Contribution of Artificial Intelligence in Financial Services To Boost Economy of New India

Contribution of Artificial Intelligence in Financial Services To Boost Economy of New India

Has a chatbox ever asked you to open a savings account? Does ever a computerized assistant resolve your queries in minutes?

In this blog, we will understand how Artificial Intelligence drives the Indian economy.

The world of AI is tremendously booming and it can be seamlessly seen that no industry or sector has remained untouched by its prevalence. And the world of finance and banking is also among those worlds which are also anchoring the power of kick-fast change in AI.

AI is intelligence demonstrated through machines, as opposed to natural intelligence present in humans and animals. It contains streamlined programs and procedures, including its ability to perform automated routine tasks, improve customer service, and assist businesses in achieving success, not only in the financial sector, but also in other sectors such as telecommunications, manufacturing, and more. 

Therefore, taking the economy on the path of automation. 

Undoubtedly, Artificial Intelligence has been evolving in India since 1950s, from the neonatal stage, when the idea of AI culture had coined to a complete boom state, where AI was intensively being used to store large data, VRs, ARs, and IoTs – India is taking every possible initiative to embed AI in every nook and corner of society

India’s National Strategy for AI has been prepared by NITI Ayog (a premier policy think tank of the Indian Government through providing directional and policy inputs) to harness the power of AI in distinct fields. AI’s practical and effort approach can adequately address societal needs in distinct aspects of healthcare, agriculture, education, smart cities, infrastructure, smart mobility and transportation.

With the advent of the 21st century, due to its incredible advances in data processing, collection, and computation power, electronics has become ubiquitous in almost every sector, be it the manufacturing or the service sector. Further, AI is now deployed in distinct tasks and decision-making to allow better connectivity and productivity. 

Basic Pillars Which Contribute To The Development of AI

Basic Pillars Which Contribute To The Development of Artificial Intelligence
  1. Talent

Talent is the strongest pipeline for India to be successful and no doubt, India does have the resources for the same. Since India has the largest youth population in the world (around 66% of the population), and with the Indian government’s emphasis on continual training of a high-skilled workforce, India can soon become an AI hub. 

Moreover, India produces twice as many master-level engineering graduates as the United States, which provides it a competitive edge over other countries. And India is moving in the right direction through the introduction of initiatives like AI for Youth (commenced in 2020) to make the youth ready for future AI developments. 

Taking this initiative forward, “Responsible AI For Youth 2022”  was created by the National E-governance Division, Ministry of Electronics and Information Technology, Government of India in collaboration with Intel. It is launched by the Ministry of Electronics and IT. 

  1. Research 

India has the largest AI research community in the world and since 2010, it stands 4th in the largest producer of AI-relevant scholarly papers. It provides an edge to India’s youth population to increase their outreach, especially with their counterparts in the United States.

A two-tier integrated approach is introduced to magnify the core and applied research in AI –

  • Centers of Research Excellence in Artificial Intelligence (CORES), it will emphasize on the core research of AI.
  • International Center for Transformational Artificial Intelligence (ICTAI), this tier will help in establishing an ecosystem for the application based technological development and deployment.
  1. Patents

Since 2012, India ranks in the 10th position in the top 10 AI patent-producing countries, due to the immense increase in AI-driven inventions. Moreover, personal devices and computing, business, telecommunications, including life science are the four largest categories for AI patents in India. 

Collectively, these are associated with over 70% of India’s AI patents and reflect that Indian innovators have emphasized on applying AI to traditional strengths. In the past two decades, India has come a long way in AI patenting, since, the benefit of using patents to protect their devices is reflected. 

  1. AI Companies and Investments

More than 50% of Indian companies applying AI to their products are active in business analytics, medicine, finance, sales, retail, and customer relations.

NASSCOM has predicted that by FY 2026, industrial and automotive, healthcare, retail and CPG and BFSI will contribute 60% of possible AI-driven value to India. Moreover, AI companies and investments are continually bouncing back, considering that private companies’ investment in India has witnessed steady growth from 2015 to 2019. 

  1. Cloud Computing

India is using market cloud computing as a proxy for AI chips to support its AI computing needs since it does not have the domestic manufacturing capacity to manufacture AI chips. Also, India is lagging behind in cloud computing, yet contemporary, cloud bared markets are growing because of the rising demand for computing power. 

Be it talent, research, patents, investment in AI, or cloud computing – India has been moving in the right direction utilizing its population strength by introducing varied initiatives to promote AI in distinct fields.

In addition to that, the government has introduced “AIRAWAT”  (AI Research, Analytics, And Knowledge Assimilation Platform) which is a cloud platform for big data analytics and assimilation, with the power-optimized AI computing infrastructure using advanced AI processing. 

Apart from that, the Indian government has been investing in other schemes such as Digital India with the purpose to boost AI, IoT, big data, and robotics, including providing subsidies to startups under “Start-up India.”

From the given information, we can easily understand that the Indian government has been working on all aspects to make AI a reality in India, from establishing institutes to providing cloud support and AI research. This in return, is contributing to business growth through financial inclusions since, due to the development of AI in the financial services and sector, students can easily access the loan facility for education, training, or even to establish their business. 

How AI is Helping The Financial Services | Contribution of AI in Financial Services To Boost Indian Economy | AI in Financial Services

The field of Artificial Intelligence has enormously evolved since the introduction of revolutionary techniques and algorithms using automated tools. This revolutionized growth of AI in financial services and sectors has significantly been an impetus for the Indian economy.

The majority of banks and financial institutions use and recognize the true benefits of Artificial Intelligence. They are using it to respond to their customers at a faster pace around the clock. Not only does AI help provide a better customer experience, but it also frees up the personnel, improves the security measures of the institutions, and ensures that they are moving in the right direction when it comes to technology. 

Here are some of the ways Artificial Intelligence is helping in the financial services and sectors:

Contribution of Artificial Intelligence in Financial Services To Boost Indian Economy

1. Risk Assessment and Management

Till now, fintech, banks, and other financial institutions were using human resources to assess and manage their risks. Whether it was loan eligibility checking, trading, or banking, human resources were the way to go. 

But with the implementation of AI, these tasks have now become much easier to perform. With the advancement of data sciences and machine learning algorithms, Artificial Intelligence is becoming even smarter in risk assessment and management for financial institutions. 

2. Process Automation

One of the best things about an AI is that it can do the same thing again and again without getting tired, in other words – automation. With the help of AI, financial institutions can automate repetitive and mundane tasks with ease and efficiency. This allows valuable human resources to focus on the other important tasks and projects.

3. Reducing Human Error

Humans tend to make mistakes regardless of how experienced or gifted they are. According to recent studies, more than 90% of cloud breaches and financial frauds are caused by human errors. There have been several cases where the loss of valuable data, capital, and resources has been caused by minor human errors. 

With the implementation of artificial intelligence, these errors have dropped drastically. In other words, AI reduces human errors and saves valuable data and resources while preventing cyberattacks and frauds.

4. Better Customer Interaction

Virtual assistants (VAs) and chatbots can do what regular human resources can not, they can be available for customers 24/7 and offer relevant solutions. Thanks to the implementation of Artificial Intelligence, chatbots and VAs have become even smarter in their workings. 

Of course, the customers of any financial institution still need human interaction to solve difficult problems. Still, thanks to the help of AI, virtual assistants can respond to customer’s needs with minimal effort. 

5. Cyberattack and Fraud Detection and Prevention

Any financial institution, whether it is banks, insurance companies, or brokerage firms, they are always in danger of fraud and cyberattack. And it’s not just the business houses themselves, it’s also their customers who are prone to cyber crimes. 

However, thanks to the implementation of AI, fraud, and cyberattacks are detected and prevented regularly keeping both the financial institution and its customer safe. 

6. Compliance

AI can successfully streamline compliance alert systems to near-perfection, considering that it is built to learn from compliance officers’ data, especially in today’s data-driven compliance environment, AI technology is tremendously improving the efficiency of compliance operations by lowering expenses. 

One of the best examples of “how AI helps in ensuring compliance” could be its usage in IT solutions to address the problem of wasting time and money every day. 

Apart from that, Artificial Intelligence successfully automates the workflow, therefore, minimum time and human resources are necessary to support compliance operations. In addition to that, AI minimizes the possibility of human error which could occur due to the availability of a sheer volume of data.

7. Financial Inclusion

With AI and data analytics, financial products are seamlessly available to a large part of the population, even those with no formal bank account, payslip, or digital financial track record. 

The access to small financial loans have now become feasible, since the entire process is automated and scalable. In addition to that, fintech companies have found a pathway to monetize the regulatory stumbling blocks which have kept traditional banks from lending money to the poor. With the introduction of AI, the idea of money lending has taken a new shape that’s “data available on customer’s mobile.” Therefore, creating a mobile digital credit score, a reality, which was once a dream. 

Financial inclusion has established a new pathway, where a needy person can easily obtain a loan from the banks and financial institutions, thus pushing Indian youth on the path of “entrepreneurship” rather than seeking jobs. Therefore, fulfilling one more agenda of the Indian government that’s “employment generation.”

Such development has marked the emergence of new business models, with traditional banks parenting with fintech to provide digital credit score services, including the emergence of non-bank fintech in a digital lending space.

Apart from that, the use of AI is tremendously increasing to screen loans and select financial product sale recommendations. This is done based on historical data, therefore, eliminating the possibility of prejudice

Benefiting youth with easy access to loans, AI has become a tool for maximizing the access of financial services to farmers using data and machine learning (major components of AI) algorithms to eliminate the possibility of fraud and allow seamless access of funds to credit-worthy farmers

That can allow the government to limit farmers’ suicide in India, since easy access to loans and credit facilities will resolve farmers’ problems by ensuring direct access to equipment for irrigation, fertilizers, etc. Therefore, it will result in better cultivation and profit. 

AI not only resolves credit and funds-associated issues for farmers, youth, or entrepreneurs, but it also provides financial services/ assistance to startups, MSMEs, and emerging tech companies.

With the introduction of AI, financial inclusion has become a reality, where everyone has access to financial services since it facilitates branchless banking that not only minimizes the cost of banking but also makes financial services accessible. 

From AI-based chatbots resolving your query 24*7 to communicate through messaging apps, including educating customers about their financial health, AI has taken over the world.

India is the fastest growing economy with a significant contribution to the development of AI, considering that India has the finest AI research concentrated institutes such as IITs, IIITs, and IISc. 

And let’s not forget, that India is home to a highly skilled workforce, which matches the distinct technological market and a large start-up ecosystem that adds to over 77,000 DPIIT-recognized startups accessing 655 districts of the country as of August 2022. 

Realizing the potential, the Indian government is also taking the necessary initiatives to steer the country and position it among the top leaders in AI. 

Moreover, as per a recent study, AI is estimated to boost India’s annual growth rate by 1.3% by 2035 and has the potential to add 1 trillion to the Indian economy in 2035. 

From this data, we can conclude that AI plays an important role in the development of the Indian economy as a whole.  

However, with tremendous growth, AI also brings “privacy and data protection issues” which are far from only one. Concerns range from threats to privacy to threats to human dignity and safety.

Artificial Intelligence – Issues

Artificial Intelligence is developing at a fast pace and it seems like it could grow so immensely that it would be challenging for humans to control it. Moreover, AI systems developed by humans are working in every possible intelligence they could, now humans are themselves threatened by its development. 

  1. Threat to Privacy

An AI program recognizes speech, understands natural language, and is capable of understanding every conversation via emails and telephone calls. Therefore, the amount of data stored in AI models could impose the risk of data security and privacy violations. 

Proposed Solution –

  • The usage of “state of art encrypted methods” can be used to ensure data security and privacy violations.
  • The use of “low encrypted cloud software” must be avoided.
  1. Threat to Human Dignity

AI has replaced humans in many industries, however, there is no doubt that in the near future, it will replace humans working in dignified positions such as nurses, surgeons, etc. Therefore, the functions performed by AI systems are a substitute for us (humans) that devalues and deteriorates human flourishing.

Proposed Solution –

  • Despite massive improvements in AI technology, any minor fault can impose major risk, especially in the case of the use of AI in hospitals. Therefore, the presence of a doctor is essential to avoid such situations.
  • Software engineers or developers should come up with a hybrid model, where AI technology could assist doctors/ surgeons/ or other practitioners, rather than completely taking over the work. This will prevent the devaluation of human flourishing.
  1. Threat to Safety

AI systems are self-improving and advanced, which can become so mighty in comparison to humans that it could be challenging to prevent them from achieving their goals, which can result in unintentional consequences. 

Therefore, AI applications, which are in direct contact with humans or are integrated into the human body, impose safety risks, since they can be misused and hacked. 

Artificial intelligence is certainly a blessing, only if used for the right purpose and to minimize interference in human lives.

Proposed Solution –

  • Strong and unique passwords and two-factor authentication must be used to prevent hacking.
  • Search engines must be blocked from tracking.
  • Evict the unused applications and extensions.
  • Online browsing must be done through a secure VPN.

Conclusion

“India is all set to be an AI hub, with the right acquisition of talent (youth), research, patents, AI companies, investment, and cloud computing.”

From the introduction of metaverse to bitcoins/ cryptocurrency, indeed the world is on a rollercoaster ride of growth and development.

AI can change the financial services and sector completely, by allowing intelligent automation, labor and capital augmentation, and innovation diffusion which will help in ensuring technical feasibility, availability of structured data, regulatory barriers, and other benefits. Maybe someday, AI would be advanced enough to improve human relationships and resolve ethical issues.

India has emerged as the 3rd largest startup ecosystem globally, containing over 77,000 DPIIT-recognized startups across 656 districts of India as of 29th August 2022. As of September 2022, India had a total of 107 unicorns accounting for a valuation of $340.79 billion. The Indian unicorns (a term used to describe a privately owned startup company with a valuation of over $1 billion) are flourishing in a fast manner since these startups are not only developing or proposing innovative solutions and advanced technologies but are also contributing to the employment generation at a large scale.

Moreover, researchers have seen that AI has the potential to add 1 trillion dollars to the Indian economy in 2035. However, this is not the only factor responsible for economic growth. To know more on what are the factors that will lead to a $30 trillion economy, read it on our upcoming blog.

Something to think about!

Written & Compiled by CA Sunil Kumar Gupta

Founder Chairman, SARC Associates

sunilkumargupta.com

Master Circular On Bank Finance To Non-Banking Financial Companies (NBFCs)

Master Circular On Bank Finance To Non-Banking Financial Companies (NBFCs)

Financial activities of the Non-Banking Financial Companies (NBFCs) are regulated by Reserve Bank of India under the provisions of Chapter III B of the Reserve Bank of India Act, 1934. With the amendment of Section 45 IA of the Reserve Bank of India Act, 1934 in January 1997 and amendment of the National Housing Bank Act, 1987 in August 2019, in terms of Section 29 A of the National Housing Bank Act, 1987, all Non-Banking Financial Companies including Housing Finance Companies (HFCs) have to be mandatorily registered with the Reserve Bank of India.

Background

Consistent with the policy of giving greater operational freedom to banks in the matter of credit disbursement and in the context of mandatory registration of NBFCs with the Reserve Bank of India (RBI), most of the aspects relating to financing of NBFCs by banks have also been progressively deregulated. However, in view of the sensitivities attached to financing of certain types of activities undertaken by NBFCs, restrictions on financing of such activities continue to be in force.

Gist of the Master Circular

This Master Circular consolidates instructions on the above matter issued up to January 04, 2022 by which more autonomy have been given to NBFCs registered with RBI and is summarized hereunder:

(a.) The ceiling on bank credit linked to Net Owned Fund (NOF) of NBFCs has been withdrawn where NBFCs are engaged in principal business of asset financing, loan, factoring and investment activities. Accordingly, banks may extend need based working capital facilities and term loans to all NBFCs and engaged in infrastructure financing, equipment leasing, hire-purchase, loan, factoring and investment activities subject to provisions of para 8 of these guidelines.

(b.) Now, banks may also extend finance to NBFCs against second hand assets financed by them.

(c.) Banks may formulate suitable loan policy with the approval of their Boards of Directors within the existing/prudential guidelines and exposure norms prescribed by the Reserve Bank of India to extend various kinds of credit facilities to NBFCs.

Bank Finance to NBFCs not requiring registration

In terms of “Master Direction – Exemptions from the provisions of RBI Act, 1934” dated August 25, 2016, few categories of NBFCs are exempted from certain provisions of the RBI Act, 1934 including the need for registration with the RBI. Such NBFCs need not to register with the RBI and the banks may take their credit decisions on the basis of  purpose of credit, nature ,  quality of underlying assets, repayment capacity of borrowers and  risk perception, etc.

Activities not eligible for Bank Credit

(a.) The following activities undertaken by NBFCs are not eligible for bank credit:

(i) Bills discounted/rediscounted by NBFCs, except for rediscounting of bills discounted by NBFCs arising from sale of commercial vehicles and 2-wheeler and 3-wheeler vehicles subject to the following conditions:

  • the bills should have been drawn by the manufacturer on dealers only,
  • the bills should represent genuine sale transactions as may be ascertained from the chassis/engine number and
  • before rediscounting the bills, banks should satisfy themselves about the bonafides and track record of NBFCs which have discounted the bills.

(ii) Investments of NBFCs in any company/entity by way of shares, debentures, etc. However, need-based credit may be provided to Stock Broking Companies against shares and debentures held by them as stock-in-trade.

(iii) Unsecured loans/inter-corporate deposits by NBFCs to/in any company.

(iv) All types of loans and advances by NBFCs to their subsidiaries, group companies/entities.

(v) Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs) and for purchase of shares from secondary market.

(b.) Leased and Sub-Leased Assets

Banks can extend financial assistance to equipment leasing companies but they should not enter into lease agreements departmentally with such companies as well as other NBFCs engaged in equipment leasing.

Bank Finance to Factoring Companies

Banks can extend financial assistance to the Factoring Companies which comply with the following criteria with the restrictions mentioned at Paragraph 4.1 (i) and 4.1 (iv) above if:

(a) The companies qualify as Factoring Companies and carry out their business under the provisions of the Factoring Regulation Act, 2011 with notifications issued by RBI from time to time.

(b) They derive at least 50% of their income from factoring activity,

(c) The receivables purchased/financed, irrespective of whether on ‘with recourse’ or ‘without recourse’ basis, form at least 50% of the assets of the Factoring Company ;

(d) The assets/income referred to above would not include the assets/income relating to any bill discounting facility extended by the Factoring Company,

(e) Credit limits extended by the Factoring Companies is secured by hypothecation or assignment of receivables in their favour.

Bank Finance to NBFCs not permitted for:

  •  Bridge loans/interim finance

Banks should not grant bridge loans of any nature or interim finance against capital/debenture issues and/or in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of NBFCs.

  •  Advances against collateral security of shares to NBFCs

Shares and debentures cannot be accepted as collateral securities for secured loans granted to NBFC borrowers for any purpose.

  •  Restriction on guarantees for placement of funds with NBFCs

Banks not to execute guarantees covering inter-company deposits/loans thereby guaranteeing refund of all type of deposits/loans accepted by NBFCs/firms from other NBFCs/firms. However, banks are permitted to provide Partial Credit Enhancement (PCE) to bonds issued by NBFC-ND-SIs and Housing Finance Companies (HFCs) as per guidelines contained at para 2.4 of the Master Circular on Guarantees and co-acceptances dated November 09, 2021 as updated from time to time.

Prudential ceilings for exposure of banks to NBFCs

(a.) The definition and method of computation of exposure would be as prescribed in the circular on Large Exposures Framework dated June 03, 2019 and amendments made from time to time.

(b.) Banks’ exposures to a single NBFC (excluding gold loan companies) will be restricted to 20 percent of their eligible capital base (Tier-I capital). However, based on the risk perception, more stringent exposure limits in respect of certain categories of NBFCs may be considered by banks. Banks’ exposures to a group of connected NBFCs or group of connected counterparties having NBFCs in the group will be restricted to 25% of their Tier-I Capital.

(c.) The exposure of a bank to a single NBFC which is predominantly engaged in lending against collateral of gold jewellery (i.e., such loans comprising 50% or more of their financial assets), shall not exceed 7.5% of the bank’s capital funds (Tier-I plus Tier-II Capital). However, this exposure ceiling may go up to 12.5% of banks’ Capital Funds if the additional exposure is on account of funds already lent by such NBFCs to the infrastructure.

(d.) Banks may also consider fixing internal limits for their aggregate exposure to all NBFCs put together.

(e.) Banks should have an internal sub-limit on their aggregate exposures to all NBFCs, having gold loans to the extent of 50% or more of their total financial assets, taken together. This sub-limit should be within the internal limit fixed by the banks for their aggregate exposure to all NBFCs put together as prescribed in paragraph 7.4 above.

(f.) Infusion of eligible Capital Funds, after the published balance sheet date, may also be taken into account for computing exposure ceiling subject to obtaining an external auditor’s certificate on completion of the augmentation of capital and its onward submission to RBI (Department of Supervision) before reckoning the additions to Capital Funds.

(g.) Banks shall adhere to the intra-group limits in accordance with Guidelines on Management of Intra-Group Transactions and Exposures dated February 11, 2014.

Restrictions regarding investments made by banks in securities/instruments issued by NBFCs:

(a.) Banks not to invest in Zero Coupon Bonds (ZCBs) issued by NBFCs unless the issuer NBFC builds up sinking fund for all accrued interest and keeps it invested in Government bonds.

(b.) Banks are permitted to also invest in Non-Convertible Debentures (NCDs) with original or initial maturity up to 1-year issued by NBFCs. However, while investing in such instruments, banks should be guided by the extant prudential guidelines in force, ensuring the disclosure of the purpose for which the NCDs are being issued in the disclosure document and such purposes are eligible for bank finance.

Conclusion:

In view of policy measures to build scale and enhance NBFC’s contribution in 

Global Trade significantly, RBI has brought the master circular, efforts have been made to ease financing to needy borrowers through NBFCs while sensitivities attached to financing have simultaneously been taken care of. We hope this masterstroke would definitely accelerate the trade and economic activity as is expected by Government of India.

Please also refer to previous Master Circular DBR.BP.BC.No.5/21.04.172/2015-16 dated July 1, 2015 on the captioned subject.

For more details on the topic, you may refer to Master Circular no RBI/2021-22/149/ DOR.CRE.REC. No.77/21.04.172/2021-22 dated January 05, 2022 of RBI or access the author at https://www.sunilkumargupta.com/ to explore more on other related topics.

PM’s Deliberations On Easy Lending Norms By Commercial Banks To Fulfil The Requirements Of Needy Enterprises

PM’s Deliberations On Easy Lending Norms By Commercial Banks To Fulfil The Requirements Of Needy Enterprises

During speech at the conference on 18th November, 2021 on ‘Creating synergies for seamless credit flow and economic growth’, our Prime Minister said “Indian banks are strong enough to play a major role in imparting fresh energy to the country’s economy, for giving a big push and making India self-reliant. I consider this phase as a major milestone in the banking sector of India”.

On this great occasion I wish to congratulate the Hon’ble Prime Minister on behalf of the industry, for suggesting various measures to commercial banks for easing out loan delivery process for providing better opportunities to business enterprises and start-ups. Our country’s outlook is now to intensify and spread the economic activities by providing hassle free loans to entrepreneurs.  In the post Covid scenario, RBI’s role has to play an important role for boosting up economic activities and encouraging the banks to sanction loans at easy terms.

Prime Minister reiterated that banks have sufficient liquidity and coupled with the fact that now there is no backlog for provisioning of NPAs as NPAs in public sector banks are at the lowest compared to the five years back and this has led to upgrading of outlook for the Indian Banks by the International agencies. The Prime Minister said apart from being a milestone, this phase is also a new starting point and called upon the banking sector to support the wealth creators and job creators. The Prime Minister empathetically said “It is the need of the hour for the banks of India to work proactively to bolster the wealth sheet of the country along with their balance sheets”.

PM urged bankers to identify the productive potential of citizens and go beyond the traditional banking when it comes to nourish their business intelligence and entrepreneurial dreams with quick release of loan funds.  PM further stressed upon the need to do away with the feeling that lender is approver and customer is an applicant or receiver. Instead of waiting for the customers to come and seek loans, bankers have to come forward to analyse the credit appetite of both existing and potential customers and provide consultancy services with customized solutions and unified policies. In this way, banks have to adopt the model of partnership in which both partners share the benefits.

The Prime Minister said that due to recent implementation of various schemes, a huge pool of data is now available in the country. The Prime Minister emphasized that the banking sector must take advantage of this facility. He also listed the opportunities presented by the flagship schemes like PM Awas Yojana, Svamitva and Svanidhi and asked banks to participate and play their proactive role in these schemes.

Prime Minister said the scale at which corporates and startups are coming forward today is unprecedented and it is the opportune time to strengthen, fund, invest in India’s economic aspirations. 

Reduction In NPA 

He quoted detailed reports while saying that NPA ratio of public sector banks has now come down to the lowest during last 5 years and they are flushed with liquidity. PM quoted that public sector banks have recovered around 5 lakh crores of bad loans during last years but such news did not make headlines in core media due to illegitimate activities of some defaulters. 

Need For Massive Credit Push

Inspite of the current Covid situation, it is assumed that economy will recover at growth rate of 8.7% to 10.5% during current fiscal. This study sounds good but a massive credit push is essential for businesses to remain operational without hindrance and to expand to new horizons.

Studies have also found that growth rate of non-food bank credit has increased to 6.8% in September, 2021 as compared to 5.1% during same period last year. Industrial loans however have seen the growth of only 2.5%. CARE ratings also hint that weekly average (net) liquidity surplus in banking system grew from Rs.4.5 lakh crores at the end of June, 2021 to around Rs.7.5 lakh crores as of September-end.

Time For Action To Contribute to Economy 

Bank’s participation in the growth of nation’s economy is undeniable. Banks maintain strict protocols while sanctioning loans. This exercise makes entrepreneurs to wait for long period and delay the process for unwanted reasons. Bankers must overlook traditional methods to approve loans. 

PM assures the banks with dependable words and announced to provide all possible help. It is however important for loan seekers to maintain all records and provide all necessary documents for faster disbursal of loan funds. 

Make Loan Dispensation Process Easy And Time Bound

He also appreciated the proposal to set up the web-based project funding tracker. This proposal will make all ministries and banks to work in tandem. PM also suggested adding this proposal as an interface to Gati Shakti Portal. Faster loan disbursal process will also help to effectively cope with other big challenges of unemployment and fund crunch. Access https://www.rbi.org.in/ to read more information.

Conclusion 

In view of the abovementioned facts, it may be safe to conclude that the Government is fully committed to support Indian economy by promoting businesses and providing easy availability of funds through banks. It becomes pertinent for banks to be proactive in considering genuine loan requests and make sure that the funds sanctioned are being used only for the said purpose. Misuse of bank funds may land customer and/or concerned authorities into trouble and may attract various penal actions. 

In order to find more details on the given subject, you may refer to the author at https://www.sunilkumargupta.com.

Working of NBFCs Would Improve With Implementation of PCA Framework by RBI

Working of NBFCs Would Improve With Implementation of PCA Framework by RBI

Non-Banking Financial Companies (NBFCs) have been growing in size and have substantial interconnectedness with other segments of the financial system. Reserve Bank of India had introduced a Prompt Corrective Action Framework (PCA) for Scheduled Commercial Banks in 2002 and the same has been reviewed from time to time based on the experience gained and developments in the banking system. Accordingly, RBI has now decided to put in place a PCA Framework for NBFCs to initiate and implement remedial measures in a timely manner so as to restore its financial health for strengthening the supervisory tools applicable to NBFCs.

The PCA Framework for NBFCs, as summarized hereunder, comes into effect from October 1, 2022 based on the financial position of NBFCs on or after March 31, 2022. The objective of the PCA Framework is to enable supervisory intervention at appropriate time and is intended to act as a tool for effective market discipline. The PCA Framework does not preclude the Reserve Bank of India from taking any action as it deems fit at any time in addition to the corrective actions prescribed in the framework.

In terms of extant regulations, Government NBFCs have been provided time up to March 31, 2022 to adhere to the capital adequacy norms provided for NBFCs (Ref. Annex – I of Non-Banking Financial Company – Systemically Important Non-Deposit Taking Company and Deposit Taking Company (Reserve Bank of India) Directions, 2016). Accordingly, a separate circular would be issued in due course with regard to applicability of PCA framework to Government NBFCs. This framework will be reviewed after three years from the date of operation.

PCA Framework for NBFCs

A. The PCA framework is applicable to the following category of NBFCs:

(a) All Deposit Taking NBFCs [Excluding Government Companies] (NBFCs-D)

(b) All Non-Deposit Taking NBFCs in Middle, Upper and Top Layers 3 (NBFCs-ND),

[Including Investment and Credit Companies, Core Investment Companies (CICs), Infrastructure Debt Funds, Infrastructure Finance Companies, Micro Finance Institutions and Factors]; but [Excluding – (iNBFCs not accepting/not intending to accept public funds 4; (ii) Government Companies, (iii) Primary Dealers and (iv) Housing Finance Companies].

B. For NBFCs-D and NBFCs-ND, Capital and Asset Quality would be the key areas for monitoring in PCA framework. For CICs, Capital, Leverage and Asset Quality would be the key areas for monitoring in PCA framework.

C. For NBFCs-D and NBFCs-ND, indicators to be tracked would be Capital to Risk Weighted Assets Ratio (CRAR), Tier-I Capital Ratio and Net NPA Ratio (NNPA). For CICs, indicators to be tracked would be Adjusted Net Worth/Aggregate Risk Weighted Assets, Leverage Ratio and NNPA.

D.NBFC will generally be placed under PCA framework based on the audited Annual
Financial Results and/or the Supervisory Assessment made by the RBI. However, the RBI may impose PCA on any NBFC during the course of a year (including migration from one threshold to another) in case the circumstances so warrant.

E. The Reserve Bank of India may issue a press release when a NBFC is placed under PCA as well as when PCA is withdrawn vis-à-vis a NBFC.

F. Breach of any risk threshold may result in invocation of PCA as detailed under:

For NBFCs-D and NBFCs-ND (excluding CICs):

Indicator

Risk Threshold-1

Risk Threshold-2

Risk Threshold-3

CRAR

Up to 300 bps below the regulatory minimum
CRAR [currently, CRAR <15% but ≥12%]

More than 300 bps but up to 600 bps below regulatory minimum CRAR [currently, CRAR <12% but ≥9%]

More than 600 bps below regulatory minimum CRAR [currently, CRAR <9%

Tier I Capital Ratio

Up to 200 bps below the regulatory minimum
Tier-I Capital Ratio [currently, Tier-I Capital Ratio <10% but ≥8%]

More than 200 bps but up to 400 bps below the regulatory minimum Tier-I Capital Ratio [currently, Tier-I Capital Ratio <8% but ≥6%]

More than 400 bps below the regulatory minimum Tier-I Capital Ratio [currently, Tier-I Capital Ratio <6%]

NNPA Ratio (including NPIs)

>6% but ≤ 9%

>9% but ≤12%

>9% but ≤12%

For Core Investment Companies (CICs)

Indicator

Risk Threshold-1

Risk Threshold-2

Risk Threshold-3

Adjusted
Net Worth/Aggregate Risk Weighted Assets

Up to 600 bps below the regulatory minimum ANW/RWA [currently, ANW/RWA <30% but ≥24%]

More than 600 bps but up to 1200 bps below regulatory
minimum ANW/RWA [currently, ANW/RWA <24% but ≥18%]

More than 1200 bps below regulatory minimum ANW/RWA [currently, ANW/RWA <18%]

Leverage Ratio

≥2.5 times but <3 times

≥ 3 times but <3.5 times

≥3.5 times

NNPA Ratio (including NPIs)

>6% but ≤ 9%

>9% but ≤12%

>12%

G. Exit from PCA and withdrawal of restrictions under PCA – Once a NBFC is placed under PCA, taking the NBFC out of PCA framework and/or withdrawal of restrictions imposed under the PCA framework will be considered: a) if no breaches in risk thresholds in any of the parameters are observed as per four continuous quarterly financial statements one of which should be Annual Audited Financial Statement (subject to assessment by RBI), and b) based on supervisory comfort of the RBI including an assessment on sustainability of profitability of the
NBFC.

H. The menu of corrective actions is as below:

Mandatory and Discretionary actions

Specifications

Mandatory actions

     Discretionary actions

Risk Threshold – 1

1. Restriction on dividend distribution/remittance of profits,

2. Promoters/shareholders
to infuse equity and reduction in leverage,

3. Restriction on issue of guarantees or taking on other contingent liabilities on behalf of group companies (only for CICs)

Common menu

  • Special Supervisory Actions
  • Strategy Related
  • Governance Related
  • Capital Related
  • Credit Risk Related
  • Market Risk Related
  • HR Related
  • Profitability Related
  • Operations/Business Related
  • Any Other

Risk
Threshold – 2

In addition to mandatory actions of threshold: Restriction on branch expansion

Risk
Threshold – 3

In addition to mandatory actions of threshold 1 & 2,

1. Appropriate restrictions on capital expenditure other than for technological upgradation
within board approved limits

2. Restrictions/reduction in variable operating costs

Common Menu for Selection of Discretionary Corrective Actions by the RBI are mentioned below:

1. Special Supervisory Actions

2. Strategy Related Actions

3. Governance Related Actions

4. Capital Related Actions

5. Credit Risk Related Actions

6. Market Risk Related Actions

7. HR Related Actions

8. Profitability Related Actions

9. Operations Related Actions

10. Any other specific action that the RBI may deem fit considering specific circumstances of the NBFC.

RBI would initiate suitable corrective actions including in particular mandatory and discretionary actions to check the wrong doings of the companies. Corrective measures are summarized in brief i.e.  may conduct Special Supervisory Monitoring Meetings  at quarterly or other identified frequency, special inspections/targeted scrutiny of the NBFC, restricted and
need based regulatory/supervisory approvals, review short-term strategy, medium-term business plans, identify achievable targets and set concrete milestones for progress and achievement, may recommend to promoters/shareholders to remove and bring in new management/board, restriction in expansion of high risk-weighted assets, preparation of time bound plan and commitment for reduction of stock of NPAs, restrictions on branch expansion
plans, PCAs would prove to be a milestone in the history of NBFCs and RBI will definitely have more control over NBFCs and would protect interest of the public funds at large.

For more details on the topic, you may refer to circular no RBI/2021-22/139DoS.CO.PPG. SEC.7/ 11.01.005/2021-22 dated Dec. 14, 2021 of RBI or access the author at:  www.sunilkumargupta.com/ to explore more on other topics.

“AatmaNirbhar Bharat” Measures: Rs. 20 lakh crores Economic Package 2020

“AatmaNirbhar Bharat” Measures: Rs. 20 lakh crores Economic Package 2020

We congratulate our Hon’ble PM & FM for announcing the economic package in 5 parts to make India self-reliant i.e. #AatmaNirbharBharat and for better opportunities for post COVID 19. I am happy to share that some points from my blog published on 9th May, 2020 on various social media platforms and where the  Government was tagged , also found place in the package like:

  1. Release of pending payment of MSMEs from PSUs
  2. Increasing the existing loan limit of MSME sector by 20%, without any additional collateral securities
  3. Creation of a digital market for MSMEs
  4. Ease and deferment of labour law: Now, all occupations have been opened for women and permitted to work at night with safeguards. Major State Governments are now working on relaxing or deferring the labour law applicability
  5. The Indian Government has always been reviewing its policies in the best interest of the country. The focus should now be drawn on improving India’s performance in ease of doing business by reviewing and rationalizing its policies in Dealing with Construction Permits, Getting Electricity, Registering Property, Paying Taxes, Trading across Borders, Enforcing Contracts, Resolving Insolvency, Employing Workers and Contracting with the Government. The government has started working on ease of doing business  relating to easy registration of property and fast disposal of commercial disputes for making India one of the easiest places to do business as a part of next phase of Ease of Doing Business Reforms                                                                                                                  
  6. Ease of Corporate Law and IBC laws to enhance businesses and to believe in entrepreneurs
  7. de-punitive and de-criminalisation of corporate and business laws:
    a) lower penalties for all defaults for Small Companies, One person Companies, Producer Companies & Start Ups.
    b) decriminalization of Companies Act violations involving minor technical and procedural defaults (shortcomings in CSR reporting, inadequacies in board report, filing defaults, delay in holding AGM).
    c) majority of the compoundable offences sections to be shifted to internal adjudication mechanism (IAM) and powers of RD for compounding enhanced (58 sections to be dealt with under IAM as compared to 18 earlier).
    d) 7 compoundable offences altogether dropped and 5 to be dealt with under alternative framework

All these will enable businesses to complete their pending compliances without payment of any additional filing fees, thereby the entrepreneurs may focus on the growth of their businesses and simultaneously de-clog the criminal courts and NCLT 

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