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NBFC (Why - NBFCs - Bringing diversity in financial sector (complimentary…

- - - - CP
      - Loans
      - Buy out
- - - - is among the biggest fund provider to NBFCs via commercial papers and debentures
      - investors are getting reluctant to lend post the IL&FS crisis\
  - - - risks of lack of credit history
      - scale
      - historically high NPAs
  - - - delayed statutory approvals
      - problems of land acquisition
      - environmental clearance, etc
- - - - ordinary depositors lost money
      - Non banking companies were taking deposit activities
  - - - RBI tightened regulatory structure over the NBFCs
      - rigorous registration requirements
      - enhanced reporting and supervision
      - no additional NBFC will be permitted to raise deposits from the public
    - - capital requirement for fresh registration inc from 25 lakh to200 lakh
    - - Created systemic risk issues
      - growing size and interconnectedness - fin stability issues
  - - - address the risks posed by them to financial stability
      - address depositors’ and customers’ interests
      - address regulatory arbitrage
      - help the sector grow in a healthy and efficient manner
    - - those with asset size of ‘100 crore and above in the year 2006 ( 2014 - 500 cr)
      - bringing them under stricter prudential norms (CRAR and exposure norms)
      - issuing guidelines on Fair Practices Code
      - aligning the guidelines on restructuring and securitisation with that of banks
      - permitting NBFCs-ND-SI to issue perpetual debt instruments etc
      - higher minimum Tier 1 capital
      - higher corporate governance standards
      - stricter asset classification norms
      - Examples - Power Finance Corporation Limited (PFCL), Rural Electrification Corporation Limited (RECL), IL&FS, etc
    - - a) address risks wherever they exist
      - b) address regulatory gaps and arbitrage arising from differential regulations, both within the sector as well as vis-a-vis other financial institutions
      - c) harmonise and simplify regulations to facilitate a smoother compliance culture among NBFCs
      - d) strengthen governance standards
    - - What did RBI do?
        
        Classified P2P as NBFCs
        
        introduced rules and mechanism for them to follow
      - What is P2P ?
        
        crowdfunding platform (mostly online)
        
        people looking to invest and people in need of borrowing come together
        
        Regulation before
        
        Registered under companies act 1956
        
        Mechanism
        
        companies follow a reverse auction process
        
        lenders bid for borrower’s proposal
        
        borrower is free to choose whether or not to borrow
      - RBI Regulation on P2P
        
        Benefits for P2P companies
        
        will get access to credit bureaus
        
        can now pursue cheque bounce
        
        (P2P loan recovery works through post-dated cheques) cases in court
        
        What should P2P companies do?
        
        will have to share loan related data with credit bureaus
        
        mandatorily share the borrower’s credit information
        
        need to put a proper grievance mechanism in place and appoint a nodal officer
- - - - The board of IL&FS was superseded with six new directors after the government moved a petition in the NCLT to remove the previous board of directors
    - - Serious Fraud Investigation Office (SFIO) to investigate into the crisis
  - - - banks now have an additional 2% of their deposit base freed up for lending
    - - purchasing government bonds from the market
    - - NBFCs can sell or securitise their loan of more than five-year maturity after holding those for six months
      - Earlier they had to hold these assets for at least one year to do so
  - - - improving the credit rating of a corporate bond
      - Example - if a bond is rated BBB, credit enhancement, which is basically an assurance of repayment by another entity, can improve the rating to AA
      - to provide an additional source of assurance or guarantee to service the bond
    - - allowed banks to provide partial credit enhancement (PCE) to bonds issued by systemically important non-deposit taking NBFCs registered with the RBI and Housing Finance Companies (HFCs) registered with the National Housing Bank