FDI Rules for NBFC
As compared to last quarter government seems unsatisfied with an increase in FDI. The government of India has incorporated some changes in the 2017-2018 budget and introduced new FDI rules for NBFC to boost the Indian economy. On Non-Banking Financial Companies restrictions for FDI have already been removed as per the old norms.
The Department of Industrial Policy and Promotion (DIPP) has notified India’s Consolidated Foreign Direct Investment Policy 2017. This FDI Rules for NBFC Policy 2017 is a consolidation of the various decisions taken by the Government of India in the previous year.
Present consolidation subsumes and supersedes all Press Notes/Press Releases/Clarifications/Circulars which were in force as on the date August 28, 2017.
Digital Marketplace Lending space is growing at a tremendous pace. It was realized that banks are not sufficient for meeting the loan requirements for individuals and small business communities.
In India, in the year 2021 world lending business will cross $290 billion. In India in case of startups are concerned, Eco-system Digital India and P2P lending are expected to play a significant role in financial inclusion.
Due to Digital Lending platform, there is a need for funds in the NBFC sector. On account of the lower rate of interest, traditional NBFCs are failing to compete with the banks.
It has been found that in the lending process, Fintech companies are now making use of Big Data, Social Algorithms and other use of technology. Now they are adopting the alternate lending business model.
For the borrowers and investors, these marketplace lenders make use of tools such as anti-fraud for user-friendly online and mobile interfaces as well as innovative credit models, thereby offering an entirely new value proposition.
FDI Policy 2016 provided that an NBFC having FDI under the automatic route is permitted to engage in only 18 specified NBFC activities, subject to minimum capitalization norms prescribed under the FDI Policy, 2016. Financial activities other than those 18 specified NBFC activities required prior approval of the Government. The Press Note dated October 25, 2016, permits 100% FDI under the automatic route in any financial services activities, provided the activities are regulated by financial sector regulators such as RBI, Securities, and Exchange Board of India, Pension Fund Regulatory and Development Authority, Insurance Regulatory Authority of India etc.
Further, minimum capitalization norms as mandated under FDI Policy 2016 for foreign investment in NBFCs are no more applicable and hence the same are done away with, considering the financial regulators prescribe their own set of capitalization norms. This was much-awaited change, which is likely to provide a level playing field in the concerned sector.
In the year 2017, here are the following changes in FDI Rules for NBFC:
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FDI Investment in NBFC
As demand for funding in this sector is huge, Foreign Direct Investment in NBFC is important. Now venture capitalists and foreign banks can invest in NBFCs. With the easy and secure process of lending, Fintech companies are growing at a rate of 30 to 40 %.
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FDI in Automatic Route in NBFC
As per section 47 of the Foreign Exchange Management Act, new FDI norms states 100 % FDI through the Automatic route for NBFC. Before this, only in 18 specified NBFC activities investment in the automatic route was restricted and investment activities were not part of these 18 NBFC activities.
Now the investment is subject to sectoral regulations and provisions of Foreign Exchange Management Regulations, 2000 with all the amendments incorporated from time to time.
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Elimination of Minimum Capitalization Norms
Most of the regulators have now got the fixed minimum Capitalization norms in place as the minimum Capitalization norms will now be eliminated. List of non-fund based activities is said to be subjected to minimum capitalization requirements.
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Regulatory Compliance and Risk Management for NBFC
In case of NBFC, there is a complex and strict regulatory environment under which marketplace lending operates. RBI compliances must be met in case of foreign funding in NBFCs. However, RBI has now simplified the filing process through RBI portal with an online form.
The main aim of the Government is to encourage foreign investment in all sectors whether regulated or non-regulated. The only difference is that the activities which are not regulated need prior Government approval.
