Non-Banking Financial Companies (NBFCs) Current Affairs - 2020

RBI releases Framework for sale of Loan Exposure and Securitization of Standard Assets

The Reserve Bank of India recently released draft framework for “Sale of Loan Exposures” and “Securitization of Standard Assets”.

Highlights

The guidelines issued are applicable to Scheduled Commercial Banks. This includes All India Financial Institutions such as EXIM Bank, NABARD, Non-Banking Financial Companies. The guidelines have also included recommendations of Committee on Development of Housing Finance Securitization Market in India that was chaired by Dr Harsh Vardhan. Also, the guidelines included the recommendations made by the Task Force set up on the Development of Secondary Market for Corporate Loans. Both the Committee and the Task Force were set up by the Reserve Bank of India.

Key Features of the Guidelines

  • The Guidelines has proposed Two Capital Measurement approach. This includes Securitisation External Ratings based approach and Securitisation Standardised Approach.
  • Simple Transparent Comparable Securitisation has been prescribed to define preferential capital treatment.
  • The new guidelines allowed Securitisation of exposures that are purchased from other lenders
  • The Stressed Assets under the new guidelines shall be sold only through novation and assignment.

RBI suspended licence of seven non-banking finance companies (NBFCs)

On 17 August the Reserve Bank of India (RBI) suspends licence of seven non-banking finance companies (NBFCs).

The seven NBFCs whose licences were suspended are – Religare Finance, Artisans Micro Finance, Eden Trade & Commerce, RCS Parivar Finance, Nott Investments, Dewra Stocks & Securities, Swetasree Finance.

Being a dormant entity, Religare Finance licence was suspended by RBI as it did not conducted lending operation for long period of time.

RBI role in issuing licence to NBFCs:

  • A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956, whose principal business is lending, investments and receiving deposits. At present there are around 12,000 NBFCs in India.
  • NBFC does not include any institution whose principal business is agricultural activity, trading activity, industrial activity or sale/purchase/construction of immovable property.
  • RBI has power under RBI Act 1934 to register, regulate, lay down policy, inspect, issue directions, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business.
  • Any NBFCs that does not carry out its principal business according to the directions or orders issued by RBI under RBI Act is eligible for penal action that can also result in cancelling the Certificate of Registration issued to the NBFC.