pwc’s non-banking financial company insights analysis of ... · 6 pwc pwc’s non-banking...

PwC’s Non-Banking Financial Company InsightsAnalysis of regulatory changes and impact assessmentFebruary to April 2018

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How can a customer file a complaint? Other notifications Contacts

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Impact/immediate action

Other notifications

RBI notifications

How can a customer file a complaint?

Contacts

Non-banking financial companies (NBFCs) play a vital role in diversifying the financial sector, which is evident from the growing liquidity in markets and diversification of financial risks. This has given impetus to financial stability and made the sector more efficient.

NBFCs have carved niche business areas for themselves within the financial sector space with innovative products and delivery systems like providing customised products, mostly at the customer’s doorstep; processing applications within minutes; sanctioning loans at the click of a button and leveraging the FinTech ecosystem. Owing to a variety of constraints faced by the banking system in intensifying its lending activities, the role of NBFCs has become even more significant now.

Also, given the ongoing stress in banks due to the increasing bad debt, the appetite to lend (especially in rural areas) opens up tremendous opportunity for NBFCs to widen their horizon. With the advantage of lower cost and deep connect with customers, NBFCs can adopt a robust underlying risk management framework which will indirectly promote entrepreneurship and create employment opportunities.

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Ind AS (as they are commonly known in India) are essentially bringing in global accounting standards to India. Corporate entities have already started implementing Ind AS from 1 April 2016 in a phased manner, whereas banks and NBFCs will start implementing these standards from 1 April 2018.

The biggest impact of Ind AS comes from Ind AS 109, ‘Financial instruments’ (equivalent of IFRS 9), which could increase loan loss provisioning and thereby impact capital if the new impairment rules are adopted in their entirety.

These rules require the recognition of expected credit losses based on forward-looking information and not just incurred losses. Reliable data and credit models will also be needed to properly apply these provisions.

India is a pioneer in the implementation of Ind AS 109 as IFRS 9 has been globally implemented only from 1 January 2018.

For NBFCs, considering the potential wide-ranging effects of the transition, the implementation effort would also impact functions outside of the finance department, including IT, legal, risk, compliance, product groups, operations, marketing, human resources, investor relations and senior management.

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In the recent scenario, banks alone cannot meet the loan requirements of individuals and small business communities. Moreover, there was a staggering 37% increase in FDI in April–June 2017.1 To further boost the economy, the government has incorporated some changes in the 2017–2018 budget and introduced new FDI norms.

Traditional NBFCs are failing to compete with banks on account of lower rates of interest, and there is a need for funds in the NBFC sector and hence, a digital lending platform. With the rising growth of FinTech companies, the process of lending has become easy and secure for NBFCs.

The government is also looking at eliminating minimum capitalisation norms. In addition, the RBI aims to simplify the filing process with an online form on its portal for regulatory compliance and risk management of NBFCs.

1. PTI. (21 August 2017). FDI jumps 37% to $10.4 billion during April-June 2017. Economic Times. Retrieved from https://economictimes.indiatimes.com/news/economy/finance/fdi-jumps-37-to-10-4-billion-during-april-june-2017/articleshow/60163515.cms

Transition to Ind AS/IFRS Changes in the FDI sector to boost NBFCs

During the period, two major events have impacted the NBFC sector:


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RBI notifications

The RBI has published various notifications to regulate, direct and manage the NBFCs:

• Notification dated 7 February 2018 – Relief for MSME Borrowers registered under Goods and Services Tax (GST)

• Notification dated 23 February 2018 – Ombudsman Scheme for Non-Banking Financial Companies, 2018

• Notification dated 23 February, 2018 – Ombudsman Scheme for Non-Banking Financial Companies, 2018 - Appointment of the Nodal Officer/Principal Nodal Officer

• Notification dated 15 March 2018 – Submission of returns by the Government-owned Non-Banking Financial Companies

• Master Circular – Know Your Customer (KYC) Direction, 2016 (updated on 20 April 2018)

To promote a conducive credit culture among NBFCs and to regulate the credit system of the country to its advantage, the RBI decided that it was necessary to set up an Ombudsman Scheme for the redressal of complaints on deficiency in services related to deposits, loans, advances and other specified matters. The office of the ombudsman is initially being introduced at four metros, viz. Chennai, Kolkata, Mumbai and New Delhi.

Previously, the Company Law Board (CLB), either on its own motion or on an application from the depositor, directed an NBFC to repay a deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in its order. After making the payment, the company would have to file the compliance with the local office of the RBI. Further, in the absence of an ombudsman for hearing complaints against NBFCs, a depositor could approach any or all of the redressal authorities, i.e. consumer forum, court or the CLB.


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• The Ombudsman Scheme for Non-banking Companies, 2018 (Ref.: CEPD. PRS. No. 3590 /13.01.004/2017-1 - Ombudsman Scheme for Non-Banking Financial Companies, 2018. Dated: 23 February 2018)

• Applicability: - NBFC as defined in section 45-I(f) of Reserve Bank of India Act,

1934; and - Registered with the RBI under section 45-IA of Reserve Bank of

India Act, 1934, which: º Accepts deposits º Has customer interface with asset size of 1 billion INR or

more as on the date of the audited balance sheet of the previous financial year

• Specific exclusions: - Non-banking financial company – infrastructure finance

company (NBFC-IFC) - Core investment company (CIC) - Infrastructure debt fund – non-banking financial company

(IDF-NBFC) and - An NBFC under liquidation


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All the above details, along with a copy of the scheme, should also be prominently displayed on the website of the covered NBFCs. Further, a copy of the scheme must be available with the designated officer of the company for perusal on the office premises.

Complaints against NBFCs for failure or refusal to provide adequate notice on proposed changes being made in sanctioned terms and conditions as understood by the borrower.

NBFCs to implement the settlement arrived at or the award passed by the ombudsman

Appointment of nodal officers (NOs) at their head/registered/regional/zonal offices and informing the concerned ombudsman about the same

All NBFCs to display prominently in all their offices and branches in English, Hindi and vernacular languages the following:• The purpose and salient features of the scheme• Contact details, i.e. telephone/mobile numbers and email

addresses, of the ombudsman, NO, PNO and grievance redressal officer

Complaint against NBFCs can be made in case:• An NBFC rejects a customer’s written complaint;• The complainant does not receive any reply within a period

of one month after the NBFC received his representation; or• If the complainant is not satisfied with the reply given to

him by the NBFC.

Timely payment of interest and principal to their depositors

NO responsible for representing the company and furnishing information to the ombudsman and the Appellate Authority• One of the NOs to be designated as the Principal Nodal

Officer (PNO) for the respective zones or regions


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Grounds to file a complaint

Any person can file a complaint with the ombudsman on the following grounds:


Interest/deposit not paid or paid with delayFailure or refusal to provide adequate notice on proposed changes being made to sanctioned terms and conditions in vernacular language understood by the borrower

Non-payment or inordinate delay in repayment of deposits Failure to ensure transparency in contract/loan agreement

Amount of loan sanctioned, terms and conditions, annualised rate of interest, etc., not conveyed

Failure to provide legally enforceable built-in repossession in contract/loan agreement

Non-adherence to RBI directives – if applicable to rate of interest on deposit

Notice not provided for changes in agreement, levy of charges

Cheque not presented or presented with delay Failure/delay in releasing securities/documents

Guidelines on Fair Practices Code not followedFailure or refusal to provide sanction letter/terms and conditions of sanction in vernacular language or a language understood by the borrower



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Any person who has a grievance against an NBFC on any one or more of the grounds mentioned above may himself, or through his authorised representative (other than an advocate), make a complaint to the ombudsman within whose jurisdiction the branch/registered office of the NBFC complained against is located.

File a complaint with the NBFC ombudsman (not later than one year after

receiving a reply from the

NBFC)

If a reply is not received from the NBFC or

the customer is dissatisfied with the reply of the

NBFC

Written representation

to the concerned

NBFC

At the end of one month

If the customer has not

approached any forum

Can a customer appeal if she/he is not satisfied with the decision of the ombudsman?

Yes, the ombudsman’s decision is appealable with the Appellate Authority by the complainant as well as the NBFC within 30 days of receipt of the communication of award or rejection. The Appellate Authority is vested with the Deputy Governor of the RBI. Further, the customer is at liberty to approach any court/forum/authority for redressal at any stage.On receipt of the appeal, the Appellate Authority may act as under:• Dismiss the appeal;• Allow the appeal and set aside the award;• Send the matter to the NBFC ombudsman for fresh disposal in

accordance with such directions as it may consider necessary or proper;

• Modify the award and pass such directions as may be necessary to give effect to the modified award; or

• Pass any other order as it may deem fit.



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Necessary measures will have to be undertaken to define the code of conduct and to ensure the independence of an individual while performing his functions as an NO. Further, due care should be taken to ensure that there exists no conflict of interest at the time of appointment of an NO.

Setting up a mechanism to maintain a record of actions taken to address the complaints and other grievance-related issues and timely reporting to risk management/grievance committee.

Setting up the process that lists down the steps to be undertaken to resolve the grievances in accordance with the prescribed guidelines. Further, in case of any unresolved issues, the necessary measures to be undertaken to escalate the matter to the concerned authority.

Ensure that the required contact details such as telephone/mobile numbers and email addresses of the ombudsman, NO, PNO and grievance redressal officer are prominently displayed by all NBFCs at their offices and branches as well as on their websites.

Necessary measures will have to be undertaken to ensure that the appointment of an NO is in accordance with the requirements and parameters defined by the RBI. Further, this aspect needs to be taken into consideration by the NBFCs while defining the scope of their internal controls system.

Setting up a system to maintain adequate documentation and a record of complaints received, grounds based on which the complaints were made, appeals made to the Appellate Authority, if any, along with the status of the same.

System to be set up in order to obtain feedback from customers to improve the existing processes.

There can be an increase in the cost structure for implementation of all processes pursuant to the appointment of the NO.

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Other notifications

• Ref.: DNBS.PD.CC.No.1925/66.08.001/2017-18

• Date of notification: 15 March 2018

• Applicability: NBFCs, being government companies, as defined in clause 45 of section 2 of the Companies Act, 2013, and registered with the RBI under section 45IA of the Reserve Bank of India Act, 1934, i.e. government-owned NBFCs

• Brief impact: All above NBFCs shall put in place a reporting system for filing periodic returns with the bank, as detailed in ‘Master Direction – Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016’, dated 29 September 2016. The returns should be compiled on the basis of the figures available in the books of accounts of such NBFCs and filed with the RBI online (using the COSMOS software package) by an authorised official of the NBFC.

All weekly and quarterly returns up to 31 December 2017 must be submitted by 15 April 2018. Thereafter, these returns shall be submitted within the timeline stipulated in the Master Direction on returns to be submitted by NBFCs.

• Considerations:• Additional checks and balances around financial reporting• Automating of system to generate reports

• Ref.: DBR.No.BP.BC.100/21.04.048/2017-18

• Date of notification: 7 February 2018

• Applicability: All banks and NBFCs regulated by the RBI

• Brief impact: Formalisation of business through registration under GST had adversely impacted the cash flows of small entities during the transition phase, with consequent difficulties in meeting their repayment obligations to banks and NBFCs.

In order to support these entities, the RBI has issued this notification.

It has been decided that the exposure of banks and NBFCs to a borrower classified as a micro, small and medium enterprise under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, will continue to be classified as a standard asset in the books of banks and NBFCs subject to conditions prescribed in the notification.

Based on the above requirements, the notifications can be expected to have long-term impacts in terms of defining the code of conduct for NOs, systems and records for tracking the complaint resolution process, customer feedback recording and actionable tracking, and adherence to regulatory timelines. Thus, these notifications make NBFCs more accountable and answerable to their customers and set timelines for their grievance resolution.

Name of the circular: Submission of returns by the Government-owned Non-Banking Financial Companies

Name of the circular: Relief for MSME Borrowers registered under Goods and Services Tax (GST)


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Gaurav Mehta Associate [email protected]: +91 9820082799

Dnyanesh Pandit Director [email protected]: +91 9819446928

Vivek Iyer [email protected] Mobile: +91 9167745318

Mayank KhandelwalConsultant [email protected] Mobile: +91 8080148119

Sarvasvi Pawar Consultant [email protected]: +91 8767325849

Contacts

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