20-May-2020: Cabinet approves Special Liquidity Scheme for NBFCs/HFCs to address their Liquidity Stress

The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, has given its approval to the proposal of the Ministry of Finance to launch a new Special Liquidity Scheme for Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) to improve liquidity position of the NBFCs/HFCs.

Financial implication: The direct financial implication for the Government is Rs. 5 crore, which may be the equity contribution to the Special Purpose Vehicle (SPV). Beyond that, there is no financial implication for the Government until the Guarantee involved is invoked. However, on invocation, the extent of Government liability would be equal to the amount of default subject to the Guarantee ceiling. The ceiling of aggregate guarantee has been set at Rs. 30,000 crore, to be extended by the amount required as per the need.

Details of the Scheme: The Government has proposed a framework for addressing the liquidity constraints of Non-Banking Financial Companies (NBFCs) and Housing Finance Companies (HFCs) through a Special Liquidity Scheme. An SPV would be set up to manage a Stressed Asset Fund (SAF) whose special securities would be guaranteed by the Government of India and purchased by the Reserve Bank of India (RBI) only. The proceeds of sale of such securities would be used by the SPV to acquire short-term debt of NBFCs/HFCs. The Scheme will be administered by the Department of Financial Services, which will issue the detailed guidelines.

Implementation schedule: A large public sector bank would set up an SPV to manage a stressed asset fund which would issue interest bearing special securities guaranteed by the Government of India, to be purchased by RBI only. The SPV would issue securities as per requirement subject to the total amount of securities outstanding not exceeding Rs. 30,000 crore to be extended by the amount required as per the need. The securities issued by the SPV would be purchased by RBI and proceeds thereof would be used by the SPV to acquire the debt of at least investment grade of short duration (residual maturity of upto 3 months) of eligible NBFCs / HFCs.

Impact: Unlike the Partial Credit Guarantee Scheme which involves multiple bilateral deals between various public sector banks and NBFCs, requires NBFCs to liquidate their current asset portfolio and involves flow of funds from public sector banks, the proposed scheme would be a one-stop arrangement between the SPV and the NBFCs without having to liquidate their current asset portfolio. The scheme would also act as an enabler for the NBFC to get investment grade or better rating for bonds issued. The scheme is likely to be easier to operate and also augment the flow of funds from the non-bank sector.

Benefits: It has been announced in the Budget Speech of 2020-21 that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the PCGS. This facility would supplement the liquidity measures taken so far by the Government and RBI. The Scheme would benefit the real economy by augmenting the lending resources of NBFCs/HFCs/MFIs.

Background: It has been announced in the Budget Speech of 2020-21 that a mechanism would be devised to provide additional liquidity facility to NBFCs/HFCs over that provided through the Partial Credit Guarantee Scheme (PCGS).  There is an urgency to implement the above Budget announcement to strengthen financial stability on account of the emerging situation of Covid-19.

4-Nov-2019: Liquidity Risk Management Framework for Non-Banking Financial Companies and Core Investment Companies

In order to strengthen and raise the standard of the Asset Liability Management (ALM) framework applicable to NBFCs, it has been decided to revise the extant guidelines on liquidity risk management for NBFCs. All non-deposit taking NBFCs with asset size of ₹ 100 crore and above, systemically important Core Investment Companies and all deposit taking NBFCs irrespective of their asset size, shall adhere to the set of liquidity risk management guidelines given below. However, these guidelines will not apply to Type 1 NBFC-NDs1, Non-Operating Financial Holding Companies and Standalone Primary Dealers. It will be the responsibility of the Board of each NBFC to ensure that the guidelines are adhered to. The internal controls required to be put in place by NBFCs as per these guidelines shall be subject to supervisory review. Further, as a matter of prudence, all other NBFCs are also encouraged to adopt these guidelines on liquidity risk management on voluntary basis.

While some of the current regulatory prescriptions applicable to NBFCs on ALM framework have been recast below, a few additional features including disclosure standards have also been introduced. The important changes are as under:

1. Granular Maturity Buckets and Tolerance Limits: The 1-30 day time bucket in the Statement of Structural Liquidity is segregated into granular buckets of 1-7 days, 8-14 days, and 15-30 days. The net cumulative negative mismatches in the maturity buckets of 1-7 days, 8-14 days, and 15-30 days shall not exceed 10%, 10% and 20% of the cumulative cash outflows in the respective time buckets. NBFCs, however, are expected to monitor their cumulative mismatches (running total) across all other time buckets upto 1 year by establishing internal prudential limits with the approval of the Board. The above granularity in the time buckets would also be applicable to the interest rate sensitivity statement required to be submitted by NBFCs.
2. Liquidity risk monitoring tools: NBFCs shall adopt liquidity risk monitoring tools/metrics in order to capture strains in liquidity position, if any. Such monitoring tools shall cover a) concentration of funding by counterparty/ instrument/ currency, b) availability of unencumbered assets that can be used as collateral for raising funds; and, c) certain early warning market-based indicators, such as, book-to-equity ratio, coupon on debts raised, breaches and regulatory penalties for breaches in regulatory liquidity requirements. The Board of NBFCs shall put in place necessary internal monitoring mechanism in this regard.
3. Adoption of “stock” approach to liquidity: In addition to the measurement of structural and dynamic liquidity, NBFCs are also mandated to monitor liquidity risk based on a “stock” approach to liquidity. The monitoring shall be by way of predefined internal limits as decided by the Board for various critical ratios pertaining to liquidity risk. Indicative liquidity ratios are short-term liability to total assets; short-term liability to long-term assets; commercial papers to total assets; non-convertible debentures (NCDs) (original maturity less than one year) to total assets; short-term liabilities to total liabilities; long-term assets to total assets; etc.
4. Extension of liquidity risk management principles: In addition to the liquidity risk management principles underlining extant prescriptions on key elements of ALM framework, it has been decided to extend relevant principles to cover other aspects of monitoring and measurement of liquidity risk, viz., off-balance sheet and contingent liabilities, stress testing, intra-group fund transfers, diversification of funding, collateral position management, and contingency funding plan.

Introduction of Liquidity Coverage Ratio (LCR)

In addition, the following categories of NBFCs shall adhere to the guidelines on LCR including disclosure standards:

1. All non-deposit taking NBFCs with asset size of ₹ 10,000 crore and above, and all deposit taking NBFCs irrespective of their asset size, shall maintain a liquidity buffer in terms of LCR which will promote resilience of NBFCs to potential liquidity disruptions by ensuring that they have sufficient High Quality Liquid Asset (HQLA) to survive any acute liquidity stress scenario lasting for 30 days. The stock of HQLA to be maintained by the NBFCs shall be minimum of 100% of total net cash outflows over the next 30 calendar days. The LCR requirement shall be binding on NBFCs from December 1, 2020 with the minimum HQLAs to be held being 50% of the LCR, progressively reaching up to the required level of 100% by December 1, 2024, as per the time-line given below:

2. All non-deposit taking NBFCs with asset size of ₹ 5,000 crore and above but less than ₹ 10,000 crore shall also maintain the required level of LCR starting December 1, 2020, as per the time-line given below:

3. Core Investment Companies, Type 1 NBFC-NDs, Non-Operating Financial Holding Companies and Standalone Primary Dealers are exempt from the applicability of LCR norms.

16-May-2019: Risk Management System – Appointment of Chief Risk Officer (CRO) for NBFCs

With the increasing role of NBFCs in direct credit intermediation, there is a need for NBFCs to augment risk management practices. While Boards of NBFCs should strive to follow best practices in risk management, it has been decided that NBFCs with asset size of more than Rs.50 billion shall appoint a CRO with clearly specified role and responsibilities. The CRO is required to function independently so as to ensure highest standards of risk management.

The NBFCs shall strictly adhere to the following instructions in this regard:

1. The CRO shall be a senior official in the hierarchy of an NBFC and shall possess adequate professional qualification/ experience in the area of risk management.
2. The CRO shall be appointed for a fixed tenure with the approval of the Board. The CRO can be transferred/ removed from his post before completion of the tenure only with the approval of the Board and such premature transfer/ removal shall be reported to the Department of Non-Banking Supervision of the regional office of the Bank under whose jurisdiction the NBFC is registered. In case the NBFC is listed, any change in incumbency of the CRO shall also be reported to the stock exchanges.
3. The Board shall put in place policies to safeguard the independence of the CRO. In this regard, the CRO shall have direct reporting lines to the MD & CEO/ Risk Management Committee (RMC) of the Board. In case the CRO reports to the MD & CEO, the RMC/ Board shall meet the CRO without the presence of the MD & CEO, at least on a quarterly basis. The CRO shall not have any reporting relationship with the business verticals of the NBFC and shall not be given any business targets. Further, there shall not be any ‘dual hatting’ i.e. the CRO shall not be given any other responsibility.
4. The CRO shall be involved in the process of identification, measurement and mitigation of risks. All credit products (retail or wholesale) shall be vetted by the CRO from the angle of inherent and control risks. The CRO’s role in deciding credit proposals shall be limited to being an advisor.
5. In NBFCs that follow committee approach in credit sanction process for high value proposals, if the CRO is one of the decision makers in the credit sanction process, the CRO shall have voting power and all members who are part of the credit sanction process, shall individually and severally be liable for all the aspects, including risk perspective related to the credit proposal.

Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 has been modified accordingly.

26-Apr-2019: The Reserve Bank Extends Ombudsman Scheme for Non-Banking Financial Companies to eligible Non-Deposit Taking Non-Banking Financial Companies

As announced in Para 11 of the Statement on Developmental and Regulatory Policies of the Monetary Policy Statement dated April 04, 2019, the Reserve Bank of India (RBI) has extended the coverage of Ombudsman Scheme for Non-Banking Financial Companies (NBFCs), 2018 to eligible Non Deposit Taking Non-Banking Financial Companies (NBFC-NDs) having asset size of Rupees 100 crore or above with customer interface vide Notification dated April 26, 2019.

The Non-Banking Financial Company-Infrastructure Finance Company (NBFC-IFC), Core Investment Company (CIC), Infrastructure Debt Fund-Non-banking Financial Company (IDF-NBFC) and an NBFC under liquidation, are excluded from the ambit of the Scheme.

The Scheme was launched on February 23, 2018 for redressal of complaints against NBFCs registered with RBI under Section 45-IA of the RBI Act, 1934 and covered all deposit accepting NBFCs to begin with. It provides a cost-free and expeditious complaint redressal mechanism relating to deficiency in the services by NBFCs covered under the Scheme. The offices of the NBFC Ombudsmen are functioning at four metro centres viz. Chennai, Kolkata, Mumbai and New Delhi and handle complaints of customers in the respective zones.

The Scheme also provides for an Appellate mechanism under which the complainant / NBFC has the option to appeal against the decision of the Ombudsman before the Appellate Authority.

9-Nov-2017: RBI release new outsourcing norms for NBFCs

RBI has issued fresh directions on managing risks and code of conduct in outsourcing of financial services by NBFCs.

Non-banking financial companies (NBFCs) cannot outsource core management functions like internal audit, strategic and compliance functions for know your customer (KYC) norms, sanction of loans and management of investment portfolio.

Access to customer information by staff of the service provider shall be on 'need to know' basis i.e., limited to those areas where the information is required in order to perform the outsourced function. These norms have to be complied with in the next two months.

NBFCs have to ensure that service providers are able to isolate and clearly identify the NBFC's customer information, documents, records and assets to protect the confidentiality of the information. Any leakage of confidential customer related information should be reported to the central bank immediately, RBI said adding that NBFCs would be liable to its customers for any damages.

A board approved code of conduct for direct sales and recovery agents should also be put in place. The NBFC and their agents shall not resort to intimidation or harassment of any kind, either verbal or physical, against any person in their debt collection efforts, including acts intended to humiliate publicly or intrude the privacy of the debtors' family members, referees and friends, making threatening and anonymous calls or making false and misleading representations.

In case NBFCs are sharing back-office, service arrangements with other group entities there should be a clear demarcation of resources like premises and personnel. Moreover the customers shall be informed specifically about the company which is actually offering the product/ service, wherever there are multiple group entities involved or any cross selling observed.

NBFCs also have been asked to constitute a grievance redressal machinery with the name and contact details of the redressal officer displayed prominently at their branches. It shall be clearly indicated that NBFCs' grievance redressal machinery will also deal with the issue relating to services provided by the outsourced agency.

NBFCs would also be responsible for making currency transaction reports and suspicious transactions reports to the financial intelligence unit for activities carried out by the service providers.

20-Sep-2017: Peer-to-peer lending platforms to be treated as NBFCs

After a year or more of due-diligence, the RBI has notified that peer-to-peer (P2P) lending platforms need to be regulated and treated on par with non-banking financial companies (NBFCs). In a notification, the RBI has pressed the need for regulation of this segment, which is fairly nascent in India with only 10-12 small players.

While the final guidelines are still awaited, P2P lending platforms such as LenDen Club, Faircent, Qbera, Lendbox, Rupaiya Exchange and Monexo are a relieved lot. The players, had themselves, been asking the apex bank for regulations that would help bring credibility and trust into the business.

P2P lending is a form of crowd-funding used to raise loans which are paid back with interest. It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans. The borrower can either be an individual or a legal person requiring a loan. The interest rate may be set by the platform or mutual agreement between the borrower and the lender. Fees are paid to the platform by both the lender as well as the borrower. Borrowers pay an origination fee — either a flat rate fee or as a percentage of the loan amount raised — according to their risk category.

At present, the biggest challenge in the sector, which could disrupt the urban financial inclusion space, is that most of the players are outside the formal credit rating and reporting process — a reason why lenders and even several investors shy away from investing.

21-Aug-2019: Constitution of the Advisory Board for Banking Frauds (ABBF)

The Commission has in consultation with the Reserve Bank of India based on the recommendations of an Expert Committee on NPAs and Frauds constituted under the Chairmanship of Shri YM Malegam by RBI reviewed the matter and has decided to reconstitute the Advisory Board on Bank, Commercial and Financial Frauds (ABBCFF) to be named as Advisory Board for Banking Frauds (ABBF).

Accordingly, the Central Vigilance Commission hereby reconstitutes the Board as below:

1. Dr. TM Bhasin, Ex.-CMD, Indian Bank, Ex-Vigilance Commissioner, CVC - Chairman
2. Shri Madhusudan Prasad , IAS(Retd.), former Secretary, Mio UD Member
3. Shri DK Pathak, IPS (Retd .), former Director General, Border Security Force - Member
4. Shri Suresh N. Patel, Ex.MD & CEO, Andhra Bank Member

The tenure of the Chairman/Member would be for a period of two years from 21/08/2019. The other terms and conditions of appointment would be as indicated in Annex. (In case the Chairman I Member designate is holding an office of profit I a regular appointment carrying monthly emoluments with Govt. of India, Govt. of any of the States/Union Territories of India or any other company, society and local authority owned or controlled by Govt. of

India/any of the States/Union Territories of India, as on 21 .08 .2019, his appointment as Chairman/Member of the Board would be considered from the date succeeding the day on which he demits the office/post which he is holding, other than the Chairman I Member of the Board).

The ABBF would function as the first level of examination of all large fraud cases before recommendations/references are made to the investigative agencies, i.e., CBI by the respective PSBs. The Board's jurisdiction would be confined to those cases involving the level of officers of General Manager and above in the Public Sector Banks (PSB) in respect of an

allegation of a fraud in a borrowing account in a PSB. Individual PSBs would refer all large fraud cases above Rs.500 million to the Board and on receipt of its recommendation /advice, the PSB concerned would take further action in such matters.

CBI may also refer any case/matter to the Board where it has any issue/difficulty or in technical matters with the PSB concerned.

In matters which the CBI Suo moto propose to take cognizance by way of PE/RC, the procedure u/s 17A of the PC Act, 1988 [as amended w.e.f. 26.G7.2018, vide S03664(E) dated 26.07.2018] would be followed by CBI and the concerned authorities in the PSBs and, therefore, such matters shall not be referred to the Board.

The Board may also periodically carry out frauds analysis in the financial system and give inputs, if any, for policy formulation related to the frauds, to RBI.

Apart from the above, the Board may also advise on any other technical matter referred to it by the CVC or RBI.

The Board will be headquartered at New Delhi , but the Board may, at its convenience meet anywhere in India. As in the past, the RBI would be providing the required secretarial services, logistics and analytical support along-with the necessary funding to the Board.

The Board will ordinarily, within a month of receipt of the initial reference tender its advice to the PSB/CBI in every matter. The Board would on its own decide on internal procedures for its functions/affairs.

The Board shall keep the Commission/RBI informed about its performance/activities on a quarterly basis.