodal agencies. Allowing such NBFCs access to schemes such as CGTMSE,

CLCSS and others would also improve penetration of these schemes to the benet of the

MSMEs.

Preferential Risk Weightage for MSME Exposure

Presently, credit quality of loans determines risk weights for capital allocation irrespectiveof end-use of loaned funds. In such a scenario dierential risk weights based on end-

use can be used as a tool to encourage ow of credit to desirable sectors. Accordingly,

exposures to MSMEs could carry lower risk weight than say, large corporate, commercial

real estate or stock market exposures. It appears a win-win situation as ow of credit to

this sector would increase and at the same time be benecial to the lender (say Banks as

well as NBFCs) through savings in capital cost.

Participation in Central Government Developmental Fund(s)

Central government has formulated a variety of pro-development bodies like North

Eastern Development Finance Corporation Ltd. and others where signicant measures

are taken to ensure equitable development. Loans and grants are directly disbursed to

MSMEs – and at times at extended timelines. To ensure these funds reach MSMEs on

time, systemically important NBFCs can be allowed to act as business correspondents for

these developmental bodies. One of the major benets of such extension would be greater

degree penetration of developmental schemes.


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Skill and Capacity Building Initiatives

National Skill Development – the apex body for Skill and Capacity Development performs

this function pan-India. Parallel to the apex body, if NBFCs with in-house expertise can be

involved in imparting technical and nancial skill and capacity building training, it would

be of signicant help in reaching out to large pools of MSMEs. Well governed and highly

rated NBFCs can be designated as ‘Skill and Capacity Builders’ for MSMEs with a mandate

to reach out to cent-percent of their clientele thereby enhancing penetration.

Participation under SARFAESI Act

Post 2002-2004, bankers have been leveraging SARFAESI Act as eective tool for bad debts

recovery. This is possible since the act confers signicant powers on lenders with regards

to tangible security (except agricultural land) oered by the borrower in case of default.

The tangible security can even be sold / assigned / leased by the banker in satisfaction of

his valid claims without the intervention of court, post the specied 60days provided to

cure default. In a sense, the act confers limited judiciary powers upon the bankers.

Access to these provisions SARFAESI Act may be made available to larger systemically

important, highly rated NBFCs in view of their relatively stronger governance capabilities.

Such measures can infuse additional condence in NBFCs to widen and deepen the MSMEloan market.


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Ms. Sunita Sharma, MD & CEO, LIC Housing Finance Ltd

She Suggested that

The evolution and growth of Non-Banking Finance Company (NBFC) sector has been

signicant in the recent past. NBFCs form an integral part of the nancial sector and

therefore are exposed to similar risks and challenges that are faced by other players in

the nancial sector. Therefore, the need was felt to address the risks, and also to address

the concerns of NBFCs. The recommendations made by the Working Group on Issues and

Concerns in the NBFC Sector and the Commiee on Comprehensive Financial Services for

Small Businesses and Low Income Households were considered and the changes in the

regulatory framework have been introduced .

The cyclical stress on asset quality and protability of NBFCs is covered by strong capital

adequacy, secured lending and lower ALM risk. With increased importance of NBFC sector

Structural support expected from regulator is higher.

RBI regulations are in line with its desire to strengthen nancial system and reduce the

regulatory arbitrage between banks and NBFCs. Accordingly, the new regulatory framework


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will lead to strengthening of NBFCs balance sheet, with increase in loss absorbing Tier I

capital requirement for systemically important NBFCs and deposit accepting NBFCs and

restricting leverage for smaller NBFCs in line with higher core Tier I requirement for Banks

under Basel III guidelines. On NPA recognition norms and provisioning on standard assets

also, banks and NBFC will be at par.

The increase in disclosure requirement and corporate governance norms will improve the

transparency and increase the accountability of management and the board and improve

the investor awareness.

We believe that revised regulations to be Positive for the NBFC sector and the regulationswill make the NBFC sector structurally stronger, increase transparency and improve their

ability to withstand asset quality shocks in the long run.


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Mr. Hemant Jhajhria, Partner, PWC Addressing the Summit

He presented “Comparative Data Analysis”

PwCJanuary 2015

Banks had advantages over NBFCs in most areas, though relaxed regulations partially dented this advantage

Indian NBFCs At An Inflection Point •

6

Parameter Bank NBFC

Funds Banks have access to low cost public deposits NBFCs have to rely on Banks / financial

instruments to raise funds

Customer Segments Address customer segments in a completemannerQuite a few segments under – served

Cater to niche customer segmentsReach a function of the focus onparticular customer segments

ProductsService Deposits & lending requirementsTransaction banking productsLarge product suite for various banking needs

Lending is the primary focusTailored products based on specific

business needs

Service PropositionMultiple channels of service delivery to meetcustomer needsFocus on universal access

Service to customers based onrelationships and high degree of customization

Regulations Strict norms for asset quality, CRR, SLR, etc. Relaxed norms for NPAs, no CRR and

SLR

Liquidity Support Banks can raise short – term funds from RBI

via the repo mechanismNBFCs do not have access to the repomechanism

Risk WeightsBanks have a low risk weight structure forretail assets viz. vehicle loans, home loans,gold loans, etc.

NBFC have higher risk weightsprescribed for the retail assets


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PwCJanuary 2015Indian NBFCs At An Inflection Point •

7

Regulatory Change Impact

Increase in Tier I CAR (core CAR) to 10% forNBFC-D and NBFC-ND-SI

• To improve the loss absorbing capacity of systemically important financial institutions

• Will strengthen balance sheet with higher core capitalavailability with the NBFCs

• Capital requirement in the long run will increase

NPA recognition changes to 90 daysoverdue from 180 days overdue for loansand 360 days for hire purchase assets

• Brings about parity between NBFCs and banks, removesregulatory arbitrage

• In the short term may increase NPAs for NBFCs impactingprofitability – but will remain an accounting impact

• May impact short term bank borrowing / credit rating for new funds

Provision on standard assets increasedfrom 0.25% to 0.40%

• Balance sheet of NBFCs will become more robust with theincrease in loss absorption capacity

• Profitability will be impacted in the short run

Credit concentration norms for AFCs to bein line with other NBFCs

• No major impact – AFCs generally have a high retail loanportfolio

Corporate governance and disclosurenorms

• Will bring about accountability, transparency and trust inoperations of the NBFCs

• Will help to rein in parallel economy and keep a tab oninvestors

The recent regulatory changes will have a significant impact on the NBFCsand will result in a significant change in their operations and future

strategy

PwC

January 2015

The recent regulatory changes will have a significant impact on the NBFCsand will result in a significant change in their operations and futurestrategy

Indian NBFCs At An Inflection Point •

8

Regulatory Change Impact

All NBFCs, irrespective if date of registration to have Net Owned Funds(NOF) to Rs.2cr by March, 2017

• Ensures uniformity across funds – those registered before Apr’99 and those after

• Makes sure that only firms that aspire to be competitive exist inthe business

Deposit acceptance reduced to 1.5 times of Owned Funds for Deposit taking AFCs andmandatory investment grade credit rating

for accepting public deposits

• The limit and credit rating helps safeguard investor deposits –public or otherwise

Systemically Important NBFC limit revisedto asset size above Rs 500cr

• Release of bandwidth to focus on larger NBFCs• Simplified framework for smaller NBFCs allowing them to

focus on business

Asset value to be calculated at group leverrather than on standalone basis

• Ensuring regulatory compliance for groups with multiple smallNBFCs

Introduction of leverage ratio of 7 for NBFC-ND having assets less than Rs.500 crore

• Ensures non – systemically important NBFCs are not highly leveraged


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Ms. Vibha Batra, Sr. Vice President, ICRA Limited

She focused on Indian domestic credit and retail loans for NBFCs.

Realignment of Regulatory Regime Key changes:

NPA recognition norms: To migrate from 180+ day recognition norm to 90+ day by

March 2018.

Enhanced capital requirements

Minimum Tier I capital requirements enhanced from the current 7.5% to 10% by

March 2017.

In ICRA’s estimates, only two or three NBFCs would need to be mobilize additional capital

(of ~Rs. 5 billion, i.e. 8-10% of their net worth) to maintain a 2% buer over the revised Tier

I capital requirements.

Systemic Importance

Increase in asset-base cut-o for from Rs. 100 crore to Rs. 500 crore to facilitate focused

supervision while allowing smaller players exibility to innovate and cater for niche

segments.


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Deposit Acceptance

Maximum deposit acceptance xed at 1.5 times of NOF, against 4 times applicable to

investment grade NBFCs. Limited number NBFCs to be aect.

NBFCs remain at a disadvantage

While RBI has removed some of regulatory arbitrage BFCs have enjoyed vis-à-vis banks,

NBFCs remain at a disadvantage viz.a.viz banks.

Access to SARFAESI Act: NBFCs do no have access to SARFAESI Act, which has been used

eectively by banks to expedite recovery and has also served to improve credit behavior.

Liquidity support: While banks can raise short-term funds from the RBI through the repowindow, NBFCs do not enjoy any such benets.

Lower risk weights for some asset classes: The risk weights prescribed for retail assets

such as vehicle loans, home loans and gold loans are lower for banks than for NBFCs.

While banks’ balance sheets are more diversied, the credit and market risk on specic

asset classes may be similar for both banks and NBFCs.


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Mr. V.P Nandakumar, MD & CEO, Manappuram Finance Ltd

He Suggested:

1. RBI should consider permiing a holding company structure for the proposed SFB that

would allow the existing NBFC to continue for period of 5-7 years. This will serve toease the transition period for NBFCs converting to SFBs.

2. PSL target to be exibly phased in over a viable period. This may be decided on a case-

to-case basis by the regulators considering the practical issues faced by the individual

entity.

3. The denition of what constitutes PSL should be based on the socio economic prole/

status of the borrower and not on the characteristics of the product oered as is the

case now. All small loans coming under the scope of micro-credit should be given PSL

status.

4. On-tap licensing to set up NBFCs and SFBs (for eligible promoters) with a roadmap

towards harmonization of regulations. Further, greater transparency is required

regarding the criteria followed in the selection process. At present, transparency is

almost zero. Why were Bandhan and IDFC given banking licenses while the rest were

rejected is a question for which there is no clear cut answer.

5. RBI may also examine the concept of Specialised Banks who are allowed to focus on

certain activities like transport nance, gold loans etc.


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Mr. Saurabh Bhat, Chief Executive Ocer, Ambit Finevest Pvt Ltd.

He Highlighted Data Analysis

Ambit Finvest Pvt. Ltd.NBFC – Sector Highlights

• 12029 registered NBFCs of which 241 are NBFCs-D and 465 are NBFC-ND-SI

90% of NBFC Assets are accounted for by NBFC-ND-SI

‘- - .

assets of 12.7 lac crore and total advances of 8.45 lac crore.

• As on March’14, NBFC-ND-SI had a CAR of 27.8% and Gross NPA level of

2.25%

• NBFC Assets comprise 9% of total Financial Assets in India.

• Total NBFC Assets to GDP ratio is 14% (as against bank assets to GDP ratio of

over 95%).

n eve ope coun r es s ra o s


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Ambit Finvest Pvt. Ltd.NBFC – Sector Highlights

• RoA of NBFC-ND-SI was 2.3% and PAT Margin was 20.2% as of March

‘14 (2.0% and 18.3% respectively as on March ‘13)

• As on Sept 2014, banks’ exposure to top NBFCs was approx 1.5 lac

crore ,followed by AMCs with 90,000 cr and Insurance Companies with 1

lac crore

March ‘15 levels for banks NBFC exposure would be significantly higher

g ven requ remen s o e me y arc .

• Govt (State & Central) owned NBFCs form a significant part of total

NBFC assets (>35%) and are exempt from some prudential norms (RBI

They are levered 6.4x (industry leverage of 3x) and have bank borrowings of

over 38,500 cr

Ambit Finvest Pvt. Ltd.Industry Comparison – Key Leverage Ratios

Asset Wholesale

MFIsNBFCs

Finance

NBFCs

HFCsNBFCs

Lending

NBFCs

Bank Borrowing as % of Total 84% 53% 50% (20%- 55% 43% 47%

Borrowings (82%-91%) (43%-63%) 70%) (10%-100%) (36%-52%) (32%-93%)

Access to Bank Borrowings High Medium High High Medium Low to Medium

Dependence on Bank

BorrowingsHigh Medium

Medium to

HighMedium Medium Low to Med

Leverage

4.1x

(3.1x-4.8x)

5.3x

(3.1x-7.7x)

4.3x

(3.3x-6.5x)

9.1x

(5.3x-12x)

4.2x

2.5x-6.8x)

3.9x

(1.7x-6.4x)

Leverage Potential Medium High High V High Medium Low to Med

Observed Gross NPA % 0.5%-6% 1.8% 3.3% 0.7% 1.6% 2.1%

Concentration in Portfolio Low Low Low Low Medium High

Ex ected Loss on defaults V Hi h Low to MediumMedium to

Low Medium Low to MediumHigh

Overall Riskiness of Loan Assets MediumLow to

MediumMedium Low Medium Medium to High


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Ambit Finvest Pvt. Ltd.Wholesale Lending NBFCs – Leverage Challenge

• Seen by banks as direct competition

Concentration in their Portfolio is seen as high risk

D:E covenants by banks are far tighter compared to regulatory

Max tenors of 3-5 years (necessitates high ALM mismatch or low leverage for long term lending)

Risk Weightage not linked to rating of wholesale lending NBFC – natural disincentive

• Only Private Placement Market available

Min AA- and above rating

High Cost as compared to public NCDs and lar gely 3-4 year tenor

Fixed Income product so no benefit in falling interest rate scenario

• Rating Agencies - Difficult to get a >A+ level long term rating without a min size (500 cr + asset book) &

a min capitalisation of 200-250 cr &

a min 3-4 year track record or

Ambit Finvest Pvt. Ltd.Industry Comparison – Key Leverage Ratios

Gold Asset Wholesale

MFIs Finance

NBFCs

Finance

NBFCs

HFCsocuse

NBFCsLending

NBFCs

Cost to Income Ratio 62% 56% 60% 31% 58% 51%

Operating Efficiency Low Medium Low High MediumMedium to

High

or erm orrow ngs as o

Total Borrowings64% 74% 44% 28% 35% 50%

Cash and Cash Equivalents as %

of Total Advances38% 7.4% 5% 4.2% 12% 7.1%

urp us e c t n < year

category7.7% 21% 2.3% (6%) 5% (0.3%)

Overall Liquidity High Medium Medium highMedium to

HighLow to Medium

Tier II Capital as % of Tier I

Capital8% 12% 5% 17% 14%

18.8%16% 15.0% 22% 18.3% 9.9%

o . -

27.3%)(9-19.5%) (10-19.6%) (15.5%-32%) (16.7%-20.2%) (5.5%-14%)


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Ambit Finvest Pvt. Ltd.NBFC Outlook – Medium Term

• n eres ra es seen o so en y - ps n nex m s

Would impact NBFCs in direct competition with banks like retail AFCs, HFCs , Gold Loan NBFcs

(margin squeeze)

Drop in lending rates higher than benefit on borrowing cost

• Base rate linked bank borrowings would dominate as NBFCs would not like to

lock in higher cost NCDs

Share of Bank Borrowings in total Borrowings of NBFCs expected to reach 37-38% in next 2

years

Share of short term borrowings in form of CPs or NCDs with call options

• As CV and passenger vehicle demand is expected to grow, retail NBFC-AFCs

stand to benefit through improved asset quality

market rates of second hand re-possessed vehicles would improve reducing losses


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Mr. Shankar Chakraborti, Chief Executive Ocer, SAMERA Rating Limited

He suggested that:

1. NBFCs should have a strong focus on MSME-centric growth strategy as the MSME

segment still has a substantial funding gap and the opportunities are signicant. Some

of the ways to tap the opportunities include:

a. Cluster-specic product innovation.

b. Proactive sales eort to eectively deliver solutions.

c. Aligning strategy with government initiatives like ‘Make in India’, and devising

innovative ways to channelize funding to the participating MSMEs.

2. A credit protection mechanism like Credit Guarantee Fund Trust for Micro and Small

Enterprises (CGTMSE) should be extended to eligible NBFCs in order to facilitate

meaningful non-collateral lending to MSMEs.

3. NBFCs have to ensure strong systems and processes to ensure healthy credit quality.

They should strive for creating strong internal process for evaluation and monitoring

of credit.

4. As a strong risk mitigation measure, NBFCs should consider incorporating inputs from

external credit rating agencies.


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Mr. Alok Sondhi Co-Chairman, FIDC & MD, PKF Finance Ltd

Mr. Alok Sondhi Co-Chairman, FIDC & MD, PKF Finance Ltd said, ‘I am sure the RBI

would take note of the important issues discussed during the summit deliberations. Non-

Banking Finance Companies especially Asset Finance Companies play a very vital role in

the economic development of the country by helping in Employment Generation, Asset

Formation & ‘Financial Inclusion’. AFCs ll up a crucial gap by serving rural and that class

of masses who are unable to source Bank Finance.

He Suggested that:

Following are the important issues which are threatening the closure of the complete

MSME sector AFCs in view of the latest RBI directions dated 10.11.14 :

1) Credit Rating should not be Compulsory for Small NBFCs (AFCs) (vide Para 5.2):

Out of total existing 241 deposit taking NBFCs (AFCs), 184 are small, having deposits

less than Rs. 10 crores. It is an accepted fact that credit rating agencies follow the same


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model to rate NBFCs irrespective of their size. As a result, obtaining the minimum

Investment grade rating has become practically impossible and unaffordable for

small NBFCs, simply due to their small size & inspite of their satisfactory financialperformance.

These existing small Deposit taking NBFCs should be allowed to raise Deposits without

rating requirement up to 1/1.5 times of their NOF as before from their relatives, friends

and close associates without any public advertisement/agent and also other aordable

debt instruments.

2) Deposit Acceptance limit for Rated Companies should be enhanced and more timebe granted to reduce Deposits (Para 5.3): Rated AFCs holding Deposit in excess of

1.5 times (earlier allowed upto 4 times) of their NOF have been severely aected since

they have not been granted any time to regularize. A period of 3 years is allowed to

regularize the excess Deposit even in case of down grading of Credit Rating below

Investment Grade and even un-rated AFCs have been allowed to renew deposit upto

31.03.16.

It is requested that Rated AFCs be allowed to accept Public Deposits upto 3 times of

their NOF and a period of 3 years be given to the affected Rated AFCs to regularize

their excess deposit in a phased manner. In the mean time they may be allowed to

renew as well as accept fresh Public Deposits so as not to cause disruption in their

business.

3) More time required to increase capital for small NBFCs (vide Para 4): At present,

minimum requirement of NOF for registering new NBFCs is Rs. 2.0 crores, RBI had

allowed existing NBFCs with NOF below Rs. 2.0 crores and above Rs. 25 Lacs, who had

obtained RBI registration as per RBI Amendment Act (1997), to continue operations.

Now, these companies have also been asked to increase their NOF to Rs. 2 crores,

giving only 2 years time. It is our submission that 5 years time should be given instead

of 2 years for Deposit accepting Category-’A’ AFCs (NBFCs) and NOF requirement

for Category-’B’, Non-Deposit taking AFCs, minimum requirement may be retained at

Rs. 25 Lac only.


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4) Reduction in NPA Provisioning Norms (Para-8): Overdue period for classication of

an Asset as Non-Performing Asset has been brought down to 3 months in a phased

manner with the justication “In the interest of harmonization, the asset classication

norms for NBFCs-ND-SI and NBFCs-D are being brought in line with the Banks in a

phased manner”.

Ground realities of AFCs is totally dierent from Banks as they deal mainly with

rural/illiterate/ un-banked segment of society which is mainly self employed besides

deprived of the benets of SARFESI & Debts Recovery Tribunal (DRTs). Installment is

normally delayed due to the peculiar circumstances of the borrowers. Even Nachiket

Mor commiee recommended 365 days for some sectors of AFCs stating that “one size

ts all” approach for provisioning is not desirable.

Realization of default amounts through legal re-course takes years, making NPA

norms more stringent will only harm the cause of ‘Financial Inclusion’ as AFCs

would be very selective in lending thus forcing small borrowers to go to un-regulated

sector/Money Lenders making them vulnerable. The need of the hour is to introduce

measures to expedite recovery in the present times. We request that overdue period

for classification as an NPA be kept at 6 months.

Another big anomaly which needs to be got corrected and we request Reserve Bank of

India to kindly pursue with concerned authorities for allowance of NPA provisioning

under Income Tax as allowed to Banks/Financial Institutions since the same is mandated

by RBI.


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(Revised Regulatory Framework for NBFCs – Issues and

ASSOCHAM’s Suggestions & Recommendations)1. Fund Raising is Increasingly Geing Dicult

a) Acceptance of Public Deposits

RBI has categorically stated that public deposits should be accepted by banks only and as

such deposit acceptance norms for NBFCs have been further tightened.

Statistics show that the number of deposit taking NBFCs and quantum of public deposits

accepted have both reduced drastically over the last few years. Today there are only 240odd deposits taking NBFCs. Acceptance of public deposits by these companies is more due

to their rapport with the depositors and the need to sustain the investors’ base.

In the current scenario there is hardly a case for” soliciting” deposits and instead it is

merely” acceptance” of deposits. Moreover, this serves as a ready and perennial source of

fund raising.

With the increasing regulatory burden on deposit acceptance, these NBFCs are aggressively

trying to tap alternate sources of funding thereby reducing their dependence on public

deposits.

Suggestions:

Opening new avenues of fund raising like creating a “renance window” would go a long way

in reducing and ultimately exiting of NBFCs from deposit acceptance. Financial Institutions like

SIDBI & NABARD could be entrusted with these responsibilities.

b) Restrictions on End Use of External Commercial Borrowings (ECBs)

As per the RBI Circular dated July 8, 2013 Asset Financing NBFCs have been allowed toECBs under the automatic route.

As per para 3(i) of the above said circular, the end use of funds raised through ECBs

by NBFC-AFCs has to be “to nance the import of infrastructure equipment for leasing to

infrastructure projects”.

While we fully appreciate the condition that the funds have to be used for nancing to the

infrastructure sector, the restriction on the type of equipment and the mode of nancing is

what need to be broad based.


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Thus, this unique “wholesaler/retailer” collaboration model between the banks and

NBFCs has ensured increased ow of credit to under-served, credit starved sections of

society, which in turn has helped signicantly in creation of Assets and Wealth in ruraland semi urban parts of the country and at the same time deepening the credit delivery to

undeserved parts of the country.

The partnership between banks and NBFCs has not only helped the banks meet their

statutory priority sector lending target but has also provided NBFCs a regular and

dependable source of funds for onward lending to the priority sectors.

Suggestions:

We request that the priority sector status should be restored. However, RBI may stipulate acap whereby a maximum of 50% of total bank lending to priority sector may be routed through

NBFCs.

2. Asset Classication Norms

Classication of loan NPAs for NBFCs has also been brought in line with banks.

All NBFCs have to classify loans overdue for 90 days as NPAs. In respect of 90 days. Norm

it must be stated that since credit customers are mostly from the unbanked segment, they

may nd it dicult to cope with the 90-day norm. The NPA norms are very relevant for

large corporate. But for business with irregular cash ow is so and who suers a cascading

impact of all the delays in payments this is a constraint. If he does not get payment in a

cycle it will ow in the following cycle.

The Nachiket Mor commiee recommendations were completely in conict with the Usha

Thorat commiee recommendations. He said that you should not have” one-sizets- all”

for provisioning; it depends on the risk prole. For large entities it should be 60-days and

for the person at the boom of the pyramid, it should be even as long as 365-days.

Ultimately, these moves will have an impact on the cost of credit to the unbanked sector

which NBFCs link with credit. The RBI’s rationale is this will be a problem only once,

and says that we can educate the customer and make them pay on time. Notwithstanding

education or accounting the fact is that they need consideration which banks cannot give.

Another justication given by RBI for this change is that NBFCs are free to restructure

the repayment schedule depending upon the borrowers prole and earnings. However

often there are uncertainties in his cash ow/earnings which may arise due to both


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circumstantial and socio-economic reasons. These demand a greater exibility in the

repayment schedule.

It may not be out of context to mention that the KVKamath commiee has been formed

for redening the small-business nance architecture. It is supposed to give the what a

small business nance company should be and what are the various facilitators that the

regulators have to give for enhancing nance to that particular sector.RBI should await the

recommendations.

Suggestions:

The NPA classication norms should be based on the borrowers prole and the assets being nanced

instead or uniform system of asset classication.

3. NBFCS to Be Covered Under The SARFAESI Act

NBFCS to Be Covered under the SARFAESI Act One of the prime objectives of the revised

regulatory framework is to bring parity with Banks. While the asset classication norms

have been revised to be at par with banks, what is lacking are the tools for recovery at par

with banks. Today NBFCs do not have any statutory recovery tool available. They are left

to the mercy of using indirect methods of recovery like ling cheque bouncing cases under

The Negotiable Instruments Act, 1881.

Further, RBI has already enforced a “Framework for Revitalizing of Distressed Assets in

the Economy” on banks and NBFCs in order to check the rapid growth of NPAs.

Suggestions:

It is imperative that Systemically Important NBFCs (NBFC ND SD.and Deposit Taking NBFCs

(NBFC D) should be given coverage under the SARFAESI Act. This was also recommended by the

Usha Thorat Commiee and the Nachiket Mor Commiee.

4. Income Tax Benets Should Also be at Par with Banks

Income Tax Benets should also be at Par with Banks As mentioned above there is a need

to bring parity with banks in maers relating to recovery and taxation also in addition to

parity in regulation.

i) TDS on Interest (Sec 194A) - Request for Exemption

As per Sec 194A of the Act, TDS@10%is required to be deducted on the interest portion

of the installment paid to NBFCs under loan! Finance agreements whereas banking


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companies, LIC, UTI, public financial institution etc. is exempted from the purview of

this Section.

NBFCs carry on the nancing business mostly to retail customers who are in unorganized

sectors which includes large number of individuals, HUFs and SME sectors. Thus, single

point collection of tax by way of advance tax payments from NBFCs would mean greater

convenience to the department than collecting tax through large number of such customers

from all over the country by way of tax deduction at source.

Apart from this, the distinction in the provision puts NBFCs in a disadvantageous position

and creates severe cash ow constraints since NBFCs operate on a very thin spread/ margin

on interest which at times is even lesser than the TDS deductible on the gross interest andreduces the eective interest rate of the NBFCs on the loans given. NBFCs are bank-like

institutions. Therefore, NBFCs should also be given exemption under section 194A.

The additional limitations of the existing system are the following:

a) Follow up with every customer for TDS certicates every quarter (details of which

are mandatory for claiming the same in the I. T. return) becomes almost impossible.

NBFCs have clients who number in thousands and it is practically very dicult to

collect details from everyone.

b) Even if the TDS certicate is issued by the customer, if TDS return has not been led

or not led properly, the credit for such TDS would not be granted to the NBFC as the

details of such TDS would not appear in the NSDL system.

c) Once the TDS credit is disallowed, the NBFCs have a hard time following up with the

customers and the exchequer has a hard time clearing outstanding demands against

NBFCs which, in reality, do not exist.

ii) Tax benets for Income deferral u/s.43D of the Income Tax Act

Section 43D of the Income Tax Act recognizes the principle of taxing income on sticky

advances only in the year in which they are received. This benet is already available to

Banks, Financial Institutions and State Financial Corporations. This benet has also been

extended to Housing Finance Companies by the Finance Act, 1999.

In accordance with the directions issued by the RBI, NBFCs follow prudential norms and

like the above institutions are required to defer income in respect of their nonperforming

accounts. Since the directions are mandatory in nature, NBFCs have to adhere to the

said directions in preparing their accounts. However, the income tax authorities do not


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recognize these directions and tax such deferment of income on accrual basis. It is but

appropriate that the Income tax authorities accept this principle of income deferral in the

case of NBFCs also; who are the only segments of the nancial sector denied this tax benet.It is, therefore, suggested that Sec.43D of the Income Tax Act be extended to include in its

scope NBFCs registered with RBI, as in the case of other institutions.

iii) Allowability of Provision for Non-performing Assets (NPAs) u/s.36(1)(viia) of the

Income Tax Act

NBFCs are now subject to directions of RBI as regards income recognition and provisioning

norms. Accordingly, NBFCs are also compulsorily required to make provisions for NPAs.

Under the existing provisions u/ s.36(1)(viia) in the Income tax Act, provisions for bad

and doubtful debts made by banks are allowed as a deduction to the extent of 7.5% from

the gross total income and 10% of aggregate average rural advances made by them.

Alternatively, such banks have been given an option to claim a deduction in respect of any

provision made for assets classied by the RBI as doubtful assets or loss assets to the extent

of 10% (increased from 5%) of such assets. However, the benets u/ s.36(1)(viia) are not

available to NBFCs. It is appropriate, in all fairness, that the provision (or NPAs made by

NBFCs registered with RBI be allowed as deduction u/s.36(1)(viia) of the Income tax Act.

5. Leverage Ratio of 7 for NBFCs- ND with Assets Size of Less Than Rs. 500 cr.

RBI has acknowledged that small and medium NBFCs (not accepting deposits) do not pose

any substantial risk to the system. Further, they have been exempted from the requirement

of maintaining Capital Adequacy Ratio (CRAR). Under these circumstances capping their

leverage ratio to 7 seems to be imprudent and restrictive.

Further, these companies borrow largely from banks and nancial institutions which in-

turn carry out due diligence on the borrowing NBFCs. This mitigates the risk, if any, to the

banks/Pis to a great extent.

Suggestions:

The leverage ratio of 7 introduced (or NBFC-ND should be withdrawn

We hope that our concerns and suggestions shall be given their due consideration. We look

forward to receiving a positive response from your end which shall facilitate a healthy

growth of the NBFC sector and justify RBI’s role not only as a regulator but also as a

developer of NBFCs.


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NBFC 21 Jan Report 2015 Final

Documents

Transcript of NBFC 21 Jan Report 2015 Final