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RBI Bars Four NBFCs for Regulatory Breach

RBI Bars Four NBFCs for Regulatory Breach

RBI Bars Four NBFCs for Regulatory Breach

RBI Suspends Four NBFCs from Loan Issuance: A Regulatory Crackdown
In a significant regulatory move, the Reserve Bank of India (RBI) has prohibited four non-banking financial companies (NBFCs) from issuing new loans. The action follows these firms’ violations of regulatory norms related to lending practices, signaling the central bank’s growing vigilance toward the sector.

The four entities impacted by the RBI’s order are:

Muthoot Microfin Ltd
Handygo Technologies Pvt Ltd
Vibrant Microfinance Ltd
Pai Power Solutions Pvt Ltd
This development has far-reaching implications, given the crucial role of NBFCs in extending credit, especially to underserved segments such as small businesses and low-income households.

Reasons Behind the Regulatory Action
The RBI has not disclosed the precise nature of each company’s violations. However, it indicated that the affected NBFCs breached guidelines governing fair lending practices and responsible operations. These norms are critical to ensuring transparency, borrower protection, and financial stability within the sector.

Given the RBI’s emphasis on systemic health, even relatively minor lapses in governance, documentation, or compliance can attract swift punitive actions. Analysts speculate that the infractions could involve issues such as improper loan underwriting, failure to maintain sufficient capital buffers, or mismanagement in lending portfolios.

Implications for the NBFC Sector
The RBI’s regulatory action sends a clear message to the broader NBFC ecosystem. As financial intermediaries with less stringent regulatory oversight compared to banks, NBFCs have expanded aggressively in recent years. However, this growth has heightened concerns over asset quality and operational transparency.

For investors, the incident highlights the risks associated with non-bank lenders. Companies that fail to maintain proper compliance structures risk not only regulatory action but also a deterioration in market reputation. On the other hand, NBFCs that demonstrate robust governance may find it easier to attract capital and enhance customer trust.

This crackdown may prompt other NBFCs to reassess their processes and tighten internal controls to avoid similar repercussions. Furthermore, it underscores the importance of regulatory arbitrage—a phenomenon where NBFCs operate with fewer restrictions relative to banks—remaining in check.

Impact on Credit Flow and Borrowers
The immediate impact of the ban is expected to be limited to the operations of the four affected NBFCs. However, if systemic tightening across the sector follows, it could temporarily disrupt the flow of credit to small businesses and individuals who rely heavily on non-bank lenders.

Additionally, the affected companies will likely experience increased scrutiny from stakeholders, including investors and rating agencies. Operational constraints may also hinder their ability to grow loan portfolios, further constraining profitability.

Broader Market Implications
The regulatory crackdown aligns with the RBI’s broader objective of maintaining financial discipline across the financial services ecosystem. With the sector growing rapidly, the central bank’s proactive stance aims to mitigate risks that could destabilize the economy.

NBFCs play a vital role in filling credit gaps left by traditional banks, especially in rural and semi-urban areas. However, incidents like these highlight the need for robust compliance frameworks to ensure that the sector continues to grow sustainably.

Conclusion
The RBI’s ban on four NBFCs from issuing loans serves as a reminder of the importance of regulatory adherence within India’s financial system. It demonstrates the central bank’s focus on strengthening governance practices in non-bank lending to protect borrowers and investors.

For the affected NBFCs, the path forward will require addressing the compliance gaps identified by the regulator. On a broader level, this regulatory action reinforces the need for financial institutions to operate transparently while balancing growth with sound governance.

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Shriram Finance Targets $1.5 Billion in Overseas Funding

Shriram Finance Targets $1.5 Billion in Overseas Funding

Shriram Finance, a prominent non-banking financial company (NBFC) in India, has announced its plans to raise up to $1.5 billion from international investors in the current fiscal year (2024-25). This strategic move marks a significant step towards diversifying its funding sources and bolstering its financial resilience in the face of recent regulatory changes.

The decision to seek international capital is primarily driven by the Reserve Bank of India’s (RBI) mandate for lending institutions to allocate more capital for loans extended to NBFCs. This regulatory change has increased the cost of domestic borrowing, making it more challenging for NBFCs to secure affordable financing. By tapping into the global capital markets, Shriram Finance aims to mitigate the impact of these regulatory changes and secure funding at potentially more favorable terms.

Shriram Finance is targeting to raise between $1.25 billion and $1.5 billion through a combination of loans and bonds placed in the international market. The company has already secured $300 million of this amount and is actively pursuing additional funding in the coming months. This strategic approach demonstrates Shriram Finance’s confidence in its ability to attract foreign investors and its commitment to achieving its ambitious fundraising goals.

The company’s decision to diversify its funding sources is a testament to its prudent financial management. Prior to the planned overseas fundraising, Shriram Finance had a well-balanced funding portfolio. Shriram Finance’s total liabilities were approximately 24.8% bank borrowings, 8.3% foreign currency loans,and 5.8% bonds. This diversified approach has provided the company with a degree of financial flexibility and resilience in the face of changing market conditions.

The RBI’s regulatory changes are expected to have a more significant impact on smaller NBFCs with a higher dependence on domestic banks. These institutions may face challenges in securing affordable financing due to their lower credit ratings and limited access to alternative funding sources. Shriram Finance, with its strong credit profile and diversified funding strategy, is well-positioned to weather the storm and capitalize on the opportunities presented by the evolving regulatory landscape.

Shriram Finance is confident in its growth prospects, even in light of recent regulatory changes. The company anticipates a 15-16% increase in its assets under management (AUM) in the quarter ending September 2024. However, this growth is expected to be slower than the previous quarter’s 21%, which was driven by a surge in lending for large commercial vehicles.

Looking ahead, Shriram Finance’s successful fundraising efforts and continued focus on diversification are likely to strengthen its financial position and enable it to pursue strategic growth initiatives. Shriram Finance’s future success hinges on its ability to effectively adapt to and benefit from the changing regulatory landscape.

While Shriram Finance’s overseas funding plans offer significant promise, there are several factors that could influence the outcome. These include fluctuations in global interest rates, changes in currency exchange rates, the regulatory environment in the countries where Shriram Finance plans to raise funds, and the overall sentiment among international investors towards emerging markets.

Shriram Finance’s decision to raise up to $1.5 billion from overseas investors is a bold and strategic move that reflects the company’s commitment to growth and financial resilience. By diversifying its funding sources and tapping into the global capital markets, Shriram Finance is positioning itself to navigate the challenges and capitalize on the opportunities presented by the evolving regulatory landscape. The successful execution of its fundraising plans could pave the way for further expansion and solidify Shriram Finance’s position as a leading player in the Indian NBFC sector.

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Government announces first tranche of economic package

Government announces first tranche of economic package

To go by the struggle caused due to COVID-19, Finance Minister Nirmala Sitharaman has announced an economic package of ₹ 20 lakh crore under government’s Atma Nirbhar Bharat Abhiyan / Self-Reliant India. Government noted Lockdown 4.0 will be implemented, with all the new rules and regulation which are applicable state wise and will be completely different from the previous lockdowns. The national movement of Atma Nirbhar Bharat Abhiyan / Self-Reliant India initiated by Prime Minister Narendra Modi is to support India’s small and local business. He emphasized on slogan viz. #VOCALFORLOCAL.

 

Aid to Non-Banking Financial Companies (NBFCs) in this economic booster package:

Non-banking financial companies (NBFCs), Microfinance institutions (MFIs) and Housing finance companies (HFCs) will get liquidity support of ₹30,000 crore under liquidity scheme. Under this scheme, banks can invest in investment-grade debt papers issued by NBFCs, HFCs and MFIs through both primary and secondary market transactions. The investment up to ₹30,000 crore will be entirely guaranteed by Government of India.

Additionally, NBFCs, MFIs, and HFCs will even get the assistance of ₹45,000 crore under partial guarantee scheme. This assistance provided by the government is to provide liquidity support to institutions whose credit rating is low. This will be applicable to all unrated papers and the papers with ratings of AA and below issued by NBFCs, MFIs, and HFCs. This will enhance the liquidity support of all the institutions under NBFCs, MFIs, and HFCs. Under this scheme, the first 20% loss will be borne by Indian government i.e. public sector banks resulting in a liquidity of ₹45,000 crore.

 

Aid to Micro, Small and Medium Enterprises (MSMEs) in this economic booster package:

New rules and regulation introduced in MSMEs is to enhance the growth of small businesses are as follows:

1) Government of India introduced the new definition for Micro, Small and Medium Enterprises (MSMEs) which includes increase in investment limits, new additional criteria of turnover, manufacturing and service sector will be considered same and introduced some new amendments to law. New definition states micro units, small units and medium can invest up to ₹1 crore and turnover below ₹5 crore, ₹10 crore and turnover below ₹50 crore, ₹20 crore and turnover below ₹100 crore, respectively.

2) Government introduced the provision of Collateral-free Automatic Loans of ₹3 lakh crore. This provision will help 45 lakh MSMEs in India. MSMEs can avail loan from banks, and NBFC’s. The eligibility criteria of granting loan is MSMEs with ₹25 crore outstanding credit & turnover of ₹100 crore are eligible to take advantage of this provision. They can avail the scheme before October 31st 2020. However, interest will be charged on the loan granted, but 100% guarantee will be ensured by Banks & NBFCs.

3) MSMEs which are undergoing through massive losses and NPAs, provision of Subordinate Debt worth ₹ 20,000 crore will be offered by the government. Approximately 2 lakh small companies will be aided through this provision. Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) will get assistance of ₹4,000 crore from government in return CGTMSE will provide partial credit guarantee support to banks.

4) Government will set up Fund of Funds (FoF) amounting ₹10,000 crore. This will help MSMEs for equity funding and in their potential growth and viability. Set up Fund of Funds (FoF) will be functioned by Mother Funds and some daughter funds. Daughter fund level will help Fund of Funds (FoF) to provide assistance of ₹50,000 crore MSME’s to get listed on stock exchanges and also for their expansion.

5) To support movement of VOCAL FOR LOCAL government will not pass global tender worth ₹200 crore. This step will immensely help in the growth of MSME’s.

6) Government noted all the dues of Micro, Small and Medium Enterprises (MSMEs) will be cleared in the upcoming 45 days.

 

 

Aid to Employee Provident Funds (EPF’s) in this economic booster package:

Government of India stated they will extend their support under Employees Provident Fund scheme by 3 months i.e. for the month of June, July, and August 2020. This provision will cover 3.67 lakh institutions and help approximately 71 lakh employees by providing liquidity relief of ₹2,500 crore.

Relief of ₹6,750 crore will be observed by a reduction in Employees Provident Funds (EPF) contribution for business and workers. This provision will cover 6.5 lakh institutions covered under Employees Provident Fund Organization (EPFO) and approximately 4.3 crore employees are benefited. However, state run Public sector undertakings (PSU’s) will continue to pay 12% as employer contribution.

 

Aid to contractors in this economic booster package:

Railways, Ministry of Road Transport and Highways, and various central agency will get leeway up to 6 months in construction work, all contacts which have obligations to complete in a stipulated time period. Bank guarantees are partially released to ease cash flows.

 

• Aid to Real Estate sector in this economic booster package:

Extension of 6 months will be provided in a timeline of all Real Estate Regulatory Authority (RERA) projects. All the registration and completion dates of projects under RERA will be covered in this provision.

 

Aid in Tax Reforms in this economic booster package:

There will be a reduction of 25% in TDS/TCS on all the transactions executed by individuals and businesses. This provision will help to provide liquidity support of ₹50,000 crore. This reduction will be effective from 14th May 2020 to 31st March 2021. Due date of income tax return (ITR) filings is extended to 30th November 2020.

 

 

 

What are liquid funds? Find more

DCB Bank’s (DCBB) Q1 FY23 earnings:

Lenders seek replacements for debt schemes

Lenders seek replacements for debt schemes

Debt mutual funds are the funds which are invested in instruments like treasury bills, certificate of deposits and c-papers. This instruments have fixed interest earnings with fixed tenure. Although, this interest is fixed for throughout the period of investment on the underlying asset. The main goal is to collect wealth through the interest earned and increase the overall investment value. Best debt scheme is decided on the basis of the credit rating given to them. If the credit rating is high. it means debt security have higher chances of paying the interest and principle during the time of maturity.

Debt schemes are usually taken by the investors and high network individual (HNI). They are risk averse and not ready to invest in equities. They choose debt funds according to their requirement for short to medium term. While investing in any scheme, investor considers points like what is the objective of funds? In which category this funds fall, how much risk is involved. Factors like cost, investment horizon and financial goal is also considered. Debt funds are evaluated on the factors like fund history, fund returns and ratios like financial ratios and expense ratios. Some best performing debt funds are SBI magnum constant maturity fund, ICICI prudential constant maturity gilt fund, UTI gilt fund, Axis banking and PSU debt fund and Kotak dynamic debt fund.

 

Franklin Templeton’s decision:

Franklin Templeton is one of the biggest mutual fund house and stands in 9th position in the country. They have recently announced that they are winding up the their 6 debt schemes. They are credit risk fund, duration fund, dynamic accrual fund, short term income plan, ultrashort bond fund and income opportunities fund. If valued altogether, this 6 schemes hold around 30,000 core asset of investors. After these scheme got windup, investors who had invested in this scheme cannot withdraw their cash on the basis of the asset they have put and their money is locked.

 

Liquidity concerns:

After Franklin Templeton scraped six debt schemes, liquidity became the main concern for the financial institution. Therefore they have asked investors and HNI’s who have borrowed fund from the banks and other financial institution to bring additional margins in debt mutual fund. This also includes franklin Templeton’s schemes. Investors and promoters have invested money in these schemes to raise money so that they can invest in the market or any other short term scheme to meet their short term capital requirement. Many high network individuals have borrowed money from NBFCs and bank to invest in the mutual funds. They are giving more than 8% returns and are more risky.

 

 

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