Fitch Rtgs: Changes to the regulation of NBFIs in India to strengthen the stability of the sector

0
21

Fitch Rtgs: Changes to the regulation of NBFIs in India to strengthen the stability of the sector

(The following statement was released by the rating agency) Fitch Ratings-Hong Kong / Singapore / Mumbai-January 26, 2021: Proposed changes to India’s regulatory framework for non-bank financial institutions (NBFIs) unveiled in the Reserve Bank of IndiaThe Jan. 22 (RBI) discussion paper is expected to improve industry stability, Fitch Ratings says. We believe the reforms would preserve niche business models of NBFIs and could improve the funding environment for some entities by enhancing investor confidence in the sector. For the industry as a whole, the proposed measures are expected to strengthen governance and risk management, although we do not view these areas as major credit weaknesses for Indian Fitch-rated NBFIs. The longer-term impact of such a reform would also depend on its implementation, and strong regulatory and market oversight will be essential to keep entities to higher standards. Large entities face improved disclosure requirements and more stringent risk and capital management requirements, which would likely be positive in terms of credit. Scale-based regulations reflect calls for closer supervision of large NBFIs that have acquired greater systemic importance. We believe that measures to strengthen controls and risk frameworks should be manageable for Fitch-rated NBFIs. For example, they should already comfortably meet the suggested requirement for “upper layer” NBFIs, which should include 25 to 30 of the largest entities, including Fitch-rated companies, in order to maintain a minimum common equity ratio of category 1 by 9%. We view the proposals for appointment of auditors on a rotational basis, as well as disclosure requirements such as the incidence of breaches of covenants and divergence in asset quality to be positive for credit. Unlike banks, many NBFIs have appointed the same auditors for many years. In addition, loans to directors and senior executives would be limited, which would reduce governance risks. The requirements for implementing a basic banking solution (recognized for improving efficiency and reducing operational risks in banks) and the introduction of an internal process for assessing the suitability of capital (ICAAP) could further strengthen the monitoring and risk management framework. The systems of most of the major NBFIs are already integrated with banks and payment portals, and we believe that additional costs to meet the requirement for the core banking solution would be manageable. However, the measure could result in a greater expense for medium-sized NBFIs. For upper layer IFNBs, registration may be made mandatory. This would only affect a few corporate backed NBFIs and should not be a problem given their parents’ experience in the financial markets. In general, business models are not expected to be significantly affected, but some lending activity could be reduced by the suggested changes, especially in real estate. The RBI is seeking to restrict lending to early stage development projects that have not yet received regulatory approval, and has proposed additional internal controls for loans against land acquisition. Some entities have accumulated exposures in these risk areas in recent years, which have become a point of vulnerability for the sector. The suggested new rules could curb a further acceleration of these long-term exposures. The suggested reform would also raise the standard provisioning requirements of NBFIs on commercial real estate loans, to align them with those of banks. Indian Fitch-rated IFNBs do not engage in mortgage lending except for IIFL Finance (B + / Rating Watch Negative). However, if IIFL is placed in the top layer, any additional provisioning in this proposal is unlikely to be significant compared to the company’s broader provisioning needs in light of the pandemic. NBFIs with assets below INR 10 billion (around USD 130 million) would continue to operate under current frameworks, but additional rules aligning the recognition of non-performing loans and a new debt ceiling of 7x would strengthen the robustness of the regulation. The central bank further stressed the need for a resolution framework for bankrupt NBFIs. This would be another important part of the regulator’s financial stability toolbox. Contact: Siddharth Goel Associate Director, Non-Bank Financial Institutions +91 22 4000 1760 Fitch Ratings Wockhardt (NS 🙂 Tower, West Wing, Level 4 Bandra Kurla Complex Mumbai Maharashtra 400051, India Elaine Koh Director, Non-Bank Financial Institutions +65 6796 7239 Duncan Innes-Ker Senior Director, Fitch Wire +852 2263 9993 Media Relations: Leslie Tan, Singapore, Tel: +65 6796 7234, Email: [email protected] Wai Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: [email protected] Bindu Menon, Mumbai, Tel: + 91 22 4000 1727, Email: [email protected] The above article originally appeared as an article on Fitch Wire’s credit market commentary page. The original article can be viewed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND EXCLUSIONS. PLEASE READ THESE LIMITATIONS AND EXCLUSIONS OF DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE RATING DEFINITIONS AND TERMS OF USE FOR THESE RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. THE FITCH CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE IN THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANY OTHER PERMISSIBLE SERVICE TO THE EVALUATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE CHIEF ANALYZER IS BASED IN AN ESMA OR FCA REGISTERED FITCH RATINGS COMPANY (OR THE BRANCH OF SUCH COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE OF THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright and copy 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Phone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited without authorization. All rights reserved. In issuing and maintaining its ratings and making other reports (including forward-looking information), Fitch relies on factual information it receives from issuers and underwriters and other sources that Fitch deems credible. Fitch conducts a reasonable investigation of the factual information on which it relies in accordance with its rating methodology, and obtains reasonable verification of this information from independent sources, to the extent that such sources are available for a given security or in a given jurisdiction. Fitch’s mode of factual investigation and the extent of third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices of the jurisdiction in which the rated security is offered. and sold and / or location of the issuer, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports , agreed process letters, valuations, actuarial reports, technical reports, legal opinions and other reports provided by third parties, the availability of independent and competent third party sources of verification with respect to the particular title or in the jurisdiction particular transmitter, and a variety of other factors. Users of Fitch Assessments and Reports should understand that neither an enhanced factual investigation nor any third party verification can guarantee that all of the information that Fitch relies on in connection with an assessment or report will be accurate and complete. Ultimately, the Issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing ratings and reports, Fitch must rely on the work of experts, including independent auditors in financial statements and legal and tax lawyers. In addition, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and forecasts about future events which, by their nature, cannot be verified as facts. Therefore, despite any verification of current facts, ratings and forecasts may be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or confirmed. The information in this report is provided “ as is ” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements. a recipient of the report. A Fitch rating is an opinion on the creditworthiness of a security. This opinion and Fitch’s reports are based on established criteria and methodologies that Fitch continuously assesses and updates. Therefore, evaluations and reports are the collective work of Fitch and no individual, or group of individuals, is solely responsible for any evaluation or report. The rating does not take into account the risk of loss due to risks other than credit risk, unless this risk is specifically mentioned. Fitch does not engage in the offering or sale of any security. All Fitch reports have shared authorship. The people identified in a Fitch report were involved in the opinions stated therein, but are not solely responsible. Individuals are named for contact purposes only. A report noting Fitch is neither a prospectus nor a substitute for the information gathered, verified and presented to investors by the issuer and its agents in connection with the sale of securities. Ratings may be changed or withdrawn at any time for any reason at Fitch’s sole discretion. Fitch does not provide investment advice. Ratings are not a recommendation to buy, sell or hold any security. Ratings do not comment on the adequacy of the market price, the suitability of a security for a particular investor, or the tax-exempt nature or taxation of payments made in respect of a security. Fitch receives fees from issuers, insurers, guarantors, other obligors and underwriters for rating the securities. These fees generally range from US $ 000 to US $ 000 (or the applicable currency equivalent) per issue. In some cases, Fitch will evaluate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. These fees should range from US,000 to US 500,000 (or the applicable currency equivalent). Fitch’s assignment, publication or distribution of a rating does not constitute consent by Fitch to use its name as an expert in connection with any registration statement filed under United States securities laws. , the UK Financial Services and Markets Act 2000, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch Search may be available for electronic subscribers up to three days earlier than for print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd has an Australian financial service. license (AFS License No. 337123) which authorizes it to provide credit ratings only to wholesale customers. The credit rating information published by Fitch is not intended for use by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the United States Securities and Exchange Commission as as a nationally recognized statistical rating organization (the ‘NRSRO’). Although certain credit rating affiliates of NRSRO are listed in Item 3 of the NRSRO Form and, as such, are authorized to issue credit ratings on behalf of NRSRO (see https://www.fitchratings.com/site / regulatory), other subsidiary credit ratings are not listed on the NRSRO Form (“non-NRSROs”) and, therefore, credit ratings issued by such subsidiaries are not issued on behalf of NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of NRSRO.

LEAVE A REPLY

Please enter your comment!
Please enter your name here