FIDC News • 1

T. T. SRINIVASARAGHAVAN, Chairman

VOLUME - 1 • NO. - 5FEBRUARY - JUNE 2010 FOR PRIVATE CIRCULATION

F i n a n c e

I n d u s t r y

Development

C o u n c i l

Regulatory PerimeterRegulatory Perimeter

Collaboration ModelCollaboration Model

RBI permits zero-coupon NCDs

The RBI has allowed companies to issue zero-coupon non-convertible debentures (NCD) at a discount to the face value, according to the final guidelines for issuance of the debt instruments. It released final guidelines for the issuance of the debt instruments with original maturity of up to one year. These directions will become effective from August 1. The central bank had released draft guidelines in November 2009 for public comment. As proposed in the draft guidelines, RBI has barred companies from issuing NCDs with a maturity period of less than 90 days. In addition, no corporate with a tangible net worth of less than Rs 4 crore will be permitted to issue an NCD. The company will also have to ensure that it has sanctioned working capital limit or term loan by banks or financial institutions and that its borrowal account is classified as a standard asset.

An eligible corporate intending to issue NCDs will have to obtain a credit rating for issuance of the NCDs from a rating agency and the minimum credit rating shall be P-2 of CRISIL or the equivalent rating by other agencies. The total amount of NCDs proposed to be issued will have to be completed

Financial Inclusion is the flavour of the times. Much has been spoken and written about it but one wonders how much of this has translated to action, on the ground. One question that arises is whether more banks, specifically, universal banks are the answer. What we need today are not more universal banks, but niche banks or specialized banks which can specifically target areas where financial inclusion is a crying need. For example, if we had banks that understood a particular territory very well (local area banks are a good example) or if somebody understood road transport financing very well or the second-hand financing market, they would leverage their intimate knowledge to deliver credit.Truck financing, in particular, does require an in-depth knowledge of the market and customer behaviour, and constant personal touch with the customer. Size by itself is not a problem, but the mindset in dealing with customers has to be a personalized, small-company approach.

In the UK, there used to be entities called licensed deposit taking companies. They were basically NBFCs but had limited cheque issuing authority. They were like banks. People who had deposited money there could write cheques against their deposits. In our view, these are the kinds of structures we need rather than large universal banks. We have enough of those.

NBFCs are clearly an additional delivery channel not only for lending products but also for a whole range of savings and investment products like insurance and mutual funds. It is in the economy’s interest to develop a robust NBFC sector. Even during the recent financial crisis, the NBFC sector stood up very well. None of the NBFCs availed of the stimulus package and most of them managed the downturn very well.

Banks and NBFCs must be viewed as wholesalers and retailers respectively, so that the ends of efficient credit delivery are met. It is also vitally important to create a framework for long term funding, especially for the small and medium NBFCs, with appropriate safeguards in place, including for deposits.

AT A GLANCE

Collaboration Model

Regulatory Perimeter

India is on the threshold of the most exciting time in history : An Interview of Mr. T. T. Srinivasaraghavan

FSU assessment of Non Banking Financial Companies

Meeting Funding Challenges Solution lies within : Mr. M. Anandan

Moves

Legal Eagle

Periscope

FIDC In Action

1

EDITORIAL COMMITTEE

MR. T. T. SRINIVASARAGHAVAN ...Chairman

MR. RAMAN AGGARWAL ... Co-Chairman

MR. MAHESH THAKKAR ... Director General

MR. MUKESH GANDHI

MR. SRINIVAS ACHARYA

MR. N M MUKHI ... Editor

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SREI EQUIPMENT FINANCE PVT. LTD.Y-10, Block - EP, Sector - V, Salt Lake City, Kolkata - 700 091. Telephone No. : +91 - 033 - 6639 4700 / 6602 2000 - 6602 2999 • Website : www.srei.com

"Srei BNP Paribas - The Total Equipment Solutions Company"

: C O U R T E S Y :

FIDC News • 2

within a period of two weeks from the date on which the corporate opens the issue for subscription. An additional clause that was not present in the draft guidelines is the auditors of the corporate will have to certify to the investors that all the eligibility conditions are met by the corporate. [Business Standard, June 24, 2010]

The RBI asked NBFCs wanting to make overseas investment to obtain 'No Objection Certificate' from the DNBS-RBI before making such investment. This directive follows the RBI coming across instances where NBFCs have made overseas investments without regulatory clearance. It cautioned that any investments made by NBFCs without clearance is a violation of FEMA 2004 and attracts penal provisions.

Reserve Bank vide a notification No.DNBS(PD)CC.No 175/03.10.42/2009-10 Dated May 26, 2010 has advised NBFCs[including RNBCs] to clearly note the amendments made by Government of India vide its Notification No. 7/2010-E.S.F.No6/8/2009-E.S dated February 12, 2010 in respect of the Prevention of Money-laundering Rules, 2005.

RBI has also vide a Notification on April 23 RBI/2009-10/428 DNBS(PD)CC.No 171/03.10.42/2009-10 on even subject has advised NBFCs[including RNBCs] to clearly note the amendments made by Government of India vide Notification No. 13/2009 dated 12-11-2009.

The RBI has directed NBFCs to be alert while transacting business from countries like Iran, Pakistan and North Korea. According to the RBI, the Financial Action Task Force (FATF), an international agency, has identified these countries as having lax anti money laundering and terror financing laws. In a notification, the RBI said all NBFCs are accordingly advised to take into account risks arising from deficiencies in combating of financing of terrorism regime of these countries.

NBFCs having FDI whether under automatic route or under approval route have to comply with the stipulated minimum capitalisation norms and other relevant terms and conditions. These NBFCs are required to submit a certificate from their Statutory Auditors on half year ending September and March certifying compliance with the existing terms and conditions of FDI to RBI as per direction on 4th Feb. '10. Such certificate may be submitted not later than one month from the close of the half year.

Vide DNBS (PD) CC. No. 18/SCRC/ 26.03.001/2009-2010 issued on 21st April 2010 the Securitisation Companies[SC] and Reconstruction Companies[RC] Guidelines and Directions, 2003 issued vide Notification No. DNBS

Overseas investment norms for NBFCs

NBFCs asked to adhere to amended Prevention of Money Laundering Rules

RBI cautions NBFCs on transaction in Iran, Pakistan, North Korea

Compliance with FDI norms-Half yearly certificate from Auditors

The RBI amended SC/RC guidelines

2/CGM(CSM) -2003 dated April 23, 2003 to clarify certain issues as regards acquisition of financial assets by trusts floated by SC or RCs, extension in time frame allowed for realization of financial assets, deployment of surplus funds, acquisition of land and buildings by SC or RCs; asset classification, additional disclosures in the balance sheet etc. as detailed in the said Notification.

In a case which came up before Bombay High Court it was observed that the bank granting finance in housing, should insist on projects, disclosure of the charge or any other liability on the plot in question or development project being duly made in the brochure or pamphlet etc. which may be published by developer/owner inviting public at large to purchase flats and properties. The Court also added that this obviously would be part of the terms and conditions on which the loan may be sanctioned by the bank. RBI keeping in this view felt it desirable that while granting finance to housing / development projects, NBFCs also should stipulate as a part of the terms and conditions that: (i) the builder / developer / owner / company would disclose in the Pamphlets / Brochures / advertisements etc., the name(s) of the entity to which the property is mortgaged. (ii) the builder / developer / owner / company should indicate in the pamphlets / brochures, that they would provide No Objection Certificate (NOC) / permission of the mortgagee entity for sale of flats / property, if required. RBI vide DNBS (PD) C.C No. 174 /03.10.001/2009-10 dated May 6, 2010 asked the NBFCs to ensure compliance with these stipulations and funds should not be released unless the builder / developer / owner /company fulfils these requirements.

The decision of the RBI to ease lending norms for the infrastructure sector [RBI circular dated 12 Feb. 2010 No. DBOD. No. BP. BC. 74/21.04.172/ 2009-10] is expected to help companies avail better and cheaper credit flow, besides getting access to new sources of funds. In its monetary policy for 2010-11, RBI said annuities under the build-operate-transfer (BOT) model in road and highway projects and toll collection rights should be treated as tangible securities to offer secured loans. Another proposal was to reduce provisioning on infrastructure loan accounts classified as sub-standard to 15 per cent, instead of the current 20 per cent. RBI also suggested that banks classify their investments in non-SLR (statutory liquidity ratio) bonds issued by infrastructure companies with a minimum residual maturity of seven years under the held to maturity (HTM) category, a decision which would spur investments by banks in such bonds. “The decision on secured loans will bring down the interest rate burden in BOT projects, especially for roads and highways. I expect the decision will reduce interest rates by at least 0.2 per cent to 0.5 per cent”, said Praveen Sood, chief financial officer of HCC Ltd, a Mumbai-based construction company.

Finance for housing projects- stipulation of conditions by NBFCs

Infra companies to gain from easing of lending norms

FIDC News • 3

India is on the

threshold of the

most exciting time

in history

India is on the

threshold of the

most exciting time

in history

A lot of the small NBFCs

suffer from lack of funding

support. If the government

can set up a funding

mechanism or a funding

agency through which these

NBFCs can borrow and

they can lend in the smaller

segments that will be a

great help.

An Interview ofMr.T T Srinivasaraghavan, chairman,

FIDC and managing director,Sundaram Finance Ltd.

As a person associated with the financial services sector, do you think the recession is completely over?

How would you compare the situation in the financial sector in the West and in India?

What were the problems the financial sector faced in India?

Auto sector was badly hit all over the world. Was it the same in India too?

Detroit almost shut down. . .

With the feeling that recession is behind us, will you see a lot of spending? Where do you see interest rates going?

Before I talk about whether it is completely over or not, it is useful to go back a little, because even when you talk about the recession, I don't think we were as badly affected as everybody else. So the dip for us was a smaller dip than for the rest of the world.

In the financial services space itself, we were much better off. Our financial system was pretty robust and our banking system, especially, was very solid. So we didn't have even a single bank anywhere near distress, whereas this was the case all over the world. In terms of the solidity or robustness of the financial system, we were on in pretty good shape. It wasn't so bad to start with.

The major problem all of us faced was that credit offtake dropped and demand too dropped. Also, there was a greater degree of risk aversion, both amongst lenders and among borrowers.I can speak about the automobile sector. We suddenly found the proportion of people buying cars out of their own savings went up quite significantly during that period. Because cars, specifically... 75-80 per cent of all car sales have traditionally been financed. In the case of truck sales, it is an even higher proportion. But during the downturn, we found more people using their own money to buy. There could be two reasons for this. Reason one could be that given all the uncertainty around, they didn't want to increase their indebtedness.Second, they may have felt that it was not good time to invest their savings in funds or stock markets due to uncertain market conditions. Instead they may have chosen to use the savings money to buy their own asset. Cash purchases went as high as 35-40 per cent. So there was risk aversion on the part of the borrower. Surely, there was risk aversion on the part of the lenders as the NPAs (Non Performing Assets) and delinquencies had gone up. That was something very noticeable. If you look at credit offtake and disbursements of large players during this period, it came down. And this was reflection of the fact that sales, especially in the commercial vehicles sector, tanked dramatically during that period. So if the vehicles were not sold, then obviously the auto finance companies that finance the trucks could not grow.

Definitely so. The auto sector was one of the sectors that was badly affected. The drop was as much as 40 per cent, especially in the commercial vehicles segment, while the sales of cars remained flat. That was the magnitude of the drop.

Yes, compared to the global situation, we were still in a reasonably good shape. There was a fairly steep fall in the commercial vehicles and the construction equipment segment as well. That was because infrastructure spending had also virtually come to a standstill. There was a long lull.Even within the commercial vehicles segment, the worst affected was the tipper segment. Haulage segment was also badly affected.The bus segment was the only one that was not so badly hit. This was because of the government's stimulus package on the Jawaharlal Nehru Urban Renewal Mission. Lot of state transport undertakings invested in buses.It was a flat growth in case of cars which was growing by 25 per cent every year. Now, growth has come back in the passenger cars and commercial vehicles segments.With commercial vehicles, one must bear in mind the base effect. Because we had gone so far down, anything we do looks positive and everything looks a plus. But the reality is that as of end of January, commercial vehicles were only at the same levels as what it was in 2007-08.We have just about touched that level. We are now climbing back and coming back to ground zero. Only in the coming financial year, we will have to see if the real growth happens.

May be it is too soon because the Budget announcements have just come in. People are probably still taking stock. Price increase will have some impact. Car and truck price increases will have some impact.Half a per cent or one per cent increase in interest rates will not make such a big difference. This is also the point that we make. The increase in the equated monthly instalment for the borrower because of a 1 per cent increase in interest rates is relatively small. Nobody looks at what is the impact because of the increase in price of the asset itself. Increase in truck prices, for example, by Rs 1.5 lakh (Rs 150,000) puts a much greater burden on the borrower than this 1 per cent interest rate increase. It is a combination of several things that will affect the spending -- the basic price of the truck,

The same people who two

years ago used to say we are

bureaucratic and

old-fashioned

are now singing praises

of India.

FIDC News • 4

the interest rates, diesel prices, availability of freight, freight rate and the sentiment, as well.

Definitely. People who have been more adventurous in the past and have speculated, if they have been hit badly, they are likely to be a little more careful. But those who have been more measured in their savings habits and in their spending habits, they have every reason to spend more as now the sentiment has turned positive and opportunities are once again starting to emerge. Some semblance of stability has come back. The general perception is that the recession is over. The only dampener could be the food price rise. Because -- if you talk about the average middle class India -- that is still a worry. So, unless that abates, it will remain a worry because that is something people grapple with every day. As long as that does not stabilise, there will some level of uncertainty in the spending habits.

I hope that clamour has at least died down a little bit now, especially with the recent turn of events. What this global meltdown has shown is that the so-called Global Best Practices are not necessarily the best practices. That is clearly a big learning for us. While the US model was often touted as the best, I think, again, experience has shown that is also not necessarily true. So, to make a sweeping generalisation is not a good idea.Each economy has its own dynamics, own strengths and weaknesses. The same people who two years ago used to say we are bureaucratic and old-fashioned are now singing praises of India.To be fair, our regulators and the people who manage our financial sector have done what is appropriate for our country. May be there are a few areas in which we could have gone faster. For example, in raising the JV (joint venture) stake of foreign insurance partners from 26 per cent to 49 per cent they could have been a little more flexible.Having said that, the calibrated approach we have followed is the right approach because our challenges are very different from those of the United States or Europe. We still have large segment of our population below the poverty line. They still need support from the government.We just cannot throw open to free market and ask them to fend for themselves. We have had our own challenges socially and demographically. Our model of development has to be different. We cannot blindly follow and implement a US best practice. We have to follow a system that suits this country the best. I do agree that we can't be isolationists and cut off from the global economy. But we have to do it on our terms and at a pace which is best for this country.

For ourselves, we certainly don't have any such plans. The reason is that we excel in a certain kind of business and in a certain segment of business which we are able to continue doing in our present form as a NBFC.Becoming a bank does not give any extra leverage to do what we are doing. Of course, if we wanted to do other things than what we are doing currently, like working capital loans, project finance, forex, then may be it would be a good idea to become a

Do you expect the positive sentiment to boost the sales of, say, passenger cars?

You spoke about a robust Indian financial system and you said that was why we were not affected badly during the recession. But there is a clamour for a change to the American model. What is your view?

The finance minister in the Budget offered banking licenses to NBFCs. Are you looking to convert to a bank?

bank. We don't have those kinds of ambitions.

We understand road transport financing very well and in the framework of an NBFC, we are able to deliver that extremely well. So there is no compulsion for us to become a bank. And if you look at international experience also -- since for everything we look at global practice -- everywhere in the world there are banks and there are non-banks because for certain segments of the population and for certain niches, non-banks are able to serve very well and very efficiently.We (as an NBFC) tend to be much closer to customers, quicker in terms of our response time and tend to set up businesses in the local communities. We understand the customers' needs, the culture of the place, and we speak their language. So we are able to appreciate and serve their needs much quicker and in a flexible fashion.These are things that come from personalised knowledge and understanding which is difficult for a large bank to replicate, especially because of its size.For us as an NBFC, this is the only thing we do.

Today, everybody talks the language of 'financial inclusion'. That has today become the jargon. NBFCs were probably the earliest entities that practiced financial inclusion because we have, for over five decades, served rural and semi-urban India. Even banks went into semi-urban India only post- nationalisation. We have from the very beginning served that segment.I find it funny when today people talk about financial inclusion and 'last mile credit delivery'. Actually, I would say that in the new evolving system, if there can be policy support to give NBFCs a little more of support and flexibility to be an active part of this financial inclusion, that will be really good.For example, a lot of the small NBFCs suffer from lack of funding support. If the government can set up a funding mechanism or a funding agency through which these NBFCs can borrow and they can lend in the smaller segments that will be a great help.What the microfinance institutions are doing, I believe NBFCs can do one level above them, which they were doing earlier.In the flow of credit, banks actually play the role of a wholesale provider. We are the retail provider. If they can use us (the NBFCs) as the funnel to distribute credit to the most needy, that is what will work best.

If we go on the same lines that we have in the recent past with the same kind of regulatory framework and the same calibrated approach, for a country like India where we are talking about 9 per cent growth, with a huge young middle class population that is aspiring to a better lifestyle, the opportunity is phenomenal across sectors, including for NBFCs.As a nation, we are probably on the threshold of the most exciting time in recent history. This is a very confident country today, which is why I believe it is time for us to talk more about Indian Best Practices and less about global best practices.[Excerpts from the interview by Shobha Warrier in Chennai for

Where do you think you excel?

As the oldest NBFC in India, what do you feel is the role of NBFCs in the financial services sector?

What the microfinance institutions are doing, I believe NBFCs can do one level above them, which the NBFCs were doing earlier.

As an NBFC, where do you see the sector in the next 5-10 years?

In the flow of credit, banks actually play the role of a wholesale provider. We are the retail provider. If they can use us (the NBFCs) as the funnel to distribute credit to the most needy, that is what will work best.

rediff.com on March 15, 2010]

FIDC News • 5

FSU assessment

of Non Banking

Financial Companies

FSU assessment

of Non Banking

Financial Companies

The non-banking financial companies (NBFCs) in India comprise of heterogeneous entities, of which broadly, the Reserve Bank regulates companies accepting public deposits and those non-deposit accepting entities involved in asset financing, providing loans and investments. Other non-banking entities such as housing finance companies, mutual funds, insurance companies, stock broking companies, merchant banking companies, venture capital funds, portfolio management etc. are regulated by the respective sectoral regulator and are exempted from the NBFC regulations.

The NBFCs regulated by the Reserve Bank are broadly classified into non-deposit taking (NBFC-ND), deposit taking (NBFC-D) and residuary non-banking finance companies (RNBCs). Their size is equivalent to approximately nine per cent of the total assets of the financial sector. NBFCs-ND have been further bifurcated into NBFC-ND-Systematically Important (SI), comprising companies with asset size of Rs. 100 crore and above and NBFC-ND-Others.

The NBFCs-ND-SI are the largest and fastest growing segment in the NBFC sector. The consolidated balance sheet size of NBFCs-ND-SI recorded a growth of 27.3 per cent in 2008-09. The significant increase in balance sheet size is mainly attributed to sharp increases in owned funds, debentures and other liabilities.

The heterogeneous nature of the non-banking financial companies sector is widely recognised. They perform diverse activities and are currently categorised under various sectors. Depending on their primary sphere of specialisation, the regulatory responsibility of these entities is distributed across regulators. A company is considered as an NBFC and is within the regulatory jurisdiction of the Reserve Bank if it carries on as its business or part of its business, any of the activities listed in Section 45 I (c) of the RBI Act, 1934. In other words, to be an NBFC, an institution has to be (i) a company under Companies Act; (ii) it should be engaged in financial activity; and (iii) its principal business should not be agricultural, industrial or trading activity or real estate business.

The NBFC-SI sector is well capitalised with an aggregate CRAR of 39 per cent as of March 31, 2009. There has, however, been an increase in the NPA ratios of the NBFCs-SI. The gross NPA as a per cent of total credit exposure increased sharply from 2.0 per cent as at end July 2008 to 4.6 per cent in July 2009. The net NPA as a percentage to total credit exposure during the same period also increased from 0.9 per cent to 2.7 per cent.

The major funding sources for NBFCs include debentures, borrowings from banks and FIs, Commercial Paper and inter-corporate loans (Table -1).

Banks are a major source of funding for NBFCs, either directly or indirectly. Besides advancing loans, banks also are major investors in bonds/debentures issued by NBFCs. This results in dependence of NBFCs on banks, raising the vulnerability to systemic risk in the financial system. Prudential norms have been tightened for bank lending to NBFCs in terms of bank exposure limits, higher provisioning requirement and higher risk weights of the borrowing NBFC. These measures limit the intermediation in the system.

As the recourse to bank financing is restricted, the NBFCs are dependent on other sources like debentures, commercial papers and inter-corporate deposits for funding their asset deployment. A significant portion of these instruments issued by NBFCs are being funded by mutual funds. Hence, NBFCs could be prone to asset liability mismatches, and consequently be exposed to liquidity risks. In the post- Lehman fallout, particularly in the third quarter of 2008- 09, there was a systemic liquidity crunch wherein the NBFC sector was stressed. Faced with withdrawal pressure, the mutual funds, which subscribed to the short term NBFC debt, were unable to either roll over or extend further credit. This caused a liquidity crisis for the sector and a potential crisis of confidence. The Weighted Average Discount Rate (WADR) for the Commercial Paper (CP) issued by NBFCs increased, reaching a high of 14.2 per cent in October 2008 (Chart -1). NBFCs were further stressed as bank loans to them had dried up and interest rates had increased in the money markets, leading to enhanced cost of borrowing, curtailing avenues for further growth in business. The fact that NBFCs relied more on short term borrowings also created an ALM mismatch for them.

NBFC-ND-SI: Financial indicators

Funding Issues

Going forward, the

critical issue for

NBFCs will be to

bring their asset

profile in line with the

liability profile.

Given the

inter-linkages

which the NBFCs have

with the real sector and

other players, the

stability issues need

to be addressed

over time.

FIDC News • 6

A scenario of asymmetrical information and general risk

aversion of banks was expected to strain the NBFC sector

and potentially pose a systemic risk. Therefore, it was

decided to provide liquidity to those NBFCs-SI facing

temporary liquidity mismatches through an SPV. The key part

was that the liquidity was provided to the SPV by the Reserve

Bank through purchase of fully guaranteed government

bonds. Further, this facility was only meant to tide over

temporary liquidity mismatches and not to facilitate balance

sheet expansion. The aggregate quantum for the facility was

Rs. 20 crore and the interest rate was the LoLR rate for

banks. Banks were also permitted, on a temporary basis, to

use the liquidity support under the LAF window through

relaxation in maintenance of SLR up to 1.5 per cent of their

NDTL, exclusively for meeting the funding requirements of

NBFCs and mutual funds.

Though the utilisation of these schemes has been low, the

Reserve Bank along with the Government has helped build

confidence in the sector with the launch of this 'Last Resort'

facility.

There has been a significant decline in the WADR which was

at a benign 4.7 per cent in June 2009, indicating that as a

source of funds, the cost constraints of CPs issued by NBFCs

are now lower. The number of issues also increased to

approximately 100 from 20 in October 2008. However, in

spite of banks being flushed with liquidity, the bank

borrowings by NBFCs did not increase (Chart -2). This was

probably due to risk aversion of banks, high cost of funds and

a cautious approach and risk management by the NBFCs.

The balance sheet components of NBFCs-ND-SI did not

exhibit any major structural changes as a response to the

liquidity issues faced by them. However, the sector continues

to be vulnerable to liquidity shocks as funding risk continues

to be high with low diversification of sources available to fund

the balance sheet growth. Thus, given the inter-linkages

which the NBFCs have with the real sector and other players,

the stability issues need to be addressed over time. In this

context, while capping of bank lending to NBFCs has a

prudential objective, the corporate bond market is an

alternative financing source to enable their growth. The

development of the corporate bond market could have an

added benefit of increasing the NBFCs' recourse to longer

term funds and reduce their ALM mismatch.

The performance of the NBFC sector has been satisfactory

though there is some concern on the credit quality. The

business model of NBFCs should be based on the nature

and tenor of liabilities raised by them. To the extent NBFCs do

long term funding, they will need to rely on long term sources

such as corporate bonds and debentures since their

dependence on bank funding is prudentially capped.

Going forward, the critical issue for NBFCs will be to bring

their asset profile in line with the liability profile. Another

aspect which will necessitate close monitoring are the

interconnected flows between banks and NBFCs on the one

hand, and the movement of funds between NBFCs and other

group entities, especially those active in the capital market,

on the other.

[Extract from the report of Reserve Bank set up inter-disciplinary 'Financial

Stability Unit' (FSU) with the remit to assess the health of the financial system

with a focus on identifying and analysing potential risks to systemic stability

and carrying out stress tests. It has given its first report on March 25, 2010.]

“As far as tax laws are concerned there is a preferential treatment to the

banks. There is a need to eliminate such discrimination by extending

applicability of Sections 36(1)(vii-a) and Section 43D of the IT Act to

NBFCs and also review other laws relating to depreciation and service

tax on leasing and hire purchase activities and provide a level playing

field to the NBFCs.”

- M R Umarji, Chief Advisor[Legal], IBA

Concluding Remarks

Chart 5.44 : Borrowings by NBFC - ND SIs

Per

cen

t to

To

tal L

iab

ilit

ies

Per

cen

t to

To

tal L

iab

ilit

ies

30.0

25.0

20.0

15.0

10.0

5.0

0.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

Source : RBI Supervisory Data

Mar-

08

Ju

n-0

8

Sep

-08

Dec-0

8

Mar-

08

Ju

n-0

9

Debentures Bank Loans Commercial Paper (RHS)

FIDC News • 7

Meeting Funding

Challenges

Solution lies within

Meeting Funding

Challenges

Solution lies within

Mr. M. Anandan Former Managing Director M/s. Cholamandalam DBS Finance Limited

Let us look the various ways of accessing funds.

Access to funding is critical to growth in every organization. More so in the case of non banking business, which is capital intensive. An NBFC needs funds to spur growth, expand business, build scale and maintain capital adequacy.

While funding is quite a challenging task and needs to be addressed, more often the organizations tend to articulate challenges but refrain from getting deeper and addressing the real issue in finding solutions. I firmly believe the solution to funding lies within. Solution to funding lies in the shift in mindset. It is my effort, therefore to broadly address not only the challenges but also touch upon the need to change the mindset in addressing the problem.

As we all know, though there are many innovative and structured products, they all fall under two broad classification; equity or debt.

Despite being a costly source, it is a rather important and integral source of funding, especially for NBFCs for reasons like capital adequacy, capital expenditure, and also at times meeting margin requirement of banks as well. The organizational challenge in accessing capital lies in its ability to maintain the balance between raising capital and dilution of promoter holding. While we need funds for growth, organizations need to control the temptation of visiting the capital market at regular intervals as many a time which might lead to too much of dilution and too early.

There are organizations which have accessed the market fairly regularly in the form of IPOs, rights and even explored joint venture partnerships and have been fairly successful in maintaining the balance ( Eg Cholamandalam).

On the other hand, there are organistaions which have funded growth primarily through internal accruals. And it is not that these organizations have compromised on growth. They have built scale. They have built size. They have demonstrated leadership and they have diversified. A case in point, closer home is Sundaram Finance. A Company started with a meagre Rs 25 lacs capital, has today transformed itself into one of the largest NBFCs without accessing the capital market even once. All their funding requirements have been met through internal accruals.

Accessing capital is not difficult. There are enormous opportunities today to raise capital in the country. Whether it is through Private Equity, QIP, follow on issue or preference issue, the opportunities exist both at home and overseas. Companies, irrespective of size, whether small, medium or large have had access to capital. Companies, irrespective of vintage, whether start up or established have had access to capital. Companies, irrespective of background, whether belonging to large business group or with a modest back ground have had access to capital.

Let us take for example Equitas Micro Finance, a company started by people who don't belong to a large group; A company started by people with modest financial strength. This company has been able to access capital and grow from zero to Rs 250 crores within two years.

Another company, Manappuram General Finance , has been able to grow the business and access capital and increase the networth from Rs 100 crores to Rs 600 crores all within three years.

An organization, especially an NBFC cannot do business and grow only with equity. Debt forms an integral part of business growth. It is important to take the benefit of gearing, avail the tax advantages as we build scale. Well managed debt also improves the return of equity.

Today we have the choice of various structured debt instruments as well in addition to the conventional deposits, debentures, bonds, term loans and cash credit facilities. The debt can come from either retail investors or institutions. The challenges in raising debt vary depending on whether we need the debt for short term or long term, whether we need with security or without security. Banks, at times, apart from the margin provided, also seek and demand personal security or guarantee. Raising debt often means managing different regulators as well. While deposits are regulated by RBI, debentures and bonds come under the scan of SEBI. Debt also attracts issues like tax deduction and stamp duty gets

Equity :

Debt :

The real challenge in

raising funds, either

equity or debt, lies in the

organizations ability

to demonstrate the

capability by maintaining

growth and meet the

expectations of the

investors or lenders as the

case may be.

NBFC serving the segment

ignored by banks are best

suited to grow. NBFCs that

have identified the niche

markets, build strength

and expertise, deep local

knowledge of remote

topographies would be

able to build scale

and size.

FIDC News • 8

under the purview of IT and other state legislations. While these are some of the challenges, the real challenge is in the inherent ability of the organization to access debt.

Every organization can raise enough debt or equity to fund its growth. The real challenge in raising funds, either equity or debt, lies in the organizations ability to demonstrate the capability by maintaining growth and meet the expectations of the investors or lenders as the case may be.

It is here we find the NBFCs struggle.

Raising finance is a problem for organizations which don't grow on size, profitability and customer base. Raising money is difficult for organizations which have not identified a robust business model for building scale. That's why I feel the real solution to meeting the funding challenges lies within. The key to this lies in the organisation's ability to re look continuously at what they do? Why do they exist? What problem do they address? What needs of the customer do they meet? Are they socially relevant?

If the NBFC tries to do the same thing as that of a bank and address the same product basket, address the same customer segment then the growth would be limited and raising funds would become a strenuous proposition. NBFCs as a class came into existence and prospered by reaching out to the segments thus far unserved or under served by the banking sector.

An NBFC trying to do all that a bank does, in my opinion, would not only find it difficult to access capital or debt but also would find it difficult to survive, sustain and grow. They would not be looked at positively by the banks. NBFC serving the segment ignored by banks are best suited to grow. NBFCs that have identified the niche markets, build strength and expertise, deep local knowledge of remote topographies would be able to build scale and size. The NBFCs focusing on ticket sizes and customer profiles which are non bankable, NBFCs which focus on the segment of population whose other source of funding has been the local moneylenders, often charging exorbitantly high interest rates would be able to grow significantly fast and highly profitable. These NBFCs not only supplement the cause of bank role in disintermediation but also play a significant part in financial inclusion. In every sense, I hence see an acute need to re align ourselves with the social objectives and look at reaching out to the bottom of the pyramid customers and complete the last mile credit delivery.

Therefore, it may time that that we look at re classifying the NBFCs, based on the customer segment we serve instead of the product segment we are present in. Instead of classifying ourselves as automobile finance company, home equity finance company, gold loan company, it may be prudent to look at what segment of customers we serve and classify ourselves as finance providers to small/medium/micro customers or businesses.

Financial inclusion attains significant importance in our country. RBI and the banks look towards reaching out to these customers through the NBFCs.

Solution lies within

a) Customer Segment

b) Business Model & Corporate Governance

a) Shriram Transaport,

b) Equitas Micro Finance,

c) Manappuram General Finance,

Another key to accessing capital lies in the ability of the organization to demonstrate capability in terms of business model, organization structure, customer centricity. These organizations have high level of transparency in the way they conduct business. They maintain high level of corporate governance practices. They have strict compliance and board process. All this is extremely important if one is looking at access to funding. How do the banks assess an organization especially if it doesn't belong to a large group, if it doesn't have a long credit history? The organizations which communicate credibility through the structure, board, management team find it easier to accessing capital or debt.

I'm particularly impressed by few companies, couple of which I have also been associated as Director for some time now. I have quoted these companies earlier. There may be more companies. It may be better to look at these companies and take them up for a case study which would be a lot of learning value.

an organization funding to small road transport operators located across the remote parts of the country through extensive distribution network, have demonstrated exceptional capabilities in identifying and servicing the customer profile which banks find difficult to serve. They typically provide financial assistance to used vehicle buyers in commercial transportation segment. This niche segment is not only seen as socially relevant bringing in financial inclusion but is also high profitable and therefore attracts equal interest from both equity providers and lenders. This company has been able to build a balance sheet size of Rs 25000 crores in the last five years

an organization started not long ago, serving the financial needs of the bottom of the pyramid customers. A company which has strong corporate governance practices, management team, board processes, robust business model, high level of transparency.

another organization catering to the needs of the economically weaker section customers, which has grown rapidly over the last few years and build strong retail reach.

These companies have not had funding problem. They have been able to access funds whether it is debt or capital with ease.

I would therefore like to summarise, access to finance in form of capital or debt is a challenge for any organization. While we can continue to articulate the issues through the Chairman and members of FIDC, we also need to look within and understand the real challenge. In an ever changing environment, an organization needs to continuously explore and identify and evolve a robust business model and build niche capabilities which would then attract sufficient capital or debt to fuel growth.

These organizations over time build scale, size and dominance.

“There are few, if any, instances of an economy transiting from an agrarian system to a post-industrial modern society without broad-based financial inclusion.” - Dr. Duvvuri Subbarao, Governor, Reserve Bank of India,

FIDC News • 9

Punjab Police extends a helping hand to AFCs

Subject : Reg. Difficulties faced by Asset Finance Companies. Memo:

Police Department, Punjab has issued direction to all its senior officials on June 10, 2010 to address long experienced difficulties of Asset Finance Companies especially in respect of [1] Action against Proclaimed Offenders, [2] Receipt of Intimation on Repossession, [3] Reg is t ra t i on o f F IR aga ins t F rauds te rs and [4 ]Non Registration/Quashing of FIR filed against finance company representative.

These directions were issued by Additional Director General of Police, Crime, Economic Offence Wing, Punjab in response to a representation of the Punjab & Haryana Finance Companies Association [PHFCA] which was followed up by Mr.Alok Sondhi and co-chairman Mr. Raman Aggarwal from Finance Industry Development Council [FIDC]. The circular is as under:

E-mail From

The Addl. Director General of Police,

Crime, Punjab, Chandigarh,

(Economic Offences Wing)

To

1) AU IsGP/Zonal-in Punjab,

2) All DIsG/Ranges in Punjab,

3) All the Commissioner of Police in Punjab

4) All SSsP in Punjab,

No. /EOW-IV, dated. Chandigarh the:-

The Punjab & Haryana Finance Companies Association has made a representation regarding the difficulties faced by them. Their representation has been examined in accordance with the law and it has been found that the Finance Companies Association was affiliated to Federation of Indian Hire Purchase Association and has very strict code of conduct and its members are law abiding and normally adhere to the norms as laid down by Reserve Bank of India and other statutory bodies. This association was established long ago in 1962 and is also affiliated to Finance Industry Development Council (FIDC). The member of this association mainly finance transport vehicles and also other income generating assets which help the economy of the State as well as generate employment. Their source of fund is Public Deposits. They normally face difficulties in following matter:-

No action or little action is taken by concerned police station Proclaimed Offenders (PS’s) declared by the respective courts. It has been represented that the cases of Association members’ are kept pending for years together and as such it would be appropriate that the PO’s are arrested at the earliest as has been emphasized in various meeting held in this regard and proper system be formulated in the Police stations to keep record of such cases.

At the time of repossession of the vehicles, finance companies approach the concerned police station to give intimation of repossession of vehicle but almost in all cases the same is not accepted by the police station. It has been decided that the information/intimation/ communication given by the finance companies to the concerned police, stations should be duly accepted & acknowledged with the stamp of concerned police station on the copy of such intimation for record, so as to thwart nefarious design of defaulters.

In the recent time, a number of borrowers who have turned defaulters have disposed of the financed vehicle either to scrap dealer (Kabadies) without documents or have sold vehicle on forged documents. It has been requested that FIRs should be lodged and expeditious action be taken against such anti-social elements on lodging of complaints by the finance companies.

It is only no acute default that a need arises to re-possess vehicle as per the Hire Purchase/ Hypothecation agreement. Finance Companies take abundant precaution & after giving due notice to the defaulters and their guarantors, repossess their vehicle & inform the concerned, police

1) Action against P.O’s:

2) Receipt of Intimation:

3) Registration of FIR against Fraudsters:

4) Non - Registration/Quashing of FIR against Finance Companies Lodged without verifying the Facts:

station of the repossession of the vehicle.

In few cases, the defaulters so as to harass the finance companies manage to lodge a false complaint of looting/ docoity by twisting facts with the police station of their choice resulting in filling of a wrong FIR. In some recent cases, FIRs have been got lodged after a period of 7 years totally ignoring evidence & facts.

It is requested that such complaints by the defaulters should be properly verified from the concerned finance company so as to find the truth rather then hurriedly lodging of FIR which not only harass the concerned finance companies & their employees but wastes time & resources of all concerned since it takes a long time to get the FIR quashed through the courts.

You are requested, to call for the concerned complainants from the Finance Companies and probe the said complaints by them and take necessary action in the matter, as permitted by law. It is further hereby added that the said problem, faced by the Asset Finance Companies may be tackled in accordance with law. Judgment by the Apex Court delivered by Hon’ble Justice K.T. Thomas and K.G. Balkrishan on August 31, 2001 in the case of Charanjit Singh Chaddha versus Sudhir Mehra provide the necessary guide lines in such like cases,

Sd-

For Addl. Director General of Police,

Crime, Punjab, Chandigarh. (Economic Offences Wing)

No.[0-1] / EOW-IV, dated Chandigarh the 10-6-2010

A copy of the above is forwarded to the Secretary General, the Punjab & Haryana Finance Companies Association (Regd.) Cantt. Road, Near St. Joseph - Girls Convent School, Jalandhar Cantt. w.r.t. their letter No. 409/PHFCA dated 04.02.2010 for information please.

Sd-

For Addl., Director General of Police,

Crime, Punjab, Chandigarh, (Economic Offences Wing)

? RBI has issued draft guidelines regarding proposed regulatory framework for Core Investment Companies (CICs) on April 21.

? The RBI has posted on 3rd June on its website the draft guidelines on minimum holding period and minimum retention requirement for securitisation

transactions undertaken by NBFCs.

? The RBI plans to amend its rules for NBFCs for restricting to use the liberal rules governing limited liability partnership firms. In the interim, NBFCs that want to convert themselves to LLP firms will have to obtain a no-objection certificate from the RBI.

? The Reserve Bank said it will come out with a discussion paper on new norms for granting banking licences to private sector companies and NBFCs by July end.

? The RBI said on May 20 that it is considering the possibility of allowing Islamic financial institutions to function as NBFCs since Islamic banks are not permitted under the present laws.

? The government will consider changes in rules to allow 100% foreign owned and well capitalised NBFCs to set up subsidiaries, removing the curbs introduced by the foreign direct investment guidelines issued last year.

? The government and financial sector regulators are finally moving on to reform and develop the corporate bond market. On May 25 “The high-level co-ordination committee on financial markets reviewed the recommendations made by various committees and market participants, measures taken so far for developing the corporate bond market and the way forward,” the RBI said. According to sources, RBI was asked to prepare the road map for strengthening the domestic bond markets.

? To promote transparency in the secondary market for short term instruments, the RBI proposed to introduce a reporting platform for deals in commercial paper and deposit certificates.

? The revised draft of the Direct Taxes Code (DTC) has suggested that book profits rather than gross assets to be used to calculate the minimum alternate tax [MAT].

Regulatory & Developmental Moves:

MovesMoves

FIDC News • 10

SC gets tough on cheque bounce cases

Cheque-bouncing cases: Moily for special courts

Quicker release/disposal of seized vehicles by police

Delay in settling cheque bounce cases will now cost the defaulter dear, up to 20% of the cheque amount. The penalty for delayed settlement of the cheque amount, after conviction in the trial court, would rise steadily from 10% in district courts, 15% in high courts to a whopping 20% in the Supreme Court. The SC on May 4 took this radical step through a pioneering judgment which aims to curb the tendency among defaulters to sit over the amount tendered through a bounced cheque. Saddled with 30 lakh cheque bounce cases, the SC accepted most of the suggestions offered by attorney general G E Vahanvati.

SC Bench also laid down guidelines for early settlement in cheque dishonour cases under Section 138 of the Negotiable Instrument Act. The judgment indicated that defaulters going for early settlement before the trial court would have to pay just the principal amount with applicable interest. But if they approached the district court for settlement after being convicted by the trial court, they would have to pay 10% of the cheque amount to avoid going to jail. So if a chque amount is for Rs 1 lakh, then to compound the offence before the district court, the defaulter has to pay an additional Rs 10,000 to avoid going to jail. Similarly, if the defaulter agrees for settlement and compounding of the offence at the HC stage, then he would have to pay 15% of the cheque amount. The amount so collected would be given to Legal Aid Authorities of the respective states which provide free legal assistance to poor litigants in various forums, the SC said.

This judgment will go a long way in reducing the pendency of over 30 lakh cheque bounce cases which have jammed the wheels of justice already slowed down by pendency of 2.7 crore cases. During the hearing of a Section 138 case between Damodar S Prabhu and Sayed Babalal, the Bench observed that there had been an enormous rush of cases after cheque bounce was made a penal offence in 1989, followed by the amendment in 2002 providing for summary trial for early resolution of the dispute. [Eco. Times, May 5]

With huge pendency in cheque-bouncing cases, the Government is mulling setting up of fast track courts to deal with such litigations. In a letter to Finance Minister Law Minister M Veerappa Moily has sought funds to set up special courts in this regard. He has also suggested that Parliament should make new laws only after assessing the extra burden they are likely to impose on the courts and ensuring the provision of money required for the purpose, senior Law Ministry officials said. Mr.Moily in his recent letter has said that there are about 38 lakh cheque-bouncing cases pending in the trial courts and this needs to be speedily addressed. “Dishonour of cheque by a bank causes incalculable loss, injury and inconvenience to the payee and the credibility of issuance of cheque is also being eroded to a large extent. The very purpose of the above amendments made in the Act for speedy disposal of dishonoured cheque cases is being lost,” the Law Commission said in its 213th report. Moily also stated in his letter to Mukherjee that “assessment must be made for the purpose of estimating the extra load any new bill or legislation may add to the burden of courts and expenditure required for the purpose.”[Business Standard, May 31]

In order to prevent national waste in losing the seized vehicles involved in various offences which are reduced to junk at the

Legal

Eagle

Legal

Eagle

respective police stations, the Supreme Court [SC] in a judgment on 19th April, 2010 [in writ petition No. [C] 14 of 2008 by Parties: General Insurance Council & Others Versus State of Andhra Pradesh & Others ) gave the following directions to Police Authorities and courts enabling quicker release/disposal of such vehicles :

1. An insurer may be permitted by way of a separate application before a jurisdictional court for securing release of the vehicle as soon as the insurer becomes aware of the seizure of the vehicles;

2. The vehicle shall be released within a period of 30 days from the date of the application in the ordinary course .

3. Before release, necessary photographs may be taken duly authenticated and certified, and a detailed PANCHNAMA may be prepared before such release.

4. The photographs so taken may be used as a secondary evidence during trial. Hence physical production of the vehicle may be dispensed with.

5. Insurer would submit an undertaking /guarantee to remit the proceeds from the sale/auction of the vehicle conducted by the insurance company in the event that the magistrate finally adjudicates that the rightful ownership of the vehicle does not vest with the insurer. The undertaking/guarantee would be furnished at the time of release of the vehicle pursuant to the application for release of the seized vehicle. Insistence on personal bonds may be dispensed with looking to the corporate structure of the insurer.

Even though the above judgment enables the insurer to secure custody of the vehicle, the above judgment can be made use of by the financiers. It is also interesting to note from the above judgement that after securing release of the vehicle, steps can be taken for sale of the vehicle without approaching the court in as much as there is an undertaking/guarantee given by the petitioner for depositing the sale proceeds, as stated above.

In the above judgment, Supreme Court has made the following observations:

It is a matter of common knowledge that as and when vehicles are seized and kept in various

police stations, not only they occupy substantial space of the police stations but upon being kept in open, are also prone to fast natural decay on account of weather conditions. Even a good maintained vehicle loses its road worthiness, if it is kept stationary in the police station for more than fifteen days. Apart from the above, it is also a matter of common knowledge that several valuable and costly parts of the said vehicles are either stolen or are cannibalised so that the vehicles become unworthy of being driven on road. To avoid all this, apart from the aforesaid directions issued herein above, we direct that all the State Governments/Union Territories/ Director Generals of Police shall ensure macro implementation of the statutory provisions and further direct that the activities of each and every police stations, especially with regard to disposal of the seized vehicles be taken care of by the inspector General of Police of the concerned Division/Commissioner of Police of the concerned cities/Superintendent of Police of the concerned district.

The directions given in the above judgment are in addition to the directions given by the Supreme Court in the case Sunderbhai Ambalal Desai Vs State of Gujarat

(2002, 10 SCC 283). [Contributed by Mr. V Srinivasan]

Comments:

FIDC News • 11

SMEs' credit rating model may be applied to smaller NBFCs too

NBFCs eye custodian space

Relief for lease rentals

Default risk highest among proprietary firms: Survey

The government will explore ways to facilitate easier credit rating of smaller finance companies as it looks to tighten the regulatory and oversight regime before enlisting them for its financial inclusion drive. The finance ministry will discuss the idea with the RBI. “It's being discussed if a rating model similar to small and medium enterprises and micro finance institutions can be applied to small non-banking financial firms as well,” said a finance ministry official.Under the existing structure an un-rated or under rated (less than A-) NBFC cannot accept public deposits of more than Rs 10 crore. As per industry reports more than 90% of the deposit-taking NBFCs are of small & medium size. Almost all of them are without rating or have inadequate rating. “This (lack of rating) has made fund raising both through public deposits and bank or institutional borrowings increasingly difficult,” said co-chairman FIDC, Raman Aggarwal. FIDC is a representative body of asset financing NBFCs. Rating agencies such as CRISIL, ICRA and FTICH use the same rating model for grading both small and large NBFCs, which leads many to NBFCs opting out from the rating process. Only a handful of small & medium NBFCs enjoy the minimum investment grade credit rating. As of now rating agencies such as SMERA and M-CRIL rate SMEs and MFIs but these agencies are not approved by the RBI. “SIDBI accepts ratings of these companies. It can be looked into if a similar approach is viable for NBFCs too,” the official said, adding that RBI already does an annual onsite inspection for deposit taking NBFCs thus taking care of the depositor interest. According to Alok Misra, director ratings and research at M-CRIL, the rating process should not be restricted to financial parameters for such companies. “There needs to be a holistic appraisal involving governance parameters and assessing operation and management of the company,” he said. NBFCs account for 9.1% of the assets of the total financial system.

The predominantly bank-dominated custodian space is on the radar of non-banking financial service firms. Five financial services firms have obtained an in-principle approval from the market regulator SEBI. As of June 8, there are 18 SEBI-registered custodians. The SEBI data has it that of the total assets of $350 billion under custody as on March 31, 2009, 98.5 per cent was institutional business, 0.2 per cent pension funds and the remaining 1.3 per cent non-institutional and corporate. A custodian offers a cost-effective broker neutral interface for clearing and settlement of securities.

Finance Act 2009 provided considerable relief for lease rentals. Withholding Tax on lease rentals was reduced to 2 % under section 194-I under Income Tax Act, which was 10 percent.

A survey conducted by Coface, a French trade receivables' management company said that “The risk of default in payment in India is the highest amongst proprietary firms, with a 37 per cent share. Private limited companies with 26 per cent and partnership firms with a 21 per cent share, respectively, are the second and third highest in terms of risk of default.” The survey covered 905 companies spread over 23 sectors in the country. The risk of default was lowest in government departments.On reasons for the defaults, it said financial difficulties, commercial

disputes and management chaos were responsible for defaults. In a few cases, fraud and lack of morality (trying to avoid payment) were seen as reasons for non-payment. [Business Standard, June 24, 2010]

The FLA of UK's Vehicle Recovery Scheme is a partnership between finance companies and regional police authorities. The scheme involves the police running a background check on vehicles seized for traffic offences. Finance companies then receive a notification if the seized vehicle is found to have outstanding finance. It ensures that where a vehicle has been seized by the police for a road traffic offence, a check is carried out to determine whether it is subject to an outstanding finance agreement. If a vehicle is on finance, the finance provider the legal owner is alerted that the vehicle has been detained by the police and they have the opportunity to recover it. According to the Association of Chief Police Officers, 170,000 vehicles were seized by the police in 2008. More than 80% were seized for driving without insurance or a valid licence, so the FLA scheme focuses very much on these offences. A pilot of the scheme in 2008 showed that 12% of vehicles seized by the police were on finance - a significant proportion. In the first six months of full operation, the Vehicle Recovery Scheme allowed motor finance providers to recover cars worth £2.3 million. Lenders have received more than 200 notifications of seized cars each month. 53% of cars are released back to the

customer, 18% are held by the police or recovered by insurers and the remaining 29% are recovered by

the finance companies themselves.

By providing false information in a finance application or selling a car which has outstanding finance, customers may not realise they are committing a serious crime.

This was the warning from the Finance and Leasing Association (FLA) of UK, which

published new figures on May 21 showing nearly 2,500 fraudulent motor finance applications in the first

three months of 2010. Rigorous checks by finance companies kept the number of actual cases of fraud down to 960, worth a total £15.8 million. Finance companies continue to work closely with police to combat finance crime, but it is vital that consumers are made aware of how fraud could affect them. Almost a third of motor finance fraud (30.8%) in the past year was application fraud where a customer sometimes unintentionally gives incomplete or inaccurate information to a lender. Fraudulent sale of vehicles which do not belong to the sellers - known as conversion fraud-forms 29% of frauds. For most car finance arrangements, ownership of the car does not pass to the customer until the end of the agreement, so customers are committing fraud if they sell their car with outstanding finance. First party fraud was also significant, accounting for 27.7% of fraud cases in the 12 months to March 2010. This is where a customer makes their loan repayments using, for example, a false credit card. The 'customer' may also be illegally leasing the vehicle to another person, through a bogus car rental business, for example. The ACPO Vehicle Crime Intelligence Service (AVCIS) is a national police unit dedicated to investigating and recovering fraudulently-obtained vehicles, and prosecuting offenders. The FLA has sponsored the Vehicle Fraud Unit of AVCIS since September 2007. Acting as the eyes and ears for the police.

Vehicle Recovery Scheme

Thousands of car buyers at risk of committing finance fraud

FIDC News • 12

Views expressed herein are not necessarily the views of FIDC.

Published by :

T T SRINIVASARAGHAVANfor and on behalf ofFinance Indusry Development Council,

222, Ashoka Shopping Centre, 2nd Floor, L T Road,Near G T Hospital, Mumbai-400001, INDIA.Phone : 91-222267 5500 / 91 98200 35553Fax : 91-222267 5600,E-mail : FIDC : info@fidcindia.comDirector General : maheshthakkar45@yahoo.inWebsite : www.fidcindia.com

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Optionality clause is dispensed with in final NCD guidelines: FIDC

Not to insist for PAN for Small depositors / Debenture holders

FIDC welcomes Ms.Uma Subramaniam

Meeting of Managing Committee of FIDC in Hyderabad

AGM and Next Committee Meeting at Mumbai:

RBI issued the final guidelines on NCDs on 23rd June, 2010 wherein RBI has dispensed with the optionality clause as suggested by FIDC on Dec.12, 2009 in response to the draft guidelines released in November, 2009. As such, NCDs issued by NBFCs having a maturity period of one year and more shall not be covered by these guidelines. The draft guidelines had mentioned that even those NCDs which are originally issued with a maturity period of one year and above but have an option of early redemption before one year would be covered under these guidelines.

Now, NBFCs generally issue NCDs having maturity period of at least one year and above, but do have a put / call option enabling early redemption even before one year. This is done to enable the debenture holders to claim refunds in case of any urgent need for funds. As such, these NCDs would have been covered under the proposed draft guidelines which would have created lot of problems for NBFCs, specially the small and medium NBFCs for whom Secured NCDs are an important source of fund raising. FIDC had effectively represented on this matter.

To facilitate small depositors FIDC represented to the Ministry of Finance in Post-Budget Memorandum that PAN should not be made compulsory for deposits of less than Rs. 10,000/- each. Likewise, a similar representation was made to the Reserve Bank on Guidelines to be issued on Debentures and also to make these changes prospective and not to give it retrospective effect.

Ms.Uma Subramaniam has taken over as new Chief General Manager-in-Charge, Department of Non-Banking Supervision, Reserve Bank of India, Mumbai. A warm welcome to Ms. Uma Subramaniam from FIDC.

The meeting of Managing Committee of FIDC was held at Hyderabad on June 18, 2010. There was a special meeting with the members FIHPA and Andhra Pradesh Hire Purchase Association. It had the largest gathering ever in the history of FIDC.

Annual General Meeting of FIDC and meeting of Managing Committee will be held on 25th August at Mumbai.

(Courtesy : Times of India)

Daily that old empty petrol can helpshim get free lifts to office and home.

FIDC

In

Action

FIDC

In

Action

Dispense with minimum holding period requirement for securitisation by NBFC-AFCs

Responding to the draft guidelines proposed for securitisation of assets by NBFCs on June 3 by the Reserve Bank, the FIDC-a body representing asset financing companies- said on June 21 that “the stipulations regarding the minimum holding period and the minimum retention requirement are not made mandatory for retail asset pools originated by Asset Financing NBFCs”. Such stipulation of minimum retention period for assets securitised by NBFC-AFCs would put severe pressure on their capital, restricting their ability to extend loans to the priority sector and weaker sections of the society, stated Mr. T.T.Srinivasaraghavan, chairman, FIDC.

Securitisation is an important funding mechanism for NBFCs. The ability of NBFC-AFCs to securitise their pool of receivables with the bankers has resulted in lower dependence on public deposits for financing their business. NBFC-AFCs need securitisation of their assets constantly to churn their portfolio and provide credit on a continuous basis, since they have limited access to other sources of funds, he added.

Explaining the genesis chairman FIDC mentioned that ‘the RBI draft guidelines prescribe a minimum holding period of 9 /12 months, where maturity of the loans in the pool securitised is about 24 months. For the purpose of calculating the holding period, the draft

guidelines refer to the first instalment due date or the date of full disbursement whichever is later. This effectively means that a

loan can be securitised only after 10/13 months from the date of originating the loan. NBFCs normally provide

vehicle loans for a period of 36 months to 42 months. Currently these loans are offered for securitisation

even if the holding period is as low as one or two months’.

If the minimum holding period is stipulated at 12 months, as contemplated in the draft

guidelines, a pool of assets when identified for securitisation would have a minimum holding period of

around 12-16 months, because one cannot conclude the transaction immediately after the 12th month. Hence the

remainder period would be approx 20 months (door to door) and the average tenor would be 6 - 8 months (since the run down

of the receivables will be faster in the initial months).

He emphasised that “there is a need for differentiating a retail securitisation transaction from the single loan sell down transaction, which is essentially securitisation of single corporate loan. In such a transaction, the risk is completely dependent on the underlying customer and hence the stipulation of minimum seasoning may be relevant. However, in a securitisation transaction of retail assets, the main comfort for the investor and the rating agency is that the risk is widely distributed”. The credit enhancement that is the prescribed by the rating agencies to offer a rating of “AAA (SO)” appropriately deals with the minimum residual interest as proposed in guideline.