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Proceedings &

Recommendations

2nd National Summit

Non-Banking Finance Companies


The way forward
23rd January, 2015 New Delhi

The Associated Chambers of Commerce and Industry of India

The Associated Chambers of Commerce and Industry of India

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 Governments agenda of financial Inclusion. They have been to
some extent successful in filling the gap in offering 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 financial
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 field 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 (specifically 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 better understanding on NBFCs
role 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
Assocham Corporate Office: 5, Sardar Patel Marg, Chanakyapuri, New Delhi - 110 021
Phone: +91-11-46550555 (Hunting Line) Fax: +91-11-23017008-9 E-mail: assocham@nic.in Website: www.assocham.org

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 Committees 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 Governments 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 classification 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 benefits on provisions made against NPAs.
This shall then bring the desired parity with banks and other financial institutions.
Fund raising has increasingly become difficult and challenging, specially, for the large
number of small and medium sized NBFCs.
It is indeed a matter 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

MESSAGE
For a large and diverse country like India, ensuring financial 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 financial 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 financing to small microfinance, the sector has innovated over time and found
ways to address the debt requirements of every segment of the economy. To its credit, the
industry has also responded positively to regulatory efforts to better 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 financing Indias 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 settled to a more healthy
understanding of the risks and rewards of a diverse financial system. For the industry, there are
some costs associated with greater regulations, but the opportunity of being a well regulated
participant in the financial 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 define 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 find it useful.
Shinjini Kumar
Partner, Leader - Banking and Capital Markets
PricewaterhouseCoopers P. Ltd

Analyzing the Revised Regulatory Framework for NBFCs


Background
The roller coaster liquidity ride post the global financial crisis witnessed Indian NBFCs
facing a predicament. Many of them had a favorable business opportunity to convert
the available liquidity into short-term, profitable assets as the banking system and
infrastructure-focused NBFCs dealt with asset quality issues. On the other hand, global
regulatory attention 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 financial crisis on India was limited, it left its marks on the
regulatory 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 benefits to portfolio origination for banks. In contrast, some were
marked with adverse business impact, such as restricting the flow 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 Committee) and the Committee on Comprehensive Financial Services for
Small Businesses and Low Income Households under the Chairmanship of Dr. Nachiket
Mor (hereinafter referred to as the Mor Committee) were landmarks in aggregating
concerns and issues and throwing up ideas and recommendations for discussions.
In this context of high anxiety levels, the final 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 classification 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 differentiation 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 effective layer of financial intermediation between the
informal sector of the economy and the formal sector of finance. NBFCs can claim credit
for converting many Indians to first time users of formal, regulated financial system.
In the process, they have played a meaningful role in shaping borrower behavior, collecting
credit related data and deepening the footprints of finance where data and information can
be accessed by regulators and policymakers as well as other market participants.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

NBFC regulation, on the other hand, deriving broadly from the banking framework, has
been tweaked over time to ensure as good a fit as possible. The other pressure on the
regulatory approach has been the desire to conform to global standards, even when the
Indian economy and the demands of the services led, diverse, informal economy have been
very different from the global counterparts. This tension, between a highly differentiated
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 final 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 perception
of 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 concentration
norms 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 benefit attached to them, create barriers. Diluting the NBFCFactor 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 nondeposit accepting NBFCs that are not systemically important (NBFCs-ND), group holding
companies may have an incentive to continue as NBFCs and not get classified as CIC,
given that the leverage cap is higher for such NBFCs compared to CICs (although defined
differently under the two regulations). The Foreign Direct Investment (FDI) definition of
an NBFC is still not aligned with the RBI definition, causing pain to foreign investors in the
sector specifically in terms of investment activity.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

2nd N at i o na l S u mm i t
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
Shri Rakesh Singh, Chief Executive Officer, Aditya
Birla Finance Ltd.
Mr. Souvik Sengupta, Business Head, SME
Landing, Reliance Commercial Finance Ltd.
Shri N.S. Vishwanathan, Executive Director,
Reserve Bank of India
Shri D. S. Rawat, Secretary General, ASSOCHAM

NBFCs Perspective
SME Financing Perspective
Inaugural Address by Chief
Guest
Vote of Thanks

Networking Tea/Coffee 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

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Indicative Topics
Distinguished Speakers
a) NBFCs Promoting Financial Inclusion Mr. Hemant Jhajhria
Partner, PwC
b) NBFCs Converting to Banks/ Small
Ms. Vibha Batra
Finance Banks
Sr. VP, ICRA Limited
c) Realignment of Regulatory Regime
d) NBFCs The Challenge of Leverage

Mr. V.P. Nandakumar


MD & CEO, Manappuram Finance Ltd.

Mr. Saurabh Bhat, Chief Executive Officer,


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 Mr. Ved Jain
by RBI
Chairman, ASSOCHAM National Council
b) Small & Medium Sized NBFCs on Direct Taxes
Perspective

Mr. Sankar Chakraborti


c) Fund Raising Avenues
Chief Executive Officer, SMERA Rating
d) Level Playing Field with Banks & Other Limited
FIs in
Mr. Mukesh Gandhi
- Taxation

Co-founder & Director Finance, MAS


Financial Services Ltd

- Recovery
(Coverage under SARFAESI Act)

Mr. Alok Sondhi


Co-Chairman, FIDC & MD, PKF Finance
Ltd.

Mr. R. Pratap
Dy. Chief Finance Officer, SKS Micro
Finance
Question and Answer Session
Lunch (2:00 PM Onwards)

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Release of ASSOCHAM PWC Knowledge Report by Chief Guest

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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 finance companies (NBFCs), we
will be strengthening that and then we have also put a draft charter for the customer
services, 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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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

We are planning to set up a kind of a portal where information by various regulators who
are part of SLCC (state level coordination committee) can be put in and we would also
encourage people to file their complaints in that and so that the SLCC is quickly able to
look 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 offices 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-committees 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 Committee on Comprehensive Financial
Services for Small Businesses and Low Income Households popularly known as the
Nachiket Mor Committee, the RBI is moving move away from entity-based regulation to
activity-based regulation by doing away with different categories of NBFCs.
What this would mean is that you dont look at whether the company is an investment
company or an asset finance 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 different 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 finding 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, committees 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 significant role in bringing market
intelligence reports to the notice of the bank on an entity engaged in unauthorised deposit
taking or such other financial activity. The bank has strengthened this market intelligence
so as to gather information quickly and act on it.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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Mr. Raman Aggarwal , Co-Chairman, A ss o cham National Council on


NBFCs 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 with
each other on a regular basis. Perhaps it is time to draw a lesson from these developments
and develop a financial 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.
Off 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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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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 benefits against provisions made for NPAs. Empowering NBFCs with recovery tools
like coverage under SARFAESI Act, specially for Systematically Important NBFCs, are of
prime importance.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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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 finance companies.
He suggested about industry requirements:
a) Government of India should include NBFCs in the governments agenda/action plan
for promoting financial inclusion
b) RBI bringing regulations in order to reduce the number of NBFCs, because there are
administratively difficult 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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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Mr. Rakesh Singh Chief Executive officer, Aditya Birla Finance Ltd
Addressing the Summit
He recommended/Suggested that
1. Notification of NBFCs under SARFAESI Act

Unlike Banks and Public Financial Institutions, NBFCs do not enjoy the benefits 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 the
SARFAESI Act by Central Government.

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


Since the assets of the two financial 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 affects the

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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whole NBFC profitability 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 not
permitted 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 matter on Double Taxation issue in Pass Through Certificates 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 Refinance and Credit Insurance Schemes: Opening up of refinance
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 periodicity
of issue as the RBI has not yet come back with any changes to the existing
guidelines.

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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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 financial sector, delivering a diverse set of services lending
and deposit mobilisation, distribution of financial 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 buttress NBFCs MSME funding efforts. Specific support from
central government is felt in the following areas as elaborated below:

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 can
enlist 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 benefit of the
MSMEs.
Preferential Risk Weightage for MSME Exposure
Presently, credit quality of loans determines risk weights for capital allocation irrespective
of end-use of loaned funds. In such a scenario differential risk weights based on enduse can be used as a tool to encourage flow 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 flow of credit to
this sector would increase and at the same time be beneficial 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 significant 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 benefits of such extension would be greater
degree penetration of developmental schemes.

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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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 financial skill and capacity building training, it would
be of significant 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 effective tool for bad debts
recovery. This is possible since the act confers significant powers on lenders with regards
to tangible security (except agricultural land) offered 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 specified 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 confidence in NBFCs to widen and deepen the MSME
loan 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
significant in the recent past. NBFCs form an integral part of the financial sector and
therefore are exposed to similar risks and challenges that are faced by other players in
the financial 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 Committee 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 profitability 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 financial system and reduce the
regulatory arbitrage between banks and NBFCs. Accordingly, the new regulatory framework

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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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 regulations
will 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
Section 2 Regulatory Changes

Banks had advantages over NBFCs in most areas, though relaxed


regulations partially dented this advantage
Parameter

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 complete


manner
Quite a few segments under served

Cater to niche customer segments


Reach a function of the focus on
particular customer segments

Products

Service Deposits & lending requirements


Transaction banking products
Large product suite for various banking needs

Lending is the primary focus


Tailored products based on specific
business needs

Service Proposition

Multiple channels of service delivery to meet


customer needs
Focus on universal access

Service to customers based on


relationships 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 mechanism

NBFCs do not have access to the repo


mechanism

Risk Weights

Banks have a low risk weight structure for


retail assets viz. vehicle loans, home loans,
gold loans, etc.

NBFC have higher risk weights


prescribed for the retail assets

Indian NBFCs At An Inflection Point


PwC

22

Bank

January 2015
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Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Section 2 Regulatory Changes

The recent regulatory changes will have a significant impact on the NBFCs
and will result in a significant change in their operations and future
strategy
Regulatory Change

Impact

Increase in Tier I CAR (core CAR) to 10% for


NBFC-D and NBFC-ND-SI

To improve the loss absorbing capacity of systemically


important financial institutions
Will strengthen balance sheet with higher core capital
availability with the NBFCs
Capital requirement in the long run will increase

NPA recognition changes to 90 days


overdue from 180 days overdue for loans
and 360 days for hire purchase assets

Brings about parity between NBFCs and banks, removes


regulatory arbitrage
In the short term may increase NPAs for NBFCs impacting
profitability but will remain an accounting impact
May impact short term bank borrowing / credit rating for new
funds

Provision on standard assets increased


from 0.25% to 0.40%

Balance sheet of NBFCs will become more robust with the


increase in loss absorption capacity
Profitability will be impacted in the short run

Credit concentration norms for AFCs to be


in line with other NBFCs

No major impact AFCs generally have a high retail loan


portfolio

Corporate
norms

Will bring about accountability, transparency and trust in


operations of the NBFCs
Will help to rein in parallel economy and keep a tab on
investors

governance

and

disclosure

Indian NBFCs At An Inflection Point


PwC

January 2015
7

Section 2 Regulatory Changes

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

Deposit acceptance reduced to 1.5 times of


Owned Funds for Deposit taking AFCs and
mandatory investment grade credit rating
for accepting public deposits

The limit and credit rating helps safeguard investor deposits


public or otherwise

Systemically Important NBFC limit revised


to 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 lever


rather than on standalone basis

Ensuring regulatory compliance for groups with multiple small


NBFCs

Introduction of leverage ratio of 7 for NBFCND having assets less than Rs.500 crore

Ensures non systemically important NBFCs are not highly


leveraged

Indian NBFCs At An Inflection Point


PwC

January 2015
8

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

23

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 ICRAs 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% buffer over the revised Tier
I capital requirements.
Systemic Importance
Increase in asset-base cut-off for from Rs. 100 crore to Rs. 500 crore to facilitate focused
supervision while allowing smaller players flexibility to innovate and cater for niche
segments.

24

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Deposit Acceptance
Maximum deposit acceptance fixed at 1.5 times of NOF, against 4 times applicable to
investment grade NBFCs. Limited number NBFCs to be affect.
NBFCs remain at a disadvantage
While RBI has removed some of regulatory arbitrage BFCs have enjoyed vis--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
effectively 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 repo
window, NBFCs do not enjoy any such benefits.
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 diversified, the credit and market risk on specific
asset classes may be similar for both banks and NBFCs.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

25

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


He Suggested:
1. RBI should consider permitting 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 to
ease the transition period for NBFCs converting to SFBs.
2. PSL target to be flexibly phased in over a viable period. This may be decided on a caseto-case basis by the regulators considering the practical issues faced by the individual
entity.
3. The definition of what constitutes PSL should be based on the socio economic profile/
status of the borrower and not on the characteristics of the product offered 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 finance, gold loans etc.

26

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Mr. Saurabh Bhat, Chief Executive Officer, Ambit Finevest Pvt Ltd.
He Highlighted Data Analysis

NBFC Sector Highlights

Ambit Finvest Pvt. Ltd.

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
NBFC
NBFC-ND-SI
ND SI had a average Leverage ratio of 3
3.0
0 as on March 14
14 with total
assets of 12.7 lac crore and total advances of 8.45 lac crore.
As on March14, 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%).
In
I developed
d
l
d countries
t i thi
this ratio
ti iis >50%

27

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward
PRIVATE & CONFIDENTIAL. NOT FOR CIRCULATION

NBFC Sector Highlights

Ambit Finvest Pvt. Ltd.

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
given
i
PSL requirements
i
t tto bbe mett bby M
Marchh 31st.

Govt (State & Central) owned NBFCs form a significant part of total
NBFC assets (>35%) and are exempt from some prudential norms (RBI
has raised red flag on the issue)
They are levered 6.4x (industry leverage of 3x) and have bank borrowings of
over 38,500 cr

Industry Comparison Key Leverage Ratios


mFIs

gold Finance
NBFCs

Ambit Finvest Pvt. Ltd.


Asset
Finance
NBFCs

Sme focused
NBFCs

Wholesale
Lending
NBFCs

55%
(10%-100%)

43%
(36%-52%)

47%
(32%-93%)

HFCs

PRIVATE & CONFIDENTIAL. NOT FOR CIRCULATION

Bank Borrowing as % of Total


Borrowings

84%
(82%-91%)

53%
(43%-63%)

High

Medium

High

High

Medium

Low to Medium

High

medium

medium to
High

medium

medium

Low to med

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

V High

Low to Medium

Medium to
High

Low

Medium

Low to Medium

overall Riskiness of Loan Assets

medium

Low to
medium

medium

Low

medium

medium to High

Priority Sector benefits to Banks

High

medium

medium

medium

Low

Nil

Access to Bank Borrowings


dependence on Bank
Borrowings

Leverage

Expected Loss on defaults

50%

(20%70%)

PRIVATE & CONFIDENTIAL. NOT FOR CIRCULATION

28

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Industry Comparison Key Leverage Ratios

Cost to Income Ratio

Ambit Finvest Pvt. Ltd.

mFIs

gold
Finance
NBFCs

Asset
Finance
NBFCs

HFCs

Sme ffocused
d
NBFCs

Wholesale
Lending
NBFCs

62%

56%

60%

31%

58%

51%

operating efficiency

Low

medium

Low

High

medium

medium to
High

Shortt Term
Sh
T
Borrowings
B
i
as % off
Total Borrowings

64%

74%

44%

28%

35%

50%

Cash and Cash Equivalents as %


of Total Advances

38%

7.4%

5%

4.2%

12%

7.1%

ALM Surplus
S l (Deficit)
(D fi it) iin < 1 year
category

7.7%

21%

2.3%

(6%)

5%

(0.3%)

overall Liquidity

High

medium

medium

high

medium to
High

Low to medium

8%

12%

5%

17%

18.8%
(14.4%(14
4%
27.3%)

16%
(9-19.5%)

15.0%
(10-19.6%)

22%
(15.5%-32%)

Tier II Capital as % of Tier I


Capital

R e
Roe

14%

18.3%
(16.7%-20.2%)

9.9%
(5.5%-14%)

PRIVATE & CONFIDENTIAL. NOT FOR CIRCULATION

Wholesale Lending NBFCs Leverage Challenge

Ambit Finvest Pvt. Ltd.

Banks

Seen by banks as direct competition

Concentration in their Portfolio is seen as high risk

y banks are far tighter


g
compared to regulatory
g
y
D:E covenants by

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

Debt Capital Markets (NCDs/CPs)

Only Private Placement Market available

Min AA- and above rating

g Cost as compared
p
to p
public NCDs and largely
g y 3-4 y
year tenor
High

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

a v strong parent group level guarantee

PRIVATE & CONFIDENTIAL. NOT FOR CIRCULATION

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

12

29

NBFC Outlook Medium Term

I t
Interest
t rates
t seen tto soften
ft by
b 100-150
100 150 b
bps iin nextt 12 mths
th

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

higher deployment of vehicles means better debt servicing capability of customers

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

PRIVATE & CONFIDENTIAL. NOT FOR CIRCULATION

30

Ambit Finvest Pvt. Ltd.

13

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Mr. Shankar Chakraborti, Chief Executive Officer, 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 significant. Some
of the ways to tap the opportunities include:
a. Cluster-specific product innovation.
b. Proactive sales effort to effectively 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.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

31

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. NonBanking 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 fill 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

32

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

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 financial
performance.

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 affordable
debt instruments.

2) Deposit Acceptance limit for Rated Companies should be enhanced and more time
be 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 affected 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.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

33

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


an Asset as Non-Performing Asset has been brought down to 3 months in a phased
manner with the justification In the interest of harmonization, the asset classification
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 different from Banks as they deal mainly with
rural/illiterate/ un-banked segment of society which is mainly self employed besides
deprived of the benefits of SARFESI & Debts Recovery Tribunal (DRTs). Installment is
normally delayed due to the peculiar circumstances of the borrowers. Even Nachiket
Mor committee recommended 365 days for some sectors of AFCs stating that one size
fits 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.

34

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

(Revised Regulatory Framework for NBFCs Issues and


ASSOCHAMs Suggestions & Recommendations)
1. Fund Raising is Increasingly Getting Difficult
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 240
odd 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 refinance 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 to
ECBs 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 finance the import of infrastructure equipment for leasing to
infrastructure projects.
While we fully appreciate the condition that the funds have to be used for financing to the
infrastructure sector, the restriction on the type of equipment and the mode of financing is
what need to be broad based.

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

35

i) Financing of Domestically Manufactured Equipment Should Also Be Allowed


Currently majority of the leading infrastructure equipment manufacturers of the world
have set base in India either directly or through a joint venture with a domestic partner.
Further, large quantities of equipment are being manufactured by domestic players. As
a result majority of the infrastructure equipment today are sourced locally and are not
imported. Under these circumstances the restriction on use of ECB funds for financing
only imported equipment is imprudent and highly restrictive.
ii) Mode of Financing May Be Any
You may be aware that ever since service tax was imposed on the interest component of
leasing and hire purchase transactions in 20m, NBFCs have being financing equipment by
way of loans against hypothecation. Further, Financial Lease also has issues in claiming
depreciation and Operating Lease is not considered as a financial activity. As such the
restriction on use of ECB funds for Leasing only seems to be unjustified.
Suggestion:
Based on the (acts stated above, we hereby request you to broaden the scope of the circular by
allowing NBFC-AFCs to use ECB funds for /Finandng (mode could be lease/hire purchase / loans
against hypothecation) of all infrastructure equipment (both domestic and imported)
Para 3m may be modified so as to delete the words the import of and for leasing.
c) Withdrawal of Priority Sector Status to Bank Lending To NBFCs for On-lending To
Priority Sector
The two vital players in ensuring financial inclusions of the deserving segments of
society are the Banks and NBFCs and each of them has their own strengths, most often
complementary. The strength of the Commercial Banks lies in their capability to warehouse
the assets owing firstly to their superior capital base and secondly to their ability to access
low cost deposits, while the strengths of the NBFCs lie in their loan origination, appraisal
and servicing skills. Needless to mention, these entities have, Over a period of time,
developed expertise in
i) Identifying the credit needs of this deserving yet neglected segment of Customers
ii) Efficiently assess the risk attached thereto
iii) Tailor makes credit products to suit their requirements
iv) Lend and recover their installments.

36

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

Thus, this unique wholesaler/retailer collaboration model between the banks and
NBFCs has ensured increased flow of credit to under-served, credit starved sections of
society, which in turn has helped significantly in creation of Assets and Wealth in rural
and 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 a
cap whereby a maximum of 50% of total bank lending to priority sector may be routed through
NBFCs.
2. Asset Classification Norms
Classification 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 find it difficult to cope with the 90-day norm. The NPA norms are very relevant for
large corporate. But for business with irregular cash flow is so and who suffers a cascading
impact of all the delays in payments this is a constraint. If he does not get payment in a
cycle it will flow in the following cycle.
The Nachiket Mor committee recommendations were completely in conflict with the Usha
Thorat committee recommendations. He said that you should not have one-sizefits- all
for provisioning; it depends on the risk profile. For large entities it should be 60-days and
for the person at the bottom 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 RBIs 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 justification given by RBI for this change is that NBFCs are free to restructure
the repayment schedule depending upon the borrowers profile and earnings. However
often there are uncertainties in his cash flow/earnings which may arise due to both

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

37

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


repayment schedule.
It may not be out of context to mention that the KVKamath committee has been formed
for redefining the small-business finance architecture. It is supposed to give the what a
small business finance company should be and what are the various facilitators that the
regulators have to give for enhancing finance to that particular sector.RBI should await the
recommendations.
Suggestions:
The NPA classification norms should be based on the borrowers profile and the assets being financed
instead or uniform system of asset classification.
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 classification 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 filing 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 Committee and the Nachiket Mor Committee.
4. Income Tax Benefits Should Also be at Par with Banks
Income Tax Benefits should also be at Par with Banks As mentioned above there is a need
to bring parity with banks in matters 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

38

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

companies, LIC, UTI, public financial institution etc. is exempted from the purview of
this Section.
NBFCs carry on the financing 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 flow 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 and
reduces the effective 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 certificates 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 difficult to
collect details from everyone.
b) Even if the TDS certificate is issued by the customer, if TDS return has not been filed
or not filed 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 benefits 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 benefit is already available to
Banks, Financial Institutions and State Financial Corporations. This benefit 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

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

39

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 financial sector denied this tax benefit.
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 classified by the RBI as doubtful assets or loss assets to the extent
of 10% (increased from 5%) of such assets. However, the benefits 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 financial institutions which inturn 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 RBIs role not only as a regulator but also as a
developer of NBFCs.

40

Proceedings & Recommendations 2nd National Summit Non-Banking Finance Companies The Way Forward

The Associated Chambers of Commerce and Industry of India


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