RBI release new outsourcing norms for NBFCs

RBI has issued fresh directions on managing risks and code of conduct in outsourcing of financial services by NBFCs. These norms have to be complied with in the next two months.

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

Access to customer information by staff of the service provider shall be on ‘need to know’ basis i.e., limited to those areas where the information is required in order to perform the outsourced function.

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

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

Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license.

These institutions typically are restricted from taking deposits from the public depending on the jurisdiction. Nonetheless, operations of these institutions are often still covered under a country’s banking regulations.

NBFC cannot accept demand deposits.

NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself.

Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

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Crypto currencies now come under SEBI lens

The rising popularity of crypto currencies and the increasing number of entities looking at raising funds through Initial Coin Offerings (ICO) has caught the attention of the capital market regulator.

The Securities and Exchange Board of India (SEBI) is mulling whether an ICO can be regulated under the existing legal framework or certain amendments would be required.

Crypto currencies like bitcoin, ethereum and such offerings have been under government radar for long and discussions have been held between various bodies, including SEBI and the Reserve Bank of India (RBI), on the possible ways in which this segment can be regulated.

The central bank is of the view that these instruments are securities and so SEBI should be the regulating body.

Bitcoins are neither ‘commodities derivatives’ nor ‘securities’ under Securities Contracts (Regulation) Act, 1956.

An ICO, like an equity initial public offer (IPO), is an issuance of digital tokens that can be converted into crypto currencies and are mostly used to raise funds by start-up firms dealing in block chain technology and virtual currencies like bitcoins and ethereum.

Unlike an IPO, which is governed by SEBI regulations, there is no regulatory body for ICOs in India.

China recently banned such offerings after its central bank said that ICOs are “illegal public finance” mechanism used for issue of securities and money laundering.

Start-ups like Zebpay, Unocoin, Coinsecure, Searchtrade, Belfrics and Bitxoxo are some of the well-known players in the bitcoin and blockchain segment in India.

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Govt sets up Arun Jaitley-panel to oversee PSU bank mergers

In another significant move to revive PSU banks weighed down by bad loans, the government on Monday set up a ministerial panel, led by finance minister Arun Jaitley, to consider and oversee mergers among the country’s 21 state-run banks.

Members of the panel on PSU bank consolidation include railway and coal minister Piyush Goyal, and defence minister Nirmala Sitharaman, PTI reported.

The decision comes less than a week after the government announced a Rs2.11 trillion bank recapitalisation plan for public sector banks weighed down by bad loans, seeking to stimulate the flow of credit to spur private investment.
The constitution of an Alternative Mechanism is a move in that direction. The Union cabinet in August had decided to set up an Alternative Mechanism to fast-track PSU bank consolidation.

The consolidation of struggling state-run banks, which have a market share of about 70% and account for over 80% of bad loans in the Indian banking system, is aimed at building scale and bolstering their risk-taking ability.

The idea of bank mergers has been around since at least 1991, when former Reserve Bank of India (RBI) governor M. Narasimham recommended the government merge banks into a three-tiered structure, with three large banks with an international presence at the top.

In 2014, the P. J. Nayak panel suggested that the government either merge or privatize state-owned banks. The government hopes that state-owned banks will achieve economies of scale and operational efficiency, while managing risks in a better way after merging.

Consolidation is also likely to help them deal better with their credit portfolio, including stressed assets. Consolidation prevents multiplicity of resources being spent in the same area and strengthens banks to deal with shocks, Jaitley had said in August. According to experts, the consolidation plan along with measures such as capital infusions in weak banks will trigger a revival.

The State Bank of India merged operations of five of its associate banks and Bharatiya Mahila Bank with itself earlier this year, marking the first consolidation move in the sector following the bad loan crisis. The merger has reduced the number of state-controlled banks to 21 from 26.

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₹2.11 lakh crore for public sector banks banks to boost lending

The Union government unveiled an ambitious plan to infuse ₹2.11 lakh crore capital over the next two years into public sector banks (PSBs) that are saddled with high, non-performing assets (NPAs) and facing the prospect of having to take haircuts on loans stuck in insolvency proceedings.

The move is vital for the slowing economy, as private investments remain elusive in the face of the “twin-balance sheet problem” afflicting corporate India and public sector banks reflected in slow bank credit growth.

Several economists opine that the recapitalisation of banks — so that they can lend more freely and help revive private investment — is critical for revitalising the growth momentum at a time when the global economy is recovering.

This would be funded through budgetary provisions of ₹18,139 crore and the sale of recapitalisation bonds worth ₹1.35 lakh crore. The balance would be raised by the banks themselves by diluting the government’s equity share.

“Indiscriminate lending earlier by banks led to a high level of NPAs,” Finance Minister Arun Jaitley said. “And these NPAs were kept under the carpet. Now they have come to light because of the Asset Quality Review conducted by the Reserve Bank of India.”

The capital infusion would also be accompanied by a series of banking sector reforms, Mr. Jaitley said, without providing any specifics, adding that the measures would be revealed in the coming months.

Courtesy: The Hindu

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RBI sets up task force for India public credit registry

The Reserve Bank of India (RBI) on Monday formed a high-level task force on public credit registry (PCR) for India. The task force, chaired by Y M Deosthalee, former CMD of L&T Finance Holdings Ltd will have nine other members.

The terms of reference of the task force include, reviewing the current availability of information on credit in the country, assessing gaps in India that could be filled by a comprehensive public credit registry and suggesting a “roadmap including the priority areas, for developing a transparent, comprehensive and near-real-time” public credit registry for India.

The task force will submit its report by April 4, 2018.

The RBI said the task force will also study the best international practices on public credit registry, decide the structure of the new information system.

According to the RBI statement,the task force will “determine the scope/target of the comprehensive PCR” such as the type of information that should be covered along with the cut-off size of credit.

Currently, there are four credit bureaus in India — Credit Information Bureau (India) Limited (CIBIL), Equifax, Experian, and CRIF Highmark. These bureaus provide credit scores and allied reports and services. As of now, their analysis reports are used for issuing credit cards and for taking decisions mainly on retail loans. The bureaus are regulated by the RBI under the Credit Information Companies (Regulation) Act, 2005.

Typically, a PCR is set up by the central bank and reporting of loan details to the Registry by lenders and/or borrowers is mandated by law. A survey conducted by the World Bank reported that as of 2012, out of 195 countries that were surveyed, 87 were having PCRs, as per the RBI. A public credit registry would help “good borrowers” in securing credit at lowers costs and also improve access of credit to small and medium enterprises.

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Govt permits banks to sell more small savings schemes like NSCs, MIS

In order to encourage savings, the government has allowed banks, including top three private sector lenders, to accept deposits under various small savings schemes like National Savings Certificate (NSC), Recurring Deposits and Monthly Income Scheme (MIS). Until now, most of the small savings schemes were sold through post offices.

According to a recent government notification, banks can also sell National Savings Time Deposit Scheme 1981, National Savings (Monthly Income Account) Scheme 1987, National Savings Recurring Deposit Scheme 1981 and NSC VIII issue.

As per the notification, all public sector banks and top three in the private sector — ICICI Bank, HDFC Bank and Axis Bank — to receive subscription from the expanded portfolios. So far, these banks were allowed to receive subscription under Public Provident Fund, Kisan Vikas Patra-2014, Sukanya Samriddhi Account, Senior Citizen Savings Scheme-2004.

Increased outlets for selling small savings scheme would result in higher mobilisation under the scheme.

Last month, the government kept unchanged interest rates on small savings schemes for the October-December quarter. Since April last year, interest rates on all small saving schemes have been recalibrated on a quarterly basis.

Investments in the public provident fund (PPF) scheme will fetch annual rate of 7.8% while Kisan Vikas Patra (KVP) investments will yield 7.5% and mature in 115 months. The one for girl child savings, Sukanya Samriddhi Account Scheme will offer 8.3% annually.
Similarly, the investment on 5-year Senior Citizens Savings Scheme will yield 8.3%. The interest rate on the senior citizens scheme is paid quarterly.

On the basis of the decision of the government, interest rates for small savings schemes are to be notified on a quarterly basis since 1 April 2016, the ministry said while notifying the rates for third quarter of financial year 2017- 18.

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RBI to regulate peer-to-peer lending firms

All peer-to-peer lending (P2P) platforms will be regulated by the Reserve Bank of India (RBI), according to a government of India notification released

The gazette notification stated that all the P2P loan platforms will be treated as non-banking financial companies (NBFCs) and will be brought under the ambit of the banking regulator.

The notification is a precursor to the norms that RBI is likely to release for regulation of P2P lending in India.

RBI had argued in favour of regulating P2P lending entities in the consultation paper, stating that the sector has the potential to “disrupt the financial sector and throw up surprises”.

The paper further stated that the importance of an alternative lending channel that P2P loan platforms offer also needs to be acknowledged.

According to RBI, P2P lending is a form of crowdfunding used to raise loans which are paid back with interest.

It can be defined as the use of an online platform that matches lenders with borrowers in order to provide unsecured loans.

The notification will help P2P lenders gain official recognition, opening new avenues for fund-raising and business expansion.

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Supreme Court allows two broke firms to settle dispute

The Supreme Court, using its extraordinary constitutional powers, has allowed two companies to withdraw from insolvency proceedings and settle their loan dispute despite the case having been admitted by the National Company Law Tribunal (NCLT).

It should be noted here that once the NCLT admits a case for initiating corporate insolvency resolution process under the Insolvency and Bankruptcy Code of 2016, the case cannot be withdrawn even if the parties have decided to settle.

Article 142 provides that “the Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it”.

Just seven months after the operationalization of the Insolvency and Bankruptcy Code (IBC), it has been tested by the Supreme Court with its latest judgment. The policy underlying IBC shifts the incentive of the parties from individual recovery actions to collective action. In that context, after a petition has been filed in NCLT, allowing out-of-court bilateral settlement between the borrower and one creditor may contradict that basic objective of collective action.

After the admission of the petition, it acquires the character of a representative suit and through publication in newspapers, other creditors get a right to participate in the insolvency resolution process and therefore IBC does not allow the petition to be dismissed on the basis of a compromise between the operational creditor and corporate debtor.

National Company Law Tribunal:

National Company Law Tribunal (NCLT) is a quasi-judicial body that will govern the companies in India. It was established under the Companies Act, 2013 and is a successor body to the Company Law Board.

NCLT will have the same powers as assigned to the erstwhile Company Law Board (which are mostly related to dealing with oppression and mismanagement), Board for Industrial and Financial Reconstruction (BIFR)(revival of sick companies) and powers related to winding up of companies (which was available only with the High Courts).

The setting up of NCLT as a specialized institution for corporate justice is based on the recommendations of the Justice Eradi Committee on Law Relating to Insolvency and Winding up of Companies.

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Scheme for banks not applied as envisaged’

According to a report by the CAG, the Centre’s ‘Indradhanush’ scheme to recapitalise public sector banks (PSBs) based on their performance was not implemented in a manner envisaged.

As per the scheme, a portion of the recapitalisation was to be based on the bank’ performance. However, this was not followed during disbursal of funds.
The parameters used to determine whether banks required capital changed from year to year and in some years the rationale for capitalising banks was not even recorded. Hence, the scheme’s target of raising Rs. 1.1 lakh crore from the markets by 2018-19 was not likely to be met.

Also, some banks that did not qualify for additional capital as per the decided norms were infused with capital, and in some cases, banks were infused with more capital than required.
Gross NPAs with PSBs had risen sharply in recent years, from Rs. 2.27 lakh crore as of March 31, 2014, to about Rs. 5.4 lakh crore at the end of March 2016.

In 2015, under the Indradhanush plan, the government had announced capital infusion of Rs70,000 crores in public sector banks for four years, starting from 2015-16. In the first two financial years, ₹25,000 crore had been earmarked per year with Rs10,00crores to be disbursed in each of the remaining two years. However, credit rating agencies had pointed out that the sum was insufficient as banks needed to meet Basel-III norms as well as make provisions for rising bad loans.

The mission includes the seven key reforms of appointments, a board of Bureau, capitalisation, de-stressing, empowerment, a framework of accountability and governance reforms.

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