The Reserve Bank of India (“RBI”) recently issued instructions on practices to be adopted for charging penal interest/ charges on loans, vide its notification dated August 18, 2023, titled ‘Fair Lending Practice – Penal Charges in Loan Accounts’ (“Circular”).
Continue Reading Fair lending practices on levy of penal charges
Central banks and other financial regulatory authorities are responsible for influencing major investment decisions and resource allocation through their policies. In India, the Reserve Bank of India (RBI) has joined a growing number central banks and financial regulators, who have incorporated climate change into their financial stability mandate seeking to frame prudential regulations and/or direct credit towards sustainable projects. We have analysed the recent developments in our previous posts available here and here.
Continue Reading Green Central Banks and Financial Regulators – Are they Legally Mandated?
Section 138 of the Negotiable Instruments Act, 1881 (“NI Act”), ascribes criminal liability for dishonour of a cheque. The purpose of the provision has been held by the Hon’ble Supreme Court to be the promotion of efficacy of banking operations and to ensure credibility in transacting business through cheques.[i] Since a large number of such transactions and cheque payments are done by companies, the very same intent appears to be captured in Section 141 of the NI Act, which extends vicarious criminal liability on officers associated with the company or firm. The law on Section 141 of the NI Act has been clarified and elaborated upon from time to time. However, the broad principle guiding the extent of liability remains the involvement of the director concerned in the day-to-day business affairs of the company. This is, however, not a straight-jacket formula, and the nuances determining the extent of liability need to be examined closely.
The Securities and Exchange Board of India (“SEBI”) has recently issued the operational guidelines (“Operational Guidelines”)[1] for its circular dated August 13, 2021, on ‘Security and Covenant Monitoring using Distributed Ledger Technology’ (the “DLT Circular”)[2]. This article will examine the key highlights of the Operational Guidelines and analyse their impact.
A move that may prove to be a game-changer but the proof lies in the pudding
A government procurement contract (GPC) for goods and/ or services usually requires the elected counterparty (Contractor) to furnish a bank guarantee (BG) of upto 5-10% of the contract value as performance security, as per General Financial Rules 2017. Rising non-performing assets, in recent years, have prompted banks to exercise greater caution while issuing BGs, due to which, the cost of procuring a BG has gone up from 20-40 basis points to 50-130 basis points and the cash margin required for securing a BG has also increased from 15-20% to 40-100% of the amount of the BG. Owing to these factors, the procurement of a BG has become increasingly cumbersome for Contractors and they have been long-advocating the need for an alternative to BGs.
The Central Government had, with effect from August 09, 2019, transferred regulatory powers of the Housing Finance Companies (“HFCs”) from the National Housing Bank (“NHB”) to the Reserve Bank of India (“RBI”). It is further stated that the RBI will review the extant of regulatory framework applicable to HFCs and issue the same in due course. Until such time, HFCs were required to comply with the directions and instructions issued by NHB.[1]
Pursuant to the above and in order to increase the efficiency of HFCs, the RBI has now placed a draft of the changes proposed in the regulations applicable to HFCs for public comments till July 15, 2020, which we have briefly summarised below: Continue Reading Housing Finance Companies – Proposed changes by RBI
On June 08, 2020, the Reserve Bank of India (RBI) released two draft frameworks — one for securitisation of standard assets (Draft Securitisation Framework) and the other on sale of loan exposures (Draft Sale Framework). In our previous article (available here), we had dealt with key revisions introduced by the RBI under the Draft Securitisation Framework. This article contains a brief summary of the Draft Sale Framework.
The Draft Sale Framework is addressed to the same constituents as the Draft Securitisation Framework and is expected to operate as an umbrella framework, which will govern all loan transfers (standard and stressed assets).
The Draft Sale Framework is broadly divided into three parts viz., (i) general conditions applicable to all loan transfers; (ii) provisions dealing with sale and purchase of standard assets; and (iii) provisions dealing with sale and transfer of stressed assets (including purchase by ARCs).
Continue Reading RBI’s move to revamp loan transfers in India
The Reserve Bank of India (RBI) issued guidelines on February 01, 2006, in relation to securitisation of standard assets by banks, All India Term-Lending and Refinancing Institutions and non-banking financial companies (NBFCs). Securitisation was defined as the process by which assets are sold to bankruptcy remote special purpose vehicle (SPV) in return for immediate cash flow, wherein the cash flows from the underlying pool of assets are used to service the securities issued by the SPV[1]. The criteria for ‘true sale’ as well as the policy on provision of credit enhancement facilities, liquidity facilities and accounting treatment of such transactions was also set out. The guidelines did not separately deal with direct assignment of assets.
While the health crisis has brought the country to its knees, the fatal blow seems to be coming our way from the economic effects of the Covid-19 pandemic. The exposure of the severely-stressed para banking industry to risky segments in these times has made it even more vulnerable to an economic slowdown.[1] With its asset quality deteriorating at an increasing rate, the liquidity in para banking industry has been squeezed off to its last drops.
The impact of the liquidity crisis across various classes of non-banking financial companies (“NBFCs”) may be analysed vis-à-vis the exposure it has towards the borrower segments whose economic activities have been severely impacted. With the economic and consumption activities a bust in sectors such as real estate and micro-finance, the NBFCs with loan exposures in the said sectors will be hit the worst in the wave of this global pandemic. The increasing loan losses and inaccessibility to new capital is likely to exacerbate the liquidity stress. Continue Reading Battling Covid-19 and Liquidity– The Twin Crisis of NBFC sector
With the outbreak of the COVID-19 pandemic and the consequential countrywide lockdown, economic activities of almost all corporates, except those falling under essential services, have witnessed an unprecedented slowdown. As a result, cashflows and debt servicing capabilities of most borrowers have been seriously impacted, necessitating the Reserve Bank of India (“RBI”) to intervene and introduce a regulatory framework, enabling lenders to provide much needed relief to their borrowers.
This blog analyses the relaxation of the asset classification norms to be followed by a bank, with respect to a term loan[1] on account of the measures introduced by the RBI on March 27 and April 17, 2020 and related judicial pronouncements. Continue Reading Asset Classification – Be-hold