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Changes in FDI Rules – Unlocking Investment Potential of NBFCs

Ashish M. Shaji

| Updated: May 21, 2017 | Category: NBFC

Changes in FDI Rules

In the last decade, India has seen an extensive inflow of FDI or Foreign Direct Investment in NBFC. India and China are competing with each other to attract foreign direct investment in non-banking financial companies. Restrictions, which were in place earlier for foreign direct investment NBFC on these investments, are now being removed as the importance of FDI is being realized. In this article we described about Changes in FDI Rules – Unlocking Investment Potential of NBFCs.

In a developing country like India or China, banks are unable to meet the loan requirement of the business and individual community. Learn about the new Changes in FDI Rules introduced & the Investment Potential of NBFCs.

Is FDI permitted in the NBFC sector?

FDI in NBFC sector means the investment made by a foreign entity to the business of India. FDI is regulated by the Foreign Exchange Management Act, 2000 and is governed by the Reserve Bank[1].

FDI in this sector is made through government route or automatic route. In case of FDI through government route, approval of RBI is needed and in case of automatic route, investment can be made without any approval.

As per a RBI notification dated 9th September, 2016, FDI of up to 100% would be made under the automatic route in the NBFC sector.

Evolution of Digital Lending

Digital Marketplace Lending continues to grow rapidly in a developing economy like India. There are now over 10 digital lenders in India, and it is expected that the world’s lending business crosses $290 billion by 2021. In Indian start-ups, Eco-system Digital India: P2P lending will play a pivotal role in financial inclusion.

The digital lending platform has created the need for funds in the NBFC sector. Most of the traditional NBFCs are not able to compete with the banks due to lower interest rates offered to the borrower. In the year 2016, India has seen a positive response from Fintech companies by the introduction of an alternative lending method for consumers.

Fintech companies are now focusing on the alternative lending business model by the use of big data, social algorithms, and maximum use of technology in the lending process. From innovative credit models and well-defined anti-fraud tools to user-friendly online and mobile interfaces, marketplace lenders offer an attractive value proposition for borrowers and investors.

Fintech companies are growing by 30% to 40% every year and due to easy and secure lending methods, the need of funding is huge and therefore India has been continuously liberal in terms of FDI in NBFC. Now venture capitalist or foreign banks can freely invest in NBFC.

The government of India has allowed up to 100% FDI under automatic route in NBFC under section 47 of the Foreign Exchange Management Act. These changes in FDI rules have assisted in the growth of NBFCs.

This clears up the government’s intention to promote foreign investment in the financial sector. Earlier FDI under the automatic route was restricted to 18 specified NBFC activities. Moreover, ‘investment activity’ did not form part of 18 specified NBFC activities. On the other hand, after the amendment, the downstream investment is now subject to sectoral regulations and provisions of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 as amended from time to time.

Minimum capitalization norms as mandated earlier have been eliminated now as most of the regulators have already fixed minimum capitalization norms.

The amended regulations also list certain activities as non-fund based activities and have subjected them to a minimum capitalization requirement.

These Activities Include:

Investment Advisory services
  • Investment Advisory Services
  • Financial Consultancy
  • Forex Broking
  • Money Changing Business
  • Credit Rating Agencies

This will induce foreign investment in the financial sector and subsequently spur economic activities as the amendment covers the whole of India and is not limited to any state/districts.

An outlook of the Indian economy for NBFC or Alternative lending business in India

Traditional banks in India has been continuously ignoring the need of SME fund requirement, and due to the gap in a current lending system, it has created the demand for a finch or alternative lending business.

Marketplace Fintech or NBFC also face challenges as they strive to continue their rapid growth, innovative lending businesses, including sourcing sustainable capital, an efficient lending process so that operation cost will be lower and cost-effective, acquiring borrowers and building operational scale.

 A new start-up in alternative lending businesses can be either registered as fresh NBFC Registration with RBI or a start-up can take over an existing NBFC.

Current trends in Digital Marketplace Lending

PE / FDI Investor has shown their interest in investment in Fintech NBFC. The changes in FDI rules can be a reason for it. Everyone knows that banks are not able to meet the loan requirement of SME and individuals due to a complicated lending process. The venture capitalist has shown a positive interest in investing in technology-driven lending companies, but the only challenge is how a platform will source the sustainable fund to meet the fund need for the business.

The investor will be looking closely at the use of technology in collections. Fintech Platforms need to be prepared to demonstrate that they can protect investor fund. If Fintech companies are able to develop such level of technologies, then definitely they will able to attract more FDI in NBFC.

 RBI is also liberal for FDI In NBFC. A publication of “Business Standard” stated that the above changes in FDI Rules contributed towards the growth in the Foreign Direct Investment in India in the year 2016-17 by 29 per cent year-on-year to USD 40 billion.

Regulatory compliance and risk management for NBFC

Marketplace lending operates in a complex and strict regulatory environment, and compliance of NBFC is not easy. If you have foreign funding in NBFC, then you need extra care in meeting NBFC RBI compliance.

The challenge, which is in Compliance Management System Design, needs to develop a strong execution program against regulatory and investor expectations. RBI has made compliance easy and the entire RBI filling can be done online through the RBI portal.

Conclusion

In conclusion, it can be stated that the ultimate goal of the government is to encourage foreign investment in every sector including the financial sector, be it regulated or the non-regulated one. The only difference between the two is that the prior government approval is required for activities which are not yet regulated.

Enterslice’s NBFC team provides a comprehensive understanding of applicable RBI compliance requirement for NBFC. We can also help you with a new NBFC RBI registration or takeover of NBFC.

Read our article:Advantages of Digitalization in NBFCs

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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