Proposed regulatory framework for Housing Finance cos

The Reserve Bank of India has come out with draft regulatory framework for the Housing Finance Companies (HFC).

I feel this may the fallout of the various HFC which more act as an NBFC and fund their group companies.

It is proposed to introduce the concept of ‘qualifying assets’ for HFCs as done in case of NBFC-MFIs. The proposed regulations are as under:

Qualifying Assets refer to ‘housing finance’ or ‘providing finance for housing’  subject to the following:

1. Not less than 50% of net assets are in the nature of ‘qualifying assets’ for HFCs
2. 75% of the 50% of net assets should be towards individual housing loans.

“Net assets” shall mean total assets other than cash and bank balances and money market instruments.

The HFC is given 4 years timeframe comply with the requirements.

Timeline	At least 50% of net assets as qualifying assets i.e., towards housing finance	At least 75% of qualifying assets towards housing finance for individuals
March 31, 2022	50%	60%
March 31, 2023	-	70%
March 31, 2024	-	75%

‘Housing Finance” or “providing finance for housing” means:

1. Loans to individuals or group of individuals including co-operative societies for construction/ purchase of new dwelling units.
2. Loans to individuals for purchase of old dwelling units.
3. Loans to individuals for purchasing old/ new dwelling units by mortgaging existing dwelling units.
4. Loans to individuals for purchase of plots for construction of residential dwelling units provided a declaration is obtained from the borrower that he intends to construct a house on the plot within a period of three years from the date of availing of the loan.
5. Loans to individuals for renovation/ reconstruction of existing dwelling units.
6. Lending to public agencies including state housing boards for construction of residential dwelling units.
7. Loans to corporates/ Government agencies (through loans for employee housing).
8. Loans for construction of educational, health, social, cultural or other institutions/centres, which are part of housing project in the same complex and which are necessary for the development of settlements or townships;
9. Loans for construction of houses and related infrastructure within the same area, meant for improving the conditions in slum areas for which credit may be extended directly to the slum-dwellers on the guarantee of the Government, or indirectly to them through the State Governments;
10. Loans given for slum improvement schemes to be implemented by Slum Clearance Boards and other public agencies;
11. Lending to builders for construction of residential dwelling units.

All other loans including those given for furnishing dwelling units, loans given against mortgage of property for any purpose other than buying/ construction of a new dwelling unit/s or renovation of the existing dwelling unit/s, will be treated as non-housing loans.

Loan foreclosure charges

As a measure of customer protection and also in order to bring in uniformity with regard to repayment of various loans by borrowers of banks and NBFCs, no foreclosure charges/pre-payment penalties shall be levied on any floating rate term loan sanctioned for purposes other than business to individual borrowers with or without co-obligants. Since similar regulations are currently not prescribed for HFCs, it is proposed to extend these instructions to HFCs.

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Will EMI moratorium impacts the credit rating?

Many people ask this question, when the EMI moratorium was extended till 31-Aug-2020 - Whether my credit rating by Credit Information Bureau (India) Limited (CIBIL) will go down due to this?

RBI in their press release under Statement on Developmental and Regulatory Policies dated 22-May-2020 cleared this that the moratorium period between 1-Mar-2020 and 31-Aug-2020 shall not be counted for asset classification by lenders. That means, your non-payment of interest or EMI shall not be adversely affect your credit rating.

What is assert classification, NPA? To know, click HERE (Refer FAQ 3)

The relevant portion of the notification is given below:

(i) As the moratorium/deferment is being provided specifically to enable borrowers to tide over COVID-19 disruptions, the same will not be treated as changes in terms and conditions of loan agreements due to financial difficulty of the borrowers and, consequently, will not result in asset classification downgrade.

(ii) As earlier, the rescheduling of payments on account of the moratorium/deferment will not qualify as a default for the purposes of supervisory reporting and reporting to credit information companies (CICs) by the lending institutions. CICs shall ensure that the actions taken by lending institutions in pursuance of the announcements made today do not adversely impact the credit history of the borrowers.

(iii) In respect of all accounts for which lending institutions decide to grant moratorium/deferment, and which were standard as on March 1, 2020, the 90-day NPA norm shall also exclude the extended moratorium/deferment period. Consequently, there would be an asset classification standstill for all such accounts during the moratorium/deferment period from March 1, 2020 to August 31, 2020. Thereafter, the normal ageing norms shall apply.

(iv) NBFCs, which are required to comply with Indian Accounting Standards (IndAS), may follow the guidelines duly approved by their Boards and advisories of the Institute of Chartered Accountants of India (ICAI) in recognition of impairments. Thus, NBFCs have flexibility under the prescribed accounting standards to consider such relief to their borrowers.

For full notification dated 22-may-2020, CLICK HERE

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Borrowing for business : 3. Export funding

The Banks and Financial institutions extend various facilities to the exporters. The intention is to promote and facilitate exporters to do more to get more foreign exchange into India.

The facilities extended can be categorized into Fund based and Non-fund based facilities.

Fund based is more of extending funds to the exporters and non-fund based (as you guessed) is more of extending non-fund base facilities like guarantee or letter of credit etc.,

Fund based

• Pre-shipment facility
• Packing credit
• Basically to fund the procurement to shipment to the importer expenses against an confirmed order / LC.
• For purchase of raw materials, processing, packing, transportation and warehousing of goods meant for export, It has two essential features, viz:
• existence of an export order and / or letter of credit;
• liquidation of the packing credit by submission of export documents within a stipulated period
• It is part of your working capital limits
• Duration depends on the business cycle
• Post-shipment facility
• Discounting export bills
• Part of the sanctioned credit limit
• Bank will pay the exporter the discounted value of the invoice, immediately up on shipment.
• Bank offers this service in rupee as well as foreign currency.
• Advance against export bills sent on collection
• Mostly used when the bills drawn under Letter of Credit has some discrepancies.
• When the bill discounting limit of the exporter is exhausted and bank is not willing to sanction additional limit.
• Bank may finance a part of the total bill amount as advance. A margin of 10%-25% exercised by bank. 
• When the export bill is realized, the advance will be liquidated and the bank will pay the balance to the exporter.
• Rate of interest is same as applicable to post-shipment finance.
• Advance against duty drawback claims
• Duty Drawback Scheme aims to provide the refund/ re-coupment of custom and excise duties paid on inputs or raw materials and service tax paid on the input services used in the manufacture of export goods.
• The bank lends finance against such duty drawback receivable from customs after the exporter submits all the essential export documents with their bank to confirm eligibility.
• The bank will make sure that the drawback amount will be paid directly to them by the customs department, before they extend the advance to the exporter.
• This advance is granted to the exporter, for upto 90 days, by the bank which extends other export finances to the exporter. Other banks shall not extend this benefit.

Non-fund based

• Export Letter of Credit confirmation
• Advising a Letter of Credit is just a verification of the authenticity of the message received. There is no risk to the bank here.
• Confirming export Letter of Credit means that the bank gives the additional guarantee for the money due under the Letter of Credit
• Back to back Letter of credit
• Normally done for intermediaries - those who gets the LC and Order and works with actual supplier and gives the supplier his Letter of Credit.
• Guarantees 
• There are various guarantees are provided to the exporters in the course of the business.

The above are not exhaustive list. This is just an awareness post and you can work with your financial advisors / consultants / banking partners to know more about their offerings.

Remember, when you are importing or exporting, you are exposed to not only the party level risk, but also international / country level risk, Currency risk etc., So, play safe. Google knowledge will not suffice.

All the best.

    

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Borrowing for business : 2. Types of funding available

In the earlier post, we looked at the basic understanding of getting loans. In this post, let us see from where can get loans and the various types of funding available.

Normally, the loans are given by Banks, Financial Institutions and NBFCs

Again the facilities that can be availed are categorized into Fund based and Non-fund based.

What type of funding that we can get from them? The funding are classified in terms of 

• Duration: Short Term funding and Long Term funding.
• Security : Secured loan and Unsecured loan 

Short term funding (loan)

1. Working Capital loan
• As the name suggests, this loan is to fund your working capital requirement. The lender will fund you the 1 or 2 or 3 months of your net working capital, depending on your business nature. This is to tide over your collection time to pay your expenses and creditors.
• This will be a short term loan for 12 months and can be renewed with same limit or higher limit.
• This loan will  be based on your debtors and stock balances.
2. Flexi business loan
• This loan will give a limit to draw to the extent required.
• Normally, these type of loans are taken for seasonal businesses (eg. agro based) or gets irregular orders.
• Only the utilized amount will be charged.

Long term funding (loan)

1. Term Loan
• Normally for longer projects or for buying machines or building a facility.
• Term loan will be for more than a year (infr projects will have much more longer tenure)
• The term loan sanction will take more time, as there will more diligence exercised by the lender.
• These loans will be secured mostly against the purpose for which it is taken.
• There will be a repayment schedule agreed.
2. Asset financing (lease finance and asset finance)
• Banks and NBFC does this.
• SIDBI gives at better rate under SMILE Equipment Plan (SEP)

The above are generic and there are other ways of getting loan like personal business loan, which is unsecured and upto 25 lakh like a term loan. This will carry an interest around 14%-18% depending on your credit rating.

For all the above loans, the business and the promoters shall maintain a good credit rating in Credit Information Bureau India Limited (CIBIL). This calls for a separate posting on how maintaining helps in getting loans, how to maintain good score etc.,

This posting is more for awareness of business community. The requirement, nature of funding has to be assessed case by case. Please consult your financial consultant.

Any questions, please ask in the comments. I will answer them.

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NSE EMERGE : MSME can tap public for funding

Do you know that Micro, Small and Medium Enterprises (MSME) can tap the public through stock market?

Yes, you are reading it right. MSME can get their shares listed through National Stock Exchange of India (NSE).

NSE has created a platform called EMERGE for the SMEs to enable them to list their shares in their trading platform. Once the MSME exhausted the initial promoter capital, borrowings from friends/relatives and loans from banks and poised to grow big, they need more capital. At this stage, it is advisable to tap the equity market.

There are 2 levels. SME board and main board

Who are all eligible?

(a) Paid up Capital

	SME Board	Main Board	Remarks
Issuer's post issue paid up capital	Less than Rs.10 crore	Rs.10 crore to Rs.25 crore	It is the face value of the Capital

(b) 3 years operational history

(c) 2 years of cash accruals (operational profits)

(d) Positive networth

(e) good credit standing of company and promoters

Framework

(a) For Initial Public Offering (IPO) on NSE EMERGE

• Minimum allottee : 50
• Public shareholding : Minimum 25% 
• Grading requirement : Nil
• Underwriting : 100% of the IPO
• Draft Red herring Prospectus (DRHP) : Regular IPO format. NSE clearance enough for SME Board with observations
• Market making : mandatory 3 years (see below)

(b) Post listing compliance

• Half yearly audited accounts (quarterly for main board)
• Corporate governance : same as main board

(c) Migration to main board from SME board

• Allowed subject to meeting the criteria

(d) Investors

• Minimum application amount : Rs. 1 lakh
• Minimum trading lot : Rs. 1 lakh
• PE funds, QIBs can support  underwriting and market making

What is the listing process

IPO open days : Minimum 3 days and Maximum 10 days

Listing time : It may take a minimum 6 working days

Benefits of listing

• Higher visibility of the company
• Easy access to raise further capital
• Ease of valuation
• Since there are governance control, credibility will increase
• ESOPs can be issued to employees to retain them

Market maker

Any  member  of  the  Exchange  would  be  eligible  to  act  as  Market  Maker  provided the criteria laid down by the exchange are met. 

The member brokers desirous of acting as Market Maker in this exchange shall apply to the concerned stock exchange for registration as Market Makers unless already registered as a Market Maker. 

The obligations and responsibilities of Market Makers

The  Market  Maker shall fulfill the following conditions to provide depth and continuity on this SME exchange:  

(a)   The Market Maker shall be required to provide a 2-way quote for 75% of the time in a day. The same shall be monitored by the stock exchange. Further, the Market Maker shall inform the  exchange  in  advance  for each and every black out period when the quotes are not being offered by the Market Maker. 

(b) The minimum depth of the quote shall be Rs.1,00,000/-. However, the investors with holdings of value less than Rs 1,00,000 shall be allowed to offer their holding to the Market Maker in that scrip provided that he sells his entire holding in that scrip in one lot along with a declaration  to  the  effect to the selling broker.  

(c) Execution of the order at the quoted price and quantity must be guaranteed by the Market Maker, for the quotes given by him.  

(d) There  would  not  be  more  than  five  Market  Makers  for  a  scrip.

Please share your questions in the comments, below.

  

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Borrowing for business : 1. Basics to understand

There are many entrepreneurs who have ideas and passion for pursuing their dreams. Many are successful, few struggle and few create history.

What are the challenges they face in their starting stage?

• Getting finance
• How to convert their ideas to a marketable product or service
• Marketing their product or service

I have worked all through my life starting as finance head, borrowing funds for my organization or for my company's clients. With that experience, I am lining out few tips to those who are looking to get finance from Banks, Financial Institutions or Non Banking Financial Companies (NBFC).

As a person, all we know is that we need money - in any form to start the business, run the business etc., That is the focus and that should be the focus.

At this juncture, the entrepreneur overlooks certain things and end up focusing on running after lenders and meeting regulatory compliance. I will cover the regulatory compliance separately.

Let us look at a situation. You are a successful entrepreneur and running a successful profitable business in consumer durable. I am a rank holder in my MBA from a decent business school and started my trading business in consumer durable.

I approach you and request you to give me your products, which I can sell in market and pay you after 30 days. I show all my educational credentials and prizes that I have won in marketing competitions. 

Would you:

1. Encourage me by giving your products to me on credit for 30 days; OR
2. Ask me to get a surety or cash down to take the products.

Friends, this is exactly the banks and others also do. We need to understand that they are not NGOs and they also run the business for profits. Each banks way of functioning will be slightly different, though they are governed by RBI and Banking Regulations Act.

That said, there are ways to get seed capital, personal loans that one can take to run the initial set up. If you do not have security to offer, you can look at some financial partner to start with, giving an exit option.

Some of the entrepreneurs experience on their firs 3 years of operations;

• Start with smaller operations with tight finance
• Borrow money by pledging idle assets like gold
• Work for few years to gain experience and save money - during this time do the groundwork for the dream project
• Crowd funding
• Financial partner with loan / equity option after 3 years
• Equipment financing
• Equipment leasing

There are many ways one can get funding, if you have a good viable business proposal. Remember, no one will ignore an opportunity where they can earn more.

In this series, next I will be writing on what type of lenders and what type of financing available, the tips to get loans - what the bankers look for.

Happy weekend.

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MSME Series: 1. ATMANITBHAR BHARAT ABHIYAAN - ECLGS

Prime Minister Shri Narendra Modi on 13-May-2020 announced various measures under the umbrella Atmanirbhar Bharat Abhiyaan. That means a self reliant India movement.There are lot of presentations on this Rs. 20 Lakh crore package. I am going to write in my MSME series, each schemes in a nutshell.
The Atmanirbhar Bharat Abhiyaan has 5 pillars  
  (1) Economy : That can take a quantum leap
  (2) Infrastructure : World class one with Indian identity
  (3) System ; More technology driven arrangements
  (4) Vibrant Demography : The energy source for a self-reliant India 
  (5) Demand :  Utilizing fully the strength of our demand and supply chain
I was looking for an acronym for the 5 pillars. Finally, managed to get VIBRANT DESI (Demand, Economy, System and Infrastructure). Happy to get interesting acronym in the comments.

Emergency Credit Line Guarantee Scheme.
In the first of this MSME series, I am going to give a snapshot of the Rs.3 lakh crores Emergency Credit Line Guarantee Scheme.

Objective 
Additional funding without any collateral to MSMEs who is trying to mitigate the economic distress due to the pandemic situaion.
Amount available under the scheme
Rs.3 lakh crores by way of Guarantee from the governement
Period this Scheme is available
Can be availed till 31-Oct-220 OR till the Rs.3 lakh crore santioned, whichever is earlier
Who can avail this benefit? Please see the FAQ
All MSME borrowers with combined outstanding loans of up to Rs 25 crore as on February 29, 2020, and annual turnover of up to Rs 100 crore in FY 2019-20. Pradhan Mantri Mudra Yojana (PMMY) borrowers are eligible. 
What is the tenor for this additional loan
4 years with a moratorium of 12 months on principal repayment.
What is the additional security, collateral or guarantee required?
No additional security, collateral or guarantee required for this additional loan
What is the interest rate?
For Banks and Financial Institution, RBI prescribed external benchmark linked rates +1%, subject to a maximum of 9.25% pa.
For NBFCs, the interest rate shall not exceed 14% pa
What is the form of this additional loan?
Banks or FIs : Working Capital Loan 
NBFCs          : Term Loan 

Frequently asked questions on ECLGS

(1) Who are all eligible?
All MSME borrowers with

1. combined outstanding loans across all lending institutions of upto Rs 25 crore as on 29-Feb-2020
2. annual turnover for 2019-20 was up to Rs 100 crore
3. GST registration or not required to register under GST 
4. constitution as 
• MSME which are constituted as Proprietorships, Partnerships, Registered Companies, Trusts and Limited Liability Partnerships (LLPs), 
• Loans provided in individual capacity will not be covered under the Scheme
• loans under PMMY extended on or before February 29, 2020, and reported on the MUDRA portal shall be covered under the Scheme

(2) What are the other conditions to be met?

• The borrower should be an existing customers and who have availed the credit facility as on 29-Feb-2020
• Borrower accounts should be classified as regular, SMA-0 or SMA-1 as on February 29, 2020. Accounts classified as NPA or SMA-2 as on February 29, 2020 will not be eligible under the Scheme
• The MSME borrower must be GST registered in all cases where such registration is mandatory. This condition will not apply to MSMEs that are not required to obtain GST registration

(3) What are SMA-0, SMA-1, SMA2 & NPA
These are the categories that RBI created to have an early warning signals of a stressed account with Banks, Financial Institutions and NBFCs. 
SMA stands for Special Mention Accounts.

SMA Sub-categories	Basis for classification – Principal or interest payment or any other amount wholly or partly overdue between
SMA-0	1-30 days
SMA-1	31-60 days
SMA-2	61-90 days

NPA : a loan account which has remain overdue for 90 days or more is classified as a NPA or Non-Performance Assets.

(4) The accounts are not audited yet. What to do?
In case accounts for FY 2019-20 are yet to be audited/finalized, the lender may rely upon the borrower’s declaration of turnover.

It is better to get an audited financial done to avoid any rejection.

(5) Will MSME get 20% of the outstanding as of 29-Feb-2020 as loan?
The scheme says upto 20%. So, if the bank decides, basis your track record, can give less than 20% also.
The banks were asked to exercise diligence in extending the loan. So, it is not the automatic 20% extended. 

(6) MSME have multiple lenders, who will provide loan?
If the combined borrowing is less than Rs.25 crores, each lender can provide proportionately.
If the combined  borrowing is more than Rs.25 crores, you are not eligible.
If the other lenders give no objection certificate (NOC), one lender can give the additional 20% (but the quantum cannot exceed 20% of the combined loan balance as of 29-Feb-2020 with all lenders)

(7) Can MSME get more than 20% of outstanding as of 29-Feb-2020?
YES & NO
Yes, if you have multiple lenders and other banks give NOC to one lender, the lender will give more than 20% of his loan balance.
No, as in any case it cannot exceed your combined loan outstanding as of 29-Feb-2020

(8) Is MSME registration / Udyog Aadhar required?
Nowhere it talked about this condition. So, MSME registration or Udyog aadhar is not a must to avail this additional loan.

(9) Are there any processing fee
Since this is an extension of existing loan, no processing fee shall be charged.

(10) Is all loans and facilities covered?
No. Only fund based loans are covered. Non fund based, off-balance sheet facilities are not covered.

(11) What are the repayment terms?
After the 12 months moratorium for principal amount, the amount can be repaid in 36 equal monthly instalments

(12) Can I repay the amount earlier in part or full?
Yes, you can. There will not be any pre-payment penalty charges for this.

These are my understanding on reading the scheme. Please check with your banker, consultant for your eligibility.


Please rush, if you need the credit, as it is first come first served. Though the scheme is open till 31-Oct-2020, if the Rs.3 lakh crores sanctioned earlier, you may miss the bus.

Good luck !

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Emergency Credit Line Guarantee Scheme (ECLGS)

The cabinet approved an additional Rs.3,00,000 crores of funding to eligible Micro, Small and Medium Enterprises (MSME) and interested MUDRA borrowers by way of "Emergency Credit Line Guarantee Scheme" (ECLGS).

Under ECLGS, 100% guarantee to be provided by National Credit Guarantee Trustee Co Ltd (NCGTC) in the form of a Guarantee Emergency Credit Line (GECL) facility.

Why this scheme?

Given the pandemic situation, most of the MSMEs are facing difficult situations and many may require further credit to manage the expenses during the lockdown. To encourage the lending institutions like banks to extend additional credit facilities to MSMEs this scheme is announced.

The Scheme would be applicable to all loans sanctioned under GECL during the period from the date of announcement of the Scheme to 31.10.2020, or till an amount of Rs three lakh crore is sanctioned under the GECL, whichever is earlier.

Who are all eligible?

All MSME borrowers upto Rs.25 crores outstanding credit as of 29-Feb-2020, which are less than or equal to 60 days past due on that day AND with an annual turnover of upto Rs. 100 crores

Quantum

Additional loan upto 20% of entire outstanding credit (upto Rs.25 crores) on 29-Feb-2020 as 

• Working capital term loan (in case of Bank or Financial Institution)
• Term loan (in case of NBFCs)

Tenor

Four years with one year moratorium period of one year

Interest rate

Banks and Financial Institutions : Max   9.25%

NBFCs                                     : Max 14.00% 

For FAQs on this scheme, CLICK HERE

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What is MUDRA Loan?

Many ask, what is a MUDRA loan?

MUDRA stands for Micro Units Development and Refinance Agency Ltd.

It is a Non-Bank Financial Companies (NBFC). It is not a direct lending institution.

MUDRA does a refinance support to Micro Finance Institutions (MFI), NBFC and Banks for lending to Micro units having loan requirement upto Rs.10 Lakhs, under the aegis of Pradhan Mantri Mudra Yojana (PMMY).

Who are all eligible?

Any individual including women, proprietary concern, partnership firm, private limited company or any other entity are eligible applicant under PMMY loans, whose loan requirement is up to Rs.10 lakh.

Any Indian Citizen who has a business plan for a non-farm income generating activity such as manufacturing, processing, trading or service sector whose credit need is up to  10 lakh can approach either a Bank, MFI or NBFC for availing of MUDRA loans under PMMY. The usual terms and conditions of the lending agency may have to be followed for availing of loans under PMMY. The lending rates are as per the RBI guidelines issued in this regard from time to time.

What are the types of MUDRA loans?

MUDRA loans are available in three categories. 

   SHISHU : upto  Rs. 50,000

   KISHOR : Rs.   50,000 - Rs.  5,00,000

   TARUN  :  Rs.5,00,000 - Rs.10,00,000

Depending on the nature of business and project requirement you can access finance from one of the intermediaries of MUDRA as per the norms.

What are the requirements?

The requirements are decided by the respective banks, NBFCs based on their internal guidelines and policies.

• Generally IT returns are not insisted for small value loans.
• KYC is mandated
• Loan amount and repayment terms will be decided by the anticipated cash flow from the business activity.

Please note:

MUDRA is a refinancing Institution. MUDRA does not lend directly to the micro entrepreneurs / individuals. Mudra loans under Pradhan Mantri Mudra Yojana (PMMY) can be availed of from nearby branch office of a bank, NBFC, MFIs etc. Borrowers can also now file online application for MUDRA loans on Udyamimitra portal (www.udyamimitra.in). Currently, the site is under construction. Please check back.

CLICK HERE to know more about MUDRA

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