VOLUME – 7 NO. – 3 OCTOBER - DECEMBER – 2015 FOR PRIVATE CIRCULATION

FIDC News • 1

F i n a n c e

I n d u s t r y

Development

C o u n c i l

MR. RAMAN AGGARWAL ...Chairman, FIDC

MR. ALOK SONDHI ... Co-Chairman

MR. T. T. SRINIVASARAGHAVAN

MR. MAHESH THAKKAR ... Director General

MR. MUKESH GANDHI

MR. SRINIVAS ACHARYA

MR. K. V. SRINIVASAN

MR. N M MUKHI ... Editor

AT A GLANCE1

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EDITORIAL COMMITTEE

FIDC IN WHIRLWIND ACTION MODE FOR NEW IMAGE MAKING FOR NBFCs

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FIDC Meeting with Mr. Raghuram Rajan, Governor RBI on 28th October 2015at RBI Office, Mumbai. Present: Mr. Raman Aggarwal, Mahesh Thakkar,

Ramesh Iyer and K V Srinivasan

FIDC Meeting with Mr. Nitin Gadkari, Minister for Road Transport & Highways on 8th October 2015 at Transport Bhawan, New Delhi.

Present: Mr. Raman Aggarwal and Mahesh Thakkar

FIDC Meeting with Mr. N.S. Vishwanathan, Executive Director, RBI on 28th October 2015 at RBI Office, Mumbai. Present: Mr. Raman Aggarwal,

Mahesh Thakkar, Ramesh Iyer and K V Srinivasan

FIDC Meeting with Mr. C D Srinivasan, RBI PCGM DNBR on 19th October 2015 at RBI Office, Mumbai.

Present: Mr. Raman Aggarwal, Mahesh Thakkar and K V Srinivasan

FIDC Meeting with Mr. Sathyan David, RBI PCGM DNBS on 19th October 2015 at RBI Office, Mumbai.

Present: Mr. Raman Aggarwal, Mahesh Thakkar and K V Srinivasan

FIDC Meeting with Indian Banks Association Chief ExecutiveMr. Mohan V Tanksale, on 19th October 2015 at IBA Office, Mumbai. Present: Mr. Raman Aggarwal, Mahesh Thakkar and K V Srinivasan

FIDC In Whirlwind Action Mode For New Image Making For NBFCs ....Photo StoryMeeting with Raghuram Rajan, RBI GovernorMeeting with Nitin Gadkari, Minister for Road Transport and HighwaysMovesA meeting with CBDT chair person, Mrs. Anita KapoorLegal EagleRepositioning NBFCs in the Indian Financial System ....Raman Aggarwal, ChairmanReview of Guidelines on Restructuring of Advances by NBFCs ....DeloitteFIDC Interaction With Media on 23 November, 2015Regulatory PerimeterSebi MovesPeriscopeFIDC In ActionPhoto Story

FIDC News • 2

1. FIDC Introduction

2. Role of NBFCs in Promoting Financial Inclusion

3. Regular Interaction with FIDC

4. Differential Risk Weights on Various Assets

5. Funding

Formed at the behest of RBI Governor Dr. Jalan in 2004, by merging all associations

Majority of the leading NBFCs and a large number of small and medium NBFCs engaged-in asset and loan financing are members.

All regional associations are affiliated to FIDCPlaying the role of SRORecognition from Ministry of Finance and RBIHand over the copy of Newsletter and Handbook on

Repossession

Catering to the unbanked segment in rural and semi urban areas who do not have any track records or credit history, since 7 decades

Pioneering role in vehicle financing including commercial vehicles, particularly to SRTOs

Acting as conduits to transforming unbanked borrowers to bankable borrowers

Credit call taken on the basis of the understanding of local business dynamics and the repayment capacity of the borrower

Need to give due recognition to NBFCs for furthering financial inclusion.

Need to create a structured platform for regular interactionWith the department – once every quarter at D G/ E D level on

the lines of Informal Advisory Group. RBI had set up a mechanism of Advisory Group between the Department and industry representatives to frame new regulations and make any amendments so as to ensure wider acceptance and smooth transition.

With the Governor – twice a year before the annual credit policy & mid-term review, was prevalent earlier

Currently all assets are assigned a uniform risk weight of 100 irrespective of their type and risk profile

Revised Regulatory Framework has the system of differential risk-weights. It is therefore prudent to assign lower risk weight to assets with lower risk profile e.g. priority areas such as SRTOs, small CE operators, SMEs, and social infra (education, health care etc)

Funding avenues getting restricted:Deposits discouraged by RBIPriority sector status on refinance withdrawn Securitization guidelines are restrictive Pvt Placement of Debentures guidelines tightenedLong standing demand for creating a refinance windowMUDRA can play an active role in refinancing

FIDC Meeting with Hon’ble Dr. Raghuram Rajan, Governor, RBI on 28th October 2015 at RBI Office, Mumbai.

Present : Mr. Raman Aggarwal, Mahesh Thakkar, Ramesh Iyer and K V Srinivasan

FIDC team led by Mr.Raman Aggarwal, chairman during discussion with Dr. Raghuram Rajan, Governor RBI appraised about contribution

of NBFC sector and brought to his kind attention important issues relating to the regulation and working of NBFCs especially those engaged in Asset Financing, during the meeting. The key points:

BIS elects Raghuram Rajan as its vice-chairmanThe Bank of International Settlement (BIS) has elected as its vice-chairman Raghuram Rajan, Governor, Reserve Bank of India. Mr. Rajan will have a three-year term in his new role. He joined the BIS Board of Directors in December 2013. BIS is headquartered in Basel, Switzerland, and acts as a coordinating body among central banks to ensure global monetary and financial stability. The BIS board meets at least six times a year.The BIS board comprise all central bankers.

Need to relax eligibility norms for NBFCs to avail refinance from MUDRA e.g. Margin of 6% over MUDRA rates can be changed to Average cost of borrowing. Further, margin (like in securitisation) may be raised from 6% to 8%

This shall incentivise small NBFCs-D to shift from deposit acceptance thereby:

Address RBI’s concerns on deposit acceptance by small NBFCs

Can pave the way for small NBFCs-D to transform into NBFCs-ND thereby reducing the regulatory compliance burden to a great extent

Address some of the key issues faced by small NBFCs-D. The role played small of NBFCs across the country is very vital in Financial Inclusion and this refinance mechanism will give them new lease of life, within the structure prescribed by RBI.

Prime objective of the revised regulatory framework is to harmonize regulation with banks

NPA classification norms at par with banks (90 days notified)Therefore tax benefits pertaining to income recognition and

provisions on NPAs also should be brought at par with banksTDS issue is not only creating disparity but goes against the

Govt.’s drive of increasing the ease of doing business. It merely needs a notification.

In respect of NBFC-ND-SI (not CICs) where there’s no Public Fund involved (no Bank Loans, CPs, ICDs or Debentures), today breach of concentration norms require RBI’s prior approval. In this case, Statutory Auditors’ Certificate should be sufficient. This will considerably reduce RBI’s workload.

Leasing is a preferred tool for lending all over the worldSuffered in India due to imprudent taxationDouble Taxation – VAT & Service TaxDepreciation benefits deniedWill boost capital formation in the country in a big way

6. Taxation Issues – Support & Recommendations from RBI

7. Auditors may Certify any Breach of Concentration Norms by NBFC-ND-SI:

8. Need to Promote Leasing – RBI Support and Recommendation Required:

Fostering Competition and InnovationRegulators are naturally a conservative lot. It is good we are that way else there would be no speed breakers in the economy to slow its propensity to get into trouble. But we also should not stand in the way of innovation. There is a Chinese saying: “Cross the river by feeling the stones”. We have tried to follow that path of experimentation and incremental liberalization. So, for example, as increasingly innovative new services want their customers to have the ability to make payments quickly, we have allowed small value card payments without two-factor authentication. As we and financial institutions gain experience, and as new technologies ensuring security emerge, we can liberalize further. More generally, our philosophy is to allow innovation in institutions, instruments and practices so long as they do not present a clear and present danger. Once we understand them better, and they grow to a material size, we can do a deeper analysis on how they should be regulated.

- Raghuram Rajan, Governor, RBI.

The newly elected Chairman of Finance Industry Development Council (FIDC) Mr. Raman Aggarwal along with the Director General Mr. Mahesh Thakkar met the Union Minister for Road Transport and Highways Shri Nitin Gadkarion October 08, 2015 at his office at Transport Bhawan, New Delhi. FIDC is the representative body- cum-Self Regulatory Organization for Non-Banking Finance Companies, especially those engaged in asset financing. This meeting was the initiation of the agenda set by the Chairman in proactively engaging with the authorities. Besides highlighting the activities and achievements of FIDC, both the Chairman and the Director General apprised the Hon’ble Minister on the role played by asset financing NBFCs in the development of road transport sector for the last 70 years. This has been largely possible due to a provision in The Motor Vehicles Act (and now in the draft Road Transport and Safety Bill) clearly recognizing the lien on the vehicle in favour of the financier. Following policy matters were discussed and suggestions made thereon:1. Furthering the Government’s agenda on Financial Inclusion, NBFCs have been playing a pioneering role in providing need-based credit to the unbanked segment of the society, enabling them to become the owners of vehicles ranging from Heavy Commercial Vehicles to 3-wheelers. Therefore, the need of the hour is to provide the required statutory and policy support to the NBFCs in this venture.2. Use of technology at the RTO levels can be a game-changer in preventing frauds and prevent corruption. Use of tracking devices and online database on the ownership, transfer, licenses, financing and other details of all the vehicles is needed. This would further save the time, resources and energy to a large extent.3. The website “VAHAN”, which has been a major source of online information about vehicles has recently undergone a change and the access is limited to the registered users on payment of a fee. However, NBFCs are not able to register themselves and are thus deprived of this facility. Therefore, inclusion of RBI registered NBFCs as registered users should be done on priority.4. As per the prevailing RBI regulation, all assets financed by NBFCs, irrespective of their type are assigned a risk weight of 100. The leading rating agencies have classified automobiles, specially, commercial vehicles as “low risk” in the risk compendium defined by them. As such, there is a need to reduce the risk weight on financing of automobiles. For this, support of the Road Transport Ministry shall provide a big boost and can recommend accordingly to RBI. This would encourage more funds flowing into NBFCS at a cheaper rate, enabling them to further on-lend to the SRTOs in the remote areas of the country at affordable rates.The Hon’ble Minister gave a patient hearing to all the issues raised and suggestions made thereon. He has advised FIDC to send him a brief note on all the above said issues urgently and assured of due consideration and support.

FIDC Chairman Raman Aggarwal meets the Union Minister for Road Transport and Highways Hon'ble Mr. Nitin Gadkari on Oct. 8 at New Delhi,

who assured of due consideration and support for the suggestions made by FIDC.

FIDC asks to provide the required statutory and policy support for the NBFCs.Suggests use of technology at the RTO level: tracking devices and online database.Allow access of the website “VAHAN” to NBFCs.Extend support for reducing the risk weight on financing of automobiles.

FIDC News • 3

Corporate tax may be pruned ahead of schedule

Government sets up 10 member panel to simplify income tax law

With fresh tax breaks, infrastructure debt funds can invest in more projects

Three gold-related schemes launched

The government may take steps to cut the corporate tax rate from 30 per cent to 25 per cent before the earlier indicated timeline of four

years. By December, the Finance Ministry is also likely to outline a roadmap for phasing out of corporate

tax exemptions, Revenue Secretary Hasmukh Adhia has indicated. Various tax exemptions currently enjoyed by corporates would be phased out. The phased reduction would start in 2016-17. Currently, the effective tax rate for corporates is around 22 per cent.

The government is also preparing a separate roadmap to deal with existing litigation, Adhia told reporters. The Finance Ministry may also look at revising upwards the threshold for an appeal before the income tax appellate tribunal. [Business Line, Nov. 2]

The government set up a 10-member panel to simplify the over 50-year-old Income Tax Act, a move aimed at ensuring certainty in tax policy for ease of doing business. The panel, headed by retired Delhi high court judge R V Easwar, has also been tasked with identifying provisions and phrases in the I-T Act, which are leading to litigation due to different interpretations. The term of the committee is for one year and the first report is expected by January 2016.The government is likely to include some of the initial recommendations of the panel in the 2016-17 budget. [Economic Times, 28 Oct]

Infrastructure debt funds (IDF) set up under the NBFC route will now be able to invest in more projects, thanks to new tax breaks coming their way. The Central Board of Direct Taxes (CBDT) has widened the scope of tax exemption for IDF-NBFC. According to the latest CBDT move, income tax exemption would be available even for incomes arising from investments in non-PPP projects and also PPP project without a project authority. There is, however, no relaxation in the current norm that requires infrastructure projects to have completed one year of commercial operation for the incomes to be tax exempt at the hands of IDF-NBFCs. With the latest CBDT move, IDF-NBFCs can invest in projects where the government participation is limited and also in sectors where no project authority exists.

“The latest CBDT move to amend the income tax rules is in consonance with the amendments made by the RBI to its IDF-NBFC guidelines earlier this year in May,” Rahul Jain, Partner, Nangia & Co, a CA firm, told Business Line.[Business Line, Oct. 23]

Prime Minister on Nov. 5 unveiled three schemes that seek to dampen physical demand for gold and tap into an estimated 20,000 tonnes of the precious metal lying idle with Indian households and institutions.

The Gold Monetisation Scheme (GMS), 2015 will offer an option to resident Indians to deposit their precious metal and earn an interest of up to 2.5%, while under the Sovereign Gold Bond scheme, investors will be able to earn 2.75% interest per annum by buying paper gold.

The first gold coin minted in India, bearing national emblem Ashok Chakra on one side and Mahatma Gandhi’s image engraved on the other side was also unveiled. Initially the coins will be available in denominations of 5 grams and 10 gm. A 20 gm gold bar will also be available through 125 MMTC outlets across the country. [Economic Times, Nov.6]

MovesMoves

Tax issues relating to asset financing NBFCs

Tax benefits for Income deferral u/s.43D of the Income Tax Act

Allow Provision for Non-performing Assets (NPAs) u/s.36(1)(viia)

TDS on Interest (Sec 194A) – Request for Exemption - No Legislative Change Required

Allow higher Depreciation Rates for Construction Equipment

FIDC said that section 43D of the Income Tax Act recognises 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 and also HFCs. NBFCs like banks and FIs, follow prudential norms and are required to defer income in respect of their non-performing accounts, since the RBI directions are mandatory in nature. 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.

NBFCs are subject to directions of RBI as regards income recognition and provisioning norms. Accordingly, NBFCs are also compulsorily required to make provisions for NPAs. The revised regulatory framework has brought NPA classification norms at par with banks and other FIs.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, specially after the revised regulatory framework enforced by RBI, that the provision for NPAs made by NBFCs registered with RBI be allowed as deduction u/s.36(1)(viia) of the Income tax Act.

NBFCs, like banks, should also be given exemption under section 194A for TDS @10% required to be deducted on the interest portion of the installment paid to NBFCs under loan/finance agreements. This shall also be a step in the direction towards increasing the “Ease of Doing Business” and can be achieved simply by issuing a Notification under section 194A(3)(iii)(f) as no legislative change is required.

FIDC proposed that construction equipment and all plant and machinery provided by NBFCs to users under hire/lease should be entitled to a higher depreciation rate.Keeping in mind the nature of the asset, its average life-cycle and the pace of technological development, the depreciation rate should be 30%-50%. This will also give an impetus to the infrastructure spend and will incentivize such investments.

A meeting of FIDC chairman, Raman Aggarwal with CBDT chair person, Mrs. Anita Kapoor took place on Oct. 20. FIDC presented direct tax issues relating

to asset financing NBFC.

Arbitration and Conciliation Act, 1996 Amended

CBDT widens tax exemption scope for IDF-NBFCs

Complaints regarding bounced cheques

Bill changing law on bounced cheques passed by Parliament

The Arbitration and Conciliation Act, 1996 (“Act”) has been amended by the Arbitration and Conciliation (Amendment) Ordinance, 2015 (“Ordinance”), promulgated by the President of India on October 23,

2015. The Ordinance has introduced significant changes to the Act and seeks to address some of the issues, such as delays and high costs, which have been affecting arbitrations in India. The Ordinance is an attempt to make arbitration a preferred mode for settlement of commercial disputes and to make India a hub of international commercial arbitration. With the amendments, arbitrations in India are sought to be made more user-friendly and cost effective.Under the newly inserted section 9(3), a Court cannot, as a matter of course, entertain an application for interim measure once an arbitral tribunal has been constituted, unless the Court finds that circumstances exist which may not render the remedy available under section 17 of the Act. Another important change is the power of an arbitral tribunal to grant interim reliefs. [ Arbitration Law Update, Oct. 26]

Infrastructure debt funds (IDF) set up under the NBFC route will now be able to invest in more projects, thanks to new tax breaks coming their way. The Central Board of Direct Taxes (CBDT) has widened the scope of tax exemption for IDF-NBFC. There is, however, no relaxation in the current norm that requires infrastructure projects to have completed one year of commercial operation for the incomes to be tax exempt at the hands of IDF-NBFCs.With the latest CBDT move, IDF-NBFCs can invest in projects where the government participation is limited and also in sectors where no project authority exists. Now with CBDT move, income tax exemption would be available even for incomes arising from investments in non-PPP projects and also PPP project without a project authority. [Business Line, Oct. 23]

The Supreme Court has ruled in a large batch of appeals that in cases of bounced cheques, the complaint could be filed in the place where the cheques were dishonoured, and not where it was issued. This principle which was laid down by the court last year has now been affirmed in the Negotiable Instruments (Amendment) Ordinance of this year. The rule has come into effect with retrospective effect from June this year.In the leading case in this batch of appeals, Bridgestone India Ltd vs Inderpal Singh, the cheque was drawn on Union Bank of India in Chandigarh. It was presented at IDBI in Indore. The cheque was returned with note 'exceeds arrangement'. The company filed a complaint before the magistrate in Indore. The drawer moved the Madhya Pradesh High Court for quashing the complaint, arguing that the cheque was issued in Chandigarh and therefore the complaint should have been filed there. The high court allowed his petition and quashed the complaint stating that it should have been filed in Chandigarh.The company moved the Supreme Court which held that the high court was wrong. According to the new rules, the complaint could be filed where the cheque is delivered for collection. Judgments of other high courts, which took the view similar to that of the Madhya Pradesh were also set aside, thus confirming the rule for all future litigation. [Business Standard, Dec. 13]

Bringing relief to aggrieved by bounced cheques, a bill permitting the filing of cases at the place where a cheque is presented for clearance and not the place of issue was approved by parliament with the Rajya Sabha giving its nod on Dec.7. Minister of State for Finance Jayant Sinha moved the Negotiable Instruments (Amendment) Bill, 2015, which was passed by the Lok Sabha in the monsoon session, to seek to replace an ordinance that was re-promulgated earlier.The amendment seeks to overturn a Supreme Court ruling which said cases have to be initiated where the cheque-issuing branch was located, and provides that cases of cheque bouncing can now be filed only in a court that has jurisdiction over the bank branch of the payee.

Legal

Eagle

Legal

Eagle

FIDC News • 4

About FIDC

NBFCs : Overview (As on March 31, 2014)

A Self Regulatory Organization (SRO) cum Representative Body of RBI registered NBFCs, specially those engaged in asset financingRegistered as a Section 25 company under The Companies Act, 1956 in 2004All the leading big, small and medium sized NBFCs are membersRecognized face of the NBFC sector among the regulator and Govt. of IndiaInvited to the Pre-budget discussion with the Hon’ble Finance MinisterInvited by RBI Governor / Dy Governor for policy discussionPlaying the role of a SRO, drafted the FIDC Handbook on Repossession – one of its kind

handbook on the Dos and Donts of RepossessionEngages with other trade bodies and Chambers of Commerce and IndustryOther Significant Achievements :

Separate classification of asset financing NBFCs as AFCsService Tax relaxation on Leasing and Hire PurchaseCoverage of NBFCs under the SARFAESI Act (Asset Size >=500 cr)Restoration of relevant provisions for financiers from The Motor Vehicles Act in The Road Transport and Safety BillNational Summit on NBFCs in collaboration with ASSOCHAM

Share of NBFCs in Total Assets of the Indian Financial System = 9% (More than that of Mutual Funds, Cooperative Banks & RRBs)Total No. of NBFCs Registered with RBI = 12,029Return on Assets (net Profit as %age of total assets) = 2.30%Return on Equity (net profit as %age of equity) = 9.22%Gross NPA (as %age of total credit exposure) = 2.80%Break-up of Liabilities & Assets (IMAGE_Liabilities & Assets)

No. of Cos. (%) Proportion of Total Asset Size (%)

Asset Size < 50 cr. 79.4% 6.60%Asset Size 50-100 cr. 5.7% 3.80%Asset Size > 100 cr. 3.8% 89.60%

* Date not available for 11.1%.Successful track record of more than 60 yearsKey aspects of financial activity are well regulated (almost at par with banks):

Registration with the regulatorMinimum size (Net owned Fund)Minimum Capital Adequacy Ratio Prudential Norms on asset classification, income recognition and provisioning Know Your Customer (KYC) & Anti Money Laundering

Presented by: Raman Aggarwal , Chairman, FIDCNovember 23, 2015

GuidelinesAsset Liability Management GuidelinesCredit Concentration NormsMaintenance of SLRCode of Fair Business Practices

Promote Urban Financial Inclusion also (in addition to rural financial inclusion)Use modern technology and have developed sound MIS NPA levels have been lower than that for banksSmall & Medium NBFCs are having a local/ regional presence (and the large NBFCs through their branches or franchisees) are well versed with the local conditions/requirementsPrevent concentration of credit risk in banks only and complement the banking servicesServices not restricted by working hours and hence customer relationship is strongerProvide prompt & tailor made services with least hassles Provide a personalized touch – Guidance in insurance matters and help in their hour of need at any time of the dayCater to a class of borrowers who :

are “unbankable”Do not necessarily have high incomeare honest & sincere (gauged by the personal touch maintained with them)

NBFCs Reliability

banksAffordabilitiy High- compared to MFIs & local money lenders Accessibility High- As they cater to unbankable segment in

rural & semi urban areasFlexibility High- A balance between flexibility & low

delinquencies maintained

Shadow banking defined as credit intermediation involving entities and activities outside the regular banking system.Financial Stability Board (FSB) has reckoned NBFCs as Shadow Banks in Indian financial system.Lack of Regulation is an important element of shadow banksHowever NBFCs have been under stringent RBI regulations almost at par with banks.Regulated under The RBI Act, 1934 as amended in 1997 (Chapter IIIB) – Regulation history of 18 yearsRevised Regulatory framework issued last year has plugged the regulatory arbitrage.

NBFCs not included in the official agenda on Financial InclusionFocus has been on “regulation” instead of “development” of NBFCsLack of level playing fields with banks & HFCsFund raising is a big challenge, specially for small & medium NBFCsSome of the State Govts treat NBFCs as money lenders under the State Money Lenders’ Act despite regulation by the RBIImprudent to treat NBFCs as shadow banks (as is the case in developed economies)

Bank FundingLack of linkage by banks with NBFCs despite strong recommendations by various Expert GroupsNeed for liberal Bank Funding at competitive rates

How suitable are NBFCs for Promoting Financial Inclusion

NBFCs have all the key characteristics to achieve Financial Inclusion : Are NBFCs Truly Shadow Banks?

Therefore, NBFCs are different from the shadow banks of the word.

Funding of NBFCs

High- 18 Yrs of regulations almost at par with

The Key IssuesOverview

Repositioning NBFCs in the Indian Financial System

FIDC News • 5

“Wholesaler – Retailer” relationship between banks and NBFCs needed

Deposit acceptance is discouraged by RBI.Securitization Guidelines issued by RBI have restricted

securitization of receivables - it needs to be ‘Originator – friendly’Priority Sector status accorded to bank lending to NBFCs for on-

lending to priority sector has been withdrawn.Urgent need for a refinancing window specially for small and

medium NBFCs - MUDRA can play an important role

Income Tax Act - Deduction allowed to banks, FIs & HFCs, for non-recognition of income on NPAs and provisions made against NPAs (u/s 36(i)(vii) of Income Tax Act) – denied to NBFCs only

Income on NPAs is accounted on receipt basis u/s 43D of Income Tax Act by Banks and FIs - denied to NBFCs only

Exemption from TDS requirements denied to NBFCs onlyTDS on lease rentals entails deduction of TDS from the principal

component alsoService Tax on 10% of the Interest component of financial lease

& hire purchase transactions make them unviable as compared to a loan transaction

Multiple taxation of financial lease & hire purchase transactions – VAT, Service Tax, Interest Tax & TDS

Denial of depreciation benefits to the lessor in-spite of CBDT circular

Low rate of depreciation (@15%) on Construction and Mining Equipment - need to increase it to at least 30% (at par with CVs)

Rating Agencies have predicted that NBFCs may overtake banks in retail lending

GST is essential to do away with multiple taxation with leasing and hire purchase

Indian Finance Code (IFC) by FSLRC proposes “activity” and not ‘entity” based regulation

Leasing as a tool for capital formation and lending to low capital SMEs needs to be promoted

Supportive laws governing accounting rules, properly rights and contract enforcement shall be of prime importance

Development has to be an integral part of Regulation

FIDC to play a “proactive” role rather than a “reactive” roleProactively engage with RBI and create a formalized

arrangement for dialogue:Twice a year at the Governor levelOnce every quarter at the Dept. level

Proactively engage with Central and State Governments and create a formalized arrangement for dialogue.

at least once in a year at FM / MoS / State Minister levelat least twice a year at the Dept. level

Target Ministries :Finance – Dept of Financial Services, Dept. of RevenueRoad Transport and HighwaysUrban DevelopmentSME & MSMEsCorporate AffairsLaw

Proactively engage and create a formalized arrangement for dialogue with:

Indian Bankers Association (IBA)Society for Indian Automobile Manufacturers (SIAM)Indian Construction Equipment Manufacturers Association (ICEMA)Transporters’ bodies

Membership/Affiliation with leading Chambers of Commerce and Industry

Imprudent Taxation of NBFCs

Desired Future Scenario

Proactive Engagement

Engaging with Other Stakeholders

Road Ahead

Action Plan to Reposition NBFCs

ASSOCHAMFICCICIIPHDIMC

Objective is to build strong linkages and represent issues of common interest with greater strength.This shall reposition NBFCs as an important part of Indian Financial System.

FIDC News • 6

Review of Guidelines on Restructuring of Advances

by NBFCs: Deloitte

Non-banking financial companies (NBFCs) are emerging at a

great pace as an important segment of Indian financial system. It

is a heterogeneous group of institutions (other than commercial

and co-operative banks) performing financial intermediation in a

variety of ways such as granting loans and advances, leasing,

hire purchase, etc. These institutions raise funds directly or

indirectly from the public and lend them out to the ultimate

borrowers. Gradually, NBFCs are being recognised as

complementary to the banking sector due to their customer-

oriented services, simplified procedures, attractive rates of return

on deposits, flexibility and timeliness in meeting the credit needs

of specified sectors, etc.

During the period June to September 2015, given that entire

financial sector is going through the financial stress and the NPA

problem, the focus of the RBI was recognition of the distressed

assets, restricting of advances, which will present a true and fair

view of the financial position of the NBFC. In this respect, RBI

reviewed its guidelines on restructuring of advances granted by

the NBFCs and stated that mere extension of Date of

Commencement of Commercial Operations(DCCO) would not

be considered as restructuring , thus releasing the stress that

provisioning for such assets would have created for NBFCs. RBI

also allowed NBFCs to be part of the Joint Lending Forums.

Another focus of RBI was in ensuring the ease of doing business

for NBFCs. In this respect, RBI allowed the NBFCs to act as sub-

agents under the Money Transfer Service Scheme (MTSS) and

also allowed NBFCs to acquire/transfer the control of another

NBFCs without prior approval of RBI. The guidelines are covered

in detail in this update. RBI has been reorganizing the financial

sector framework in India to achieve its objective of financial

inclusion, by giving banking licenses to multiple applicants many

of whom were either Microfinance Institutions or NBFCs, to act as

either Full-fledged banks, Payment Banks or Small Finance

banks.

Though the RBI and the Government want most of the country to

be banked through the traditional banking arrangement, NBFCs

play an essential role due to their widespread area of operations

and specialization of services offered. NBFCs are still growing

and RBI is increasing its focus towards them and thus there will be

constant regulatory changes and updates. [Regulatory

Intelligence Group, Deloitte: Regulatory Impact Assessment titled:

“Review of Guidelines on Restructuring of Advances by NBFCs” 15

Oct. 2015.For the detailed article: inri@deloitte.com]

FIDC News • 7

FIDC undertakes proactive role to reposition NBFCs In Indian Financial System

NBFCs are different from shadow banks as they do not pose systemic risk due to a robust regulatory framework

Largest organised source for retail credit in unbanked and under banked segment

Pioneers in asset backed lendingNBFC share in total assets of Indian Financial system is 9%

FIDC (Finance Industry Development Council) the apex representative body-cum-Self Regulatory Organization for NBFCs (Non Banking Finance Companies), especially those engaged in asset financing today, on November, 23 at New Delhi shared its vision for FY 2016-17 to reposition NBFCs in Indian Financial System.

NBFCs over the years have played a vital role in the development of the economy, be it in financial intermediation in rural and semi urban areas or financing activities that are engines of growth, such as transport sector, SMEs and MSMEs, leasing, hire purchase etc.Majorly, 70% of the Indian population relies on non-banking sources for their credit needs as retail credit through banks is available largely in metropolitan and urban segment of society. NBFCs have been in the forefront of catering to this segment of customers who are un-bankable masses in the rural and semi–urban areas. Through strong linkage at the grassroots level, ability to take quicker decisions and highly personalized customer service, they have created a medium of reach and communication and are very effectively serving this segment that were forced to approach unorganized money lenders for all their credit needs. NBFC’s have also acted as conduits for transforming a borrower, who are “unbanked”, to move away from the money lenders to an organised financier and over a period of time move them into the formal segment which enables these customers to be recognised and serviced by the banking segment in order to become “bankable”.

Mr. Raman Aggarwal says “To further the Government’s agenda on Financial Inclusion, NBFCs are an important driver because of their successful track record of more than 70 years of lending to the unbanked and at the same time a regulation history of more than 18 years. In spite of the challenges faced by our economy, NBFCs have grown to a level where their share in the total assets of Indian Financial System is 9% which is more than the Mutual Funds, Co-operative Banks and Regional Rural Banks. The need is to recognize this role and include NBFCs as part of the mainstream financial system.”

NBFCs make borrowers "Bankable":

Need to recognize NBFC's Role:

Raman Aggarwal- chairman, FIDC, Mahesh Thakkar-Director General, FIDC,

Alok Sondhi, Co-chairman, FIDC and K V Srinivasan, Member, Managing Committee,

FIDC briefed the media persons.

Media Briefing was organized to announce ‘Repositioning NBFCs in the Indian Financial System’ on Nov. 23 at New Delhi, whereat a detailed presentation was made by the Chairman, Raman Aggarwal before representatives of leading financial press and media.[Please see Page: 6 & 7]

FIDC INTERACTION WITH MEDIA on 23 NOVEMBER, 2015

FIDC INTERACTION WITH MEDIA on 23 NOVEMBER, 2015

FIDC INTERACTION WITH MEDIA on 23 NOVEMBER, 2015

FIDC INTERACTION WITH MEDIA on 23 NOVEMBER, 2015

However, NBFCs in India have not received enough support and nurturing from the entire financial system. The current framework of Indian Financial Institution System needs a relook with the focus on actual delivery of credit rather than who does it. It is important to focus on the development of NBFC sector in addition to its regulation, as regulation and development always go hand in hand. This has led to a situation where NBFCs have been grappling with issues like lack of adequate funding, especially for the small and medium sized companies, level playing field with banks and other financial Institutions, especially in taxation matters.

As an effective Self Regulatory Organization cum representative body, FIDC has now embarked on transforming itself to play a “proactive” rather than a “reactive” role. In order to achieve this, the plan is to engage with the regulator and the Govts, both at the centre and the states proactively and create a formalized arrangement for a dialogue on a regular basis. This shall enable us to not only address our issues, but also lead to a healthy exchange of mutual concerns, ideas and general economic matters, based on which the required regulatory changes can be made. By doing so, we may forgo the need to do a fire fighting exercise and instead be involved in the discussion prior to such changes. Secondly, FIDC shall now take the lead in engaging with other stakeholders like the Indian Banks Association (IBA), Society for Indian Automobile Manufacturers (SIAM), The Transporters body and also the leading Chambers of Commerce an Industry like ASSOCHAM, FICCI, CII, PHD and IMC. This will ensure that we build strong linkages like funding relationship with banks, and also represent issues of common interest with greater strength. The key is that once we are able to meet the above said objectives, NBFCs shall automatically be repositioned as an important part of the Indian Financial System, which is our ultimate goal.

The Asset Financing Non-Banking Finance Companies (NBFCs) registered with Reserve Bank of India have joined hands and formed a Self Regulatory Organization (SRO) under the name of Finance Industry Development Council (FIDC). NBFCs have been recognized for their role in credit delivery in remote corners of India and have carved a niche for themselves in the semi-rural and rural segments of the country. NBFCs are also playing a vital role in furthering the cause of Financial Inclusion and in credit dispensation to the poor states/credit starved areas for over 6 decades.FIDC is the sole recognized face of the NBFC sector and has always been invited for Pre-budget discussion with the Finance Minister and policy discussion with RBI Governor / Deputy Governor. Almost all the leading NBFCs along with a large number of small and medium sized NBFCs are members. Amongst the significant achievements of FIDC are: separate categorization of asset financing NBFCs as AFCs, the service tax relaxation on Hire Purchase and Leasing transactions and coverage of NBFCs under the SARFAESI Act as part of the Union Budgets for the year 2006 and 2015 respectively. Playing the role of a SRO, FIDC had drafted the FIDC Handbook on Repossession, which is one of its kind handbook on the Dos and Don’ts of Repossession.FIDC also engages with other trade and industry bodies like IBA, SIAM, ICEMA and AIMTC in addition to the regulator RBI and the Governments, both at the centre and the states. [Press Release]

FIDC to engage with Regulator & Government Proactively:

About FIDC (Finance Industry Development Council)

Event Coverage: The event was well covered by media. Among the Electronic media Zee Business and Aaj Tak gave coverage, while in Print media Press Trust of India [PTI], Business Line, Economic Times (online), Business Standard, Pioneer, Amar Ujala had prominent coverage.

“The close connection to the individual markets and customers and the deeper knowledge NBFCs bring at the ground level is key to their survival. In addition, NBFCs have mastered the art of lending to unbanked.”

Raman Aggarwal, Chairman, FIDC

at CII Summit on NBFCs at Mumbai

RBI NOTIFICATIONS & CIRCULARS :

NBFC-MFIs can give loans of Rs 30,000 for larger tenure

Change in periodicity of ALM-1 returns by NBFCs-ND-SI-500cr

NBFC, govt issuer to gain from masala bonds funding: Moody’s

Non Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) – Directions – M o d i f i c a t i o n s : R B I / 2 0 1 5 - 2 0 1 6 / 1 9 6 ; DNBR.CC.PD.No. 069/03.10.01/ 2015-16;

01.10.2015; [All NBFC-MFIs]

Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy - Review of the Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP): RBI/2015-2016/214; DNBR.CC.PD.No. 070/03.10.01/2015-16; 29.10.2015; [All NBFCs]

Online Returns to be submitted by NBFCs- Revised: RBI/2014-2015/246; DNBS (PD).CC.No.03/03.02.02/2015-16; 26.11.2015; [All NBFCs]

Revision of the loan amount with tenure not less than 24: RBI/2015-2016/250; DNBR.CC.PD.No. 071/03.10.038/2015-16; 26.11.2015; Non-Banking Financial Company-Micro Finance Institutions (NBFC-MFIs) – Directions DNBS.PD.No. 234/CGM (US)-2011 dated December 2, 2011 and DNBR.CC.PD.No. 027/03.10.01/2014-15 dated April 08, 2015; [All NBFC-MFIs]

NBFC micro finance lenders can now give loans of up to Rs 30,000 for tenure not less than 24 months as the Reserve Bank has doubled the amount limit for these debts. In the light of the representations from NBFC-MFIs, “It is advised that limit of the loan amount, for which the tenure of the loan shall not be less than 24 months, has been raised to Rs 30,000 from the present limit of Rs 15,000. “All loans necessarily be prepaid without any penalty, as hitherto,” the central bank said in a notification. [PTI/Business standard, Nov. 26]

The RBI in a notification related to returns submitted by NBFCs, changed the periodicity of NDSI-500cr (NBFCs not accepting/holding public deposits and having asset sizes of Rs 500 crore and above) and ALM-1 returns from monthly to quarterly. RBI further said it has noticed that some of the NBFCs are not submitting correct branch information return as per the guidelines. “To maintain uniformity and avoid misunderstanding, it has been decided that the concerned NBFCs should report the stock data of branches as at end of every quarter rather than providing incremental number of branches during the quarter,” it added. [PTI/Business standard, Nov. 26]

Masala bonds will create an alternative funding source for NBFCs and government-related issuers [GRIs]. “Over the next 12 months, we expect selective issuance by some of the largest Indian NBFCs, GRIs and state-owned enterprises (SOEs). We would expect overseas investor demand to be highest for bonds issued by Indian GRIs and SOEs, Moody’s Investors Service said. In September, RBI had allowed NBFCs and other corporates to issue masala bonds within the broad external commercial borrowing (ECB) framework to deepen capital markets and provide these issuers with a way to raise funds abroad without incurring currency risk. HDFC Ltd, the largest mortgage lender in the country has already announced its plans to sell up to USD 750 million of rupee bonds overseas.Moody’s Investor Service said RBI’s relaxation is credit positive for the NBFCs, as masala bonds will offer them a new source of funding. “As the market grows in size, we expect a few more well-known NBFCs to tap this route for their funding needs.” Investors will remain cautious of accepting the higher credit risk associated with the smaller NBFCs,” said the Moody’s report. It expects the masala bond market to overcome some of the limitations of the domestic bond market, particularly in terms of participation by foreign investors.

REGULATORY PERIMETERREGULATORY PERIMETER

“While the bonds will be denominated in Indian rupees, they will be offered and settled in US dollars. This will make it easier for foreign investors to participate in issuances, especially since foreign investors are only allowed to invest up to USD 51 billion in corporate bonds issued onshore in India.” Furthermore, as the number of issuances increases, secondary trading in the instruments will help set a benchmark for future issuances, it added. [CNBC, Nov. 24]

Indian companies will be exempt from paying capital gains taxes for their rupee-denominated bonds sold abroad in case of rupee appreciation, the government said in an emailed statement on Oct. 29. The government also clarified a reduced 5% withholding tax will continue to be applied on these so-called “masala” bonds.India had cut the tax for debt investments to the current rate from 20% in 2013, although there had been some confusion about whether that also applied for rupee debt issued abroad. [Reuters/Business Standard, Oct.29]

RBI on Oct. 29 allowed NBFCs to upgrade credit facilities extended to borrowing entities whose ownership has been changed outside strategic debt restructuring (SDR) to the ‘standard’ category. The RBI said the move will enhance NBFCs’ ability to bring in a change in ownership of borrowing entities that are under stress primarily due to operational/ managerial inefficiencies despite substantial sacrifices made by lending banks. The central bank said NBFCs could use this provision subject to certain conditions.“Change in ownership may be by way of sale by lenders, to a new promoter, of shares acquired by invocation of pledge or by conversion of debt of the borrower into equity outside SDR, or bringing in a new promoter by issue of fresh shares by the borrowing entity or acquisition of the borrowing entity by another entity,” the RBI said in a notification.The new promoter should not be a person/entity/ subsidiary/ associate (domestic as well as overseas), from/belonging to the existing promoter/promoter group. NBFCs should clearly establish that the acquirer does not belong to the existing promoter group, it said.At the time of takeover of the borrowing entity by a new promoter, NBFCs may refinance the existing debt of the borrowing entities, considering the changed risk profile, without treating the exercise as ‘restructuring’ subject.NBFCs may reverse the provision held against the said account only when all the outstanding loan/facilities of the borrowing entities perform satisfactorily during the ‘specified period’. [PTI/Rediffmail, Oct. 29]

RBI vide circular dated 26 Nov. has advised that the criteria regarding asset and income of factoring companies eligible for bank finance have been revised to 50% from 75%.[RBI Website]

RBI Deputy Governor H. R. Khan said on Oct. 27 the central bank was considering new measures in debt markets, including working on a trading platform for repos and corporate bonds and looking at building bond indexes. Khan’s comments, at an event organised by the FICCI, come as the central bank has unveiled new debt initiatives this year, including the introduction of a 40-year bond and raising debt investment limits for foreign investors. [Reuters, Oct 27]

RBI on Oct. 20 invited applications for authorisation from entities, including non-banks and banks, currently engaged in bill payments and desirous of operating as Bharat Bill Payment System Operating Units under the Bharat Bill Payment System.Entities currently engaged in such bill payment activities and desirous of continuing the activity are mandatorily required to apply for authorisation to RBI under the Payment and Settlement Systems (PSS) Act 2007. The applications will be accepted till the close of business on November 20, 2015. [Business Line, Oct. 20]

Govt-to-exempt-offshore-rupee-bonds-from-capital-gains-for-fx-gains

RBI Gives NBFCs More Power to Change Ownership in Stressed Firms

Bank Finance to Factoring Companies

RBI deputy Khan mulling reforms in debt markets

RBI invites applications for bill payment services

FIDC News • 8

SEBI cuts IPO paperwork; notifies 5-sheet abridged prospectus

Companies should get Listed within 6 Days of share sale: SEBI

SEBI Issues Format for Financial Results Disclosure

Comply with minimum public shareholding: SEBI

SEBI planning to come out with revised rules for credit rating agencies

In a game-changing move, markets regulator SEBI has notified a five-sheet abridged prospectus that companies need to file for public offers — a step aimed at making it easier for investors to understand key points. Under the new norms that come into effect from December 1, the abridged prospectus including the application form can’t exceed five sheets that would be printed on both sides, a maximum of 10 pages. Currently, the full prospectus that companies file for their public offers including IPOs runs into 400-500 pages. [Times of India/ PTI, Oct 29]

Capital market regulator SEBI asked stock exchanges and other market intermediaries to ensure that companies get listed within six working days [in place of 12 days] of completing their initial share sale and the norms would be effective from January 2016. All days excluding Sundays and bank holidays would be considered as working.Investors applying in a public issue should use only the ASBA (application supported by blocked amount) facility for making payment. They would have to just write their bank account numbers and authorise the banks to make payment in case of allotment by signing the application forms, “thus obviating the need of writing the cheques”, the circular said. To ensure more transparency, the bourses would also be required to provide investors with details about status of their public issue applications through SMS and e-mail. [NDTV/PTI, Nov. 10]

SEBI issued a format for companies, which have listed their debt securities and non-cumulative redeemable preference shares on the exchanges, for disclosing financial results. The listed companies need to submit the half yearly financial results, year-to-date figures details for the current fiscal along with comparative figures for the year ago period. All figures should be in lakh. Under the format, firms will have to disclose about net sales, net profit, expenditures, exceptional items, paid-up capital, and earnings per share, among others. Apart from these disclosures, banks and NBFCs will have to make submission about non-performing assets (NPA) and capital adequacy ratios. [NDTV/PTI, Nov. 27]

SEBI said that listed entity will have to comply with minimum public shareholding requirements in the manner as specified by the regulator from time to time. To achieve the norms, the listed company will have to adopt methods like issuance of shares to public through prospectus, offer for sale of shares held by promoters to public, sale of shares held by promoters through the secondary market, institutional placement programme, right issue and bonus issues. “Any other method as may be approved by SEBI on a case to case basis. For this purpose, the listed entities may approach SEBI with appropriate details,” the regulator noted. “SEBI would endeavour to communicate its decision within 30 days from the date of receipt of the proposal or the date of receipt of additional information as sought from the company,” it added.Besides, SEBI has issued a detailed format for publishing the quarterly financial results. [PTI, Nov. 30]

The SEBI is planning to come out with revised rules for credit rating agencies after it noticed lack of proper disclosures and conflict of interest between rating agencies and issuer companies. The move is aimed at avoiding crisis such as the recent one faced by J P Morgan Mutual Fund in two of its fixed income schemes. Is there any conflict of interest in the rating process? This was an issue globally as well at the time of the global financial crisis. I hope that there is no such issue but we have flagged it with rating agencies in our meeting, “ SEBI chairman U K Sinha said. India is one of the first countries in the world to regulate credit rating agencies.The regulator is also examining similar things for debenture trustees and will be coming out with additional rules for them as well. [ET

SEBIMOVES

Bureau, 28 Oct]

Unlisted companies raising funds through securities without having a public offer document will be exempt from penal action if they provide a refund option along with 15 per cent interest rate at the time of issuance, the SEBI said. The relaxation will be applicable to entities that have raised funds by issuing securities to more than 49 persons, but up to 200 individuals in a financial year.Under the Companies Act, 2013, whose most provisions came into effect from April 1, 2014, any offer or allotment of securities is considered as a public issue if the number of allottees exceeds 200 persons in a financial year. This provision replaced the cap of 49 persons in the Companies Act, 1956. Companies that have raised funds through issuance of securities to anywhere between 49 and 200 individuals can now avoid penal action subject to certain conditions. [NDTV/PTI, Nov. 30]

Listed companies will face monetary penalties and suspension of trading for non-compliance with the SEBI’s new listing regulations, including for timely and proper disclosure of price sensitive developments, which are coming into force from December 1. SEBI said in a circular that stock exchanges will impose fines for non-compliance with listing regulations and invoke suspension of trading in case of subsequent and consecutive defaults. SEBI’s provisions for listed entities have been aligned with those of the Companies Act, 2013.SEBI said in a circular that stock exchanges will impose fines for non-compliance with listing regulations and invoke suspension of trading in case of subsequent and consecutive defaults. To ensure effective enforcement of the listing regulations, the depositories, on receipt of intimation from concerned exchange, will have to freeze or unfreeze, as the case may be, the entire shareholding of the

promoter and promoter group in such entity. Under the mechanism, the initial penal action would be a minimum fine of Rs 1,000-5,000 per day depending on the violation, while repeated offences would lead to actions like transfer to restricted-trade category, freezing of promoter shares and overall suspension

on trading in company shares. [PTI, Nov. 30]

SEBI has asked companies to provide an exit option to shareholders if the objects of fund raising are changed — a move that is likely to benefit minority shareholders. It will now have to provide the option of a refund to investors.

In a relief to promoters, SEBI has provided an exemption from open offer if it gets triggered by a passive breach, which includes expiry of the call notice period and the forfeiture of shares.

To give a fillip to the issuance and listing of green bonds SEBI has published a consultation paper on the disclosure requirements for listing of this green energy focused instruments on domestic exchanges and platforms.

The SEBI also decided to take steps to have all privately placed debt issuances to be done online. To facilitate this move the regulator proposes to create electronic book builders and they would need to have a net worth of Rs 100 crore.

SEBI has eased the delisting criteria for smaller companies. The market regulator has scarped an earlier condition of no trading for the preceding one year. SEBI has said smaller companies, which have a trading volume of less than 10 per cent of the total number of shares in preceding 12 months, would be eligible under the “simplified procedure of delisting”.

SEBI has expanded the requirement of Business Responsibility Reporting (BRR) to top 500 companies. Currently, only the top 100 companies need to do BRR, which includes information on initiatives impacting environment, social, governance and stakeholders’ relationships.

SEBI Relaxes Penal Provision for Deemed Public Offers

stSEBI’s New Listing Regulations Come Into Force on 1 Dec. 2015

SNIPPETS:Provide an exit option to dissenting shareholders :

Exemption from open offer :

Green Bonds :

Privately placed debt issuances to be done online :

Easing the delisting criteria for smaller companies :

Business Responsibility Reporting (BRR) to top 500 cos :

FIDC News • 9

NBFCs' asset quality to stabilise in a year: Moody's

India among top 10 countries on corporate responsibility reporting rates: Survey

NBFC, govt issuer to gain from masala bonds funding: Moody’s

Rating agency Moody’s on Oct. 9 said the asset quality of NBFCs in India would stabilise through the next 12 months, though their non-performing loan (NPL) ratio might rise due to tighter norms. “The ongoing tightening of NPL recognition norms mean the minimum standards for NBFCs will match those of banks, a credit positive,” said Srikanth Vadlamani, vice-president and senior credit officer, Moody’s. [Business Standard, Oct. 10]

The Asia Pacific region has overtaken others on corporate responsibility reporting rates, with India among the top 10 countries with the highest rate of CR information, a survey by consultancy firm KPMG showed. More companies (79%) now report on CR in Asia Pacific than in any other region, followed by the Americas (77%) Europe (74%). This growth has been driven by a surge of CR reporting in countries such as India, Taiwan and South Korea, where increasing amounts of reporting requirements and guidelines have been introduced. It is the ninth edition of the survey that analysed reporting from 4,500 companies across 45 countries. [Times of India, Nov 25]

Masala bonds will create an alternative funding source for NBFCs and government-related issuers [GRIs]. “Over the next 12 months, we expect selective issuance by some of the largest Indian NBFCs, GRIs and state-owned enterprises (SOEs). We would expect overseas investor demand to be highest for bonds issued by Indian GRIs and SOEs, Moody’s Investors Service said.

In September, RBI had allowed NBFCs and other corporates to issue masala bonds within the broad external commercial borrowing (ECB) framework to deepen capital markets and provide these issuers with a way to raise funds abroad without incurring currency risk.

Moody’s Investor Service said RBI’s relaxation is credit positive for the NBFCs, as masala bonds will offer them a new source of funding. “As the market grows in size, we expect a few more well-known NBFCs to tap this route for their funding needs.” Investors will remain cautious of accepting the higher credit risk associated with the smaller NBFCs,” said the Moody’s report. It expects the masala bond market to overcome some of the limitations of the domestic bond market, particularly in terms of participation by foreign investors.

“While the bonds will be denominated in Indian rupees, they will be offered and settled in US dollars. This will make it easier for foreign investors to participate in issuances, especially since foreign

investors are only allowed to invest up to USD 51 billion in corporate bonds issued onshore in India.” Furthermore, as the number of issuances increases, secondary trading in the instruments will help set a benchmark for future issuances, it added.

The withholding tax on rupee-denominated offshore bonds (‘masala bonds’) by domestic issuers has been set at five per cent, at par with that on external commercial borrowing (ECB) and domestic corporate bonds. “With a five per cent withholding tax, these will see good demand from investors. The onus of hedging is on the investor, not on the issuer. To buy corporate bonds, you have to be a registered foreign portfolio investor. But, to buy these masala bonds, registration is not compulsory, due to which these will have good demand,” said Ajay Manglunia, Edelweiss Securities. [Business Standard, Sept. 28]

NBFCs’ dependence on banks for funds has reduced drastically in the past decade, for banks, one of their stable customers shifting to markets may spell further pressure. While NBFCs drew 60 per cent of their funds from banks in fiscal 2005, the share has declined to a mere 14 per cent in fiscal 2015, thus converting a hitherto “paramount” funding source into an ancillary one, said a Spark Capital report “From a cost of funds perspective too, we note a significant decline in spread over base rates with most NBFCs currently averaging a cost of funds lesser than SBI’s base rate,” the report said.

“The borrowing pattern has changed quite sharply because money from the NCD market has become less expensive,”

said V Vaidyanathan, chairman and MD of Capital First. [ET Bureau, 15 Oct]

NBFcs are increasingly becoming independent of traditional banks for borrowing money due to the drop in wholesale lending rates.

Also, NBFCs have been witnessing subdued growth in business. “Credit growth has been slow. We

expect the second half to be better with lot of infrastructure activity, but it will not be a significant

improvement,” said Umesh Revankar, Managing Director at Shriram Transport Finance. [Business line, Oct. 14]

An increasing number of NBFCs are ramping up their reach to small and medium enterprises (SMEs) to tap these “high-quality borrowers”. Bank lending to this sector leaves a lot to be desired — it declined 3.3 per cent in April-September this fiscal. This is precisely what NBFCs such as Edelweiss, Indiabulls Housing, IndoStar Capital, Dewan Housing and IIFL Group, among others, are cashing in on as they remain optimistic about the funding scenario.

On an average, they already have a quarter of their assets devoted to the small-scale sector. In the case of Edelweiss, the sector accounts for 60 per cent of its total assets at about Rs. 2,500 crore. NBFCs normally lend in the secured category, thereby ensuring minimal defaults. On an average, non-performing assets [NPAs] from their SME books are under 0.3 per cent, many of them told PTI.

According to a recent CRISIL report, the loan against property segment for SMEs is expected to grow by Rs. 5 lakh crore by 2018-19 and NBFCs are expected to account for nearly half of this growth. According to the latest RBI data, bank credit to SMEs declined 3.3 per cent to Rs.3, 67,500 crore as of September 18.

The RBI classifies all loans to MSMEs as priority sector lending and all banks are required to extend 60 per cent of total MSME sector advances to micro enterprises. According to a recent Dun & Bradstreet report, aggregate borrowings of SMEs grew 13.3 per cent in 2014-15. NBFCs, typically, offer loans against property, consumer durable loans and business. [Business Line/PTI, Nov. 30]

Withholding tax on masala bonds set at 5%

NBFCs cut bank exposure over higher costs of borrowing

NBFCs step in to fill the void, lend more to SMEs

Loan growth

FIDC News • 10

Mahesh Thakkar, Director General, FIDC speaking on “Regulatory Architecture, Policy Prescriptions & the Agenda for NBFCs” at CII’s NBFCs Summit

“Regulatory Paradigm & Contours of Growth – Vision 2020” on, 21 Dec. 2015, at Mumbai.

FIDC News • 11

FIDCIn

Action

FIDCIn

Action

RBI must hold ‘periodic dialogue’ with NBFCs

Looking abroad

No competition

RBI Will Support NBFCs by Approving New Variants: RBI Deputy Governor at CII summit on NBFcs

RBI must put in place a “formalised arrangement” for holding periodical dialogues with non-banking finance companies, a top industry official said. Having a formalised arrangement of dialogue will help in the development of the NBFC sector, an aspect that policymakers and the regulator must pay attention to, Raman Aggarwal, Chairman, Finance Industry Development Council (FIDC), told BusinessLine. Such an arrangement will also, to a certain extent, help level the playing field for NBFCs vis-à-vis commercial banks, which already enjoy frequent formalised interactions with the regulator and the government, said Aggarwal. FIDC, a self-regulatory organisation, is the recognised face of asset-financing NBFCs in the country.Aggarwal, who recently assumed charge of FIDC, wants to reposition NBFCs in the Indian financial system and change the perception about this sector. Aggarwal also suggested that a separate refinance window be created for asset-financing NBFCs and felt that the recently set up MUDRA Bank could be an ideal body for this purpose.

FIDC is in talks with several overseas bodies as part of efforts to develop international linkages, said Mahesh Thakkar, Director-General, FIDC. Tie-ups with overseas associations will help FIDC members learn best international practices and undertake activities, such as cross-border leasing of assets and providing more funding avenues, he noted.

FIDC does not see the RBI move to grant in-principle nod for 11 payments banks and 10 small finance banks as “competition” for the asset-financing NBFCs. Corporate houses and NBFCs backed by business houses are not eligible to apply for small finance bank licenses. [Business Line, Nov. 24]

The Reserve Bank is alive to the developmental needs of the economy and therefore will continue to approve of new types of NBFCs if the economy will so require them,” Mr R Gandhi, Deputy Governor, RBI said on Dec. 21 at CII’s 1st NBFCs Summit with the theme ‘Regulatory Paradigm & Contours of Growth – Vision 2020’ at Mumbai.Mr. Gandhi praised NBFCs when he said, “NBFCs can be advantageous due to their ability to lower transaction costs, quick decision making, customer orientation and prompt delivery of services. In terms of products and services offered, NBFCs complement banking services. They have their risk elements that have led to continuous monitoring and assessment. However RBI has been dynamically making regulatory framework suitable for the day.” Speaking at the summit, Mr. Y M Deosthalee, Chairman, CII National Committee on NBFCs and CMD, L&T Finance Holdings Limited, said, “NBFCs in India have evolved over the past five decades to emerge as a notable alternate source of credit intermediation to meet the diverse financial needs of the economy. The resultant capital formation has become a catalyst for India’s growth and development. Over the years, NBFCs have exhibited an ability to create innovative products and reach out to new client segments and regions, those which banks have typically been slow to expand into. Mr Ramesh Iyer, M D, Mahindra & Mahindra Financial Services, put the NBFC sector into perspective when he said, “While we are all under the financial umbrella, I do not believe NBFCs compete with one another. Each one of us is a niche. Some have chosen a particular geography, some focus on products while others have segmented themselves only on customers. It is also a myth that we compete with banks because we service different needs and different customers. We do not compete with Banks, we complement them. It is hence with certainty that I say that NBFCs have a great future.” CII and technical partner Boston Consulting Group (BCG) released a whitepaper on the potential of NBFCs in India, including outlining

ways to accelerate their growth in the country. Mr Saurabh Tripathi, Partner and Director, BCG said, “Traditional sources of advantage for NBFCs will erode over time with deepening of banking in the country. It is imperative that NBFCs harness latest trends in technology, digital adoption by customers, and the web of partnerships to innovate and come up with new models. NBFCs are likely to benefit from these underlying trends and developments in the Indian market.” The day long summit was a huge success because of a large participation from the captains of the Indian NBFC industry.[CII Press Release, 21 Dec.]

During the quarter FIDC top brass under the leadership of new chairman, Raman Aggarwal with new mission and vision for FY 2016-17 to reposition NBFCs in Indian Financial System held a series of meetings with RBI Governor, RBI PCGMs, CBDT Chairperson, Mr. Ntin Gadkari, MUDRA M D & CEO, IBA Chief Executive and other authorities for articulating various issues faced by NBFCs and garnering support. All meetings were very positive and the most of the issues pertaining to: (a) NBFC’s role in Financial Inclusion (b) Level-playing field for NBFC sector(c) The role and relevance of Small NBFCs(d) Funding for NBFCs(e) Continuous pro-active interaction with FIDC by Regulator

were discussed and the road-map for further action plan was drawn. FIDC will keep members involved and updated on all

meetings, presentations and issues.

FIDC Managing Committee elected Mr. V S N Murty and Mr. M R Umarji as “Co-opted Special Invitee” in their respective

independent professional capacity as their advice and wisdom will make FIDC Think Tank strong.

Representation Committee of FIDC has been reconstituted under the chairmanship of Mr. K V Srinivasan and Legal Committee has been reconstituted under the chairmanship of Mr. V Srinivasan.

RBI has issued the revised norms for ECBs on Nov. 30, according to which all FIDC concerns regarding the class of NBFCs eligible and the end use restrictions have been addressed, Raman Aggarwal, FIDC chairman said. Giving details of dispensation to NBFC sector he said that:

The list of entities eligible to raise ECB under the three tracks set out by the RBI cover: All Non-Banking Financial Companies (NBFCs). iii. NBFCs-Micro Finance Institutions (NBFCs-MFIs), - Indian Rupee Denominated ECB with Minimum Average Maturity of 3/5 years”

a. On-lending to the infrastructure sector; b. providing hypothecated loans to domestic entities for acquisition of capital goods/equipments; and c. providing capital goods/equipment to domestic entities by way of lease and hire-purchases”Thus, earlier restrictions of only lease, and only imported equipment have been done away, he added.This has been possible due to FIDC’s well documented representation both in writing and in person, Mahesh Thakkar, director general, FIDC said.

Rounds of meetings with authorities with new vision and mission

Mr. V S N Murty and Mr. M R Umarji as “Co-opted Sp.Invitees

Re-constitution of FIDC Committees:

Doors wide open for NBFCs for ECB, thanks to FIDC endeavours

“Eligible Borrowers:

“NBFCs can use ECB proceeds for:

FIDC Chairman Mr. Raman Aggarwal being

felicitated at the Conference on “MSME & Small Business Financing through MUDRA -The Road Ahead”

by IMC & MUDRA on 19th October, 2015

at IMC, Mumbai.

FIDC News • 12

Published by :Raman Aggarwal, Chairmanfor and on behalf ofFinance Industry Development Council,

101/103, Sunflower, 1st Floor, Rajawadi Road No. 2, Ghatkopar (East), Mumbai-400077, INDIA.Phone : 91-2221027324 / 91 98200 35553Director General : maheshthakkar45@yahoo.inWebsite : www.fidcindia.org

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FIDC Meeting with CBDT Chairperson Mrs. Anita Kapoor on October 20, 2015

FIDC Director General Mahesh Thakkar Meeting with IBA Chairman Mr. Ashwani Kumar

on 12th October 2015 at Mumbai

Conference on "MSME & Small Business Financing through MUDRA-The Road Ahead" by IMC & MUDRA on 19th October, 2015

at IMC, Mumbai. Chief Guest : Mr. Jiji Mammen, MD & CEO, MUDRA, Mahesh Thakkar & others.

FIDC ChairmaN Mr. Raman Aggarwal being felicitated

at the Conference on "MSME & Small Business Financing

through MUDRA -The Road Ahead" by IMC & MUDRA

on 19th October, 2015 at IMC, Mumbai.

FIDC Director General Mahesh Thakkar speaking on

"Role of Self-Regulatory Organisation in de-risking the Industry"

at National Financial Inclusion Conference 2015 on October 08, 2015

at Hotel The Ashok, New Delhi, organised by Sa-dhan.

FIDC Managing Committee Meeting in progress

on 23rd November 2015 at New Delhi

Courtesy : The Hindu