News Analysis India

Tag: NBFC

  • Enforcement Directorate arrests NBFC CEO in probe against Chinese-backed loan apps

    By PTI

    NEW DELHI: The Enforcement Directorate (ED) on Saturday said it has arrested the CEO of a non-banking financial company (NBFC) in connection with a money laundering investigation against fintech firms “backed” by Chinese funds.

    Pavitra Pradip Walvekar, promoter, director and chief executive officer (CEO) of Kudos Finance and Investment Private Limited, an NBFC, was taken into custody on Friday.

    He was later produced before a special Prevention of Money Laundering Act (PMLA) court in Hyderabad that sent him to 15 days’ judicial custody, the agency said in a statement.

    The action is linked to the ED’s investigation against a number of Indian NBFCs which are in the business of instant personal loans through mobile apps (applications).

    “Various fintech companies backed by Chinese funds have made agreements with these NBFC companies for providing instant personal micro loans of term ranging from seven-14 days,” the statement said.

    “Kudos NBFC purportedly engages fintech (digital lending partners) companies as a service provider to assist in identifying prospective customers, verifying their eligibility, collection of information/documents, conducting due diligence, collecting pre-disbursement documents, arranging execution of the loan agreement, assisting with collections/recovery of principal and interest payments and attending service requests or product related queries for the retail loans offered by the company,” the agency said.

    Although it is projected that the NBFC is engaging fintech (short for financial technology) companies for these activities, the ED said, “In reality, they are allowing the fintech companies to misuse the valuable NBFC licence of Kudos.”

    “Kudos has a paltry net owned fund (NOF), but it is taking huge amount as security deposits and then opening separate merchant ID (MID) with payment gateways for each fintech app and then depositing these security deposit in the MID of the respective fintech app,” the agency alleged.

    The company, Kudos, it said, has no mobile app of its own.

    “It is not involved in the lending business at all. It has miniscule staff and is blindly allowing fintech companies to operate at the back of MoUs between self (NBFC) and fintech mobile app companies.

    “Thus, the entire lending operation is being done by the fintech app from its own funds,” it alleged.

    The accused NBFC is only lending its licence and the fintech apps are the ones acting like the “real NBFCs” and doing end-to-end micro-lending and “reaping “majority benefits”.

    “In return, Kudos is taking a commission without doing any due diligence or hardwork,” the ED alleged.

  • ED crackdown on owners of Cashbean loan app continues, Rs 300 crore attached

    By Express News Service

    NEW DELHI: The Enforcement Directorate (ED) has seized an additional amount of Rs 51.22 crore lying in the bank accounts and virtual accounts with payment gateways of fintech company PC Financial Services Private Limited (NBFC). The enforcement agency has already attached Rs 238 crore from the Gurgaon-based PC Financial Services, which provides instant personal microloans through its mobile application ‘Cashbean’.

    ED has alleged that the PCFS is controlled by a Chinese national through a maze of shell companies. It has also accused the firm of money laundering and violation of the Foreign Exchange Management Act (FEMA).

    According to the enforcement agency, PCFS is a wholly-owned subsidiary of Oplay Digital Services, SA de CV, Mexico, which is, in turn, is owned by TenspotPesa Limited of Hong Kong.  TenspotPesa, on the other hand, is owned by Opera Limited (Cayman Islands) and Wisdom Connection I Holding Inc (Cayman Islands), which are ultimately beneficially owned by Chinese national Zhou Yahui. The original Indian Company PCFS was incorporated in 1995 by Indian nationals and got NBFC license in 2002 and after RBI approval in 2018, the ownership moved to the Chinese controlled company.

    ED’s investigations reveal that the fintech company provides micro loans through its mobile app for suspicious foreign outward remittances.

    Investigations have found that the foreign parent companies of PCFS brought in Rs 173 Crore worth of FDI for lending business and within a short span of time, made foreign outward remittances worth Rs 429 crore in the name of payments for software services received from related foreign companies.

    The fintech company also showed high domestic and foreign expenditures.  A detailed investigation into the foreign expenses paid by the NBFC revealed that most of the payments were made to foreign companies, which are related and owned by the same Chinese nationals.

    ED has also found that exorbitant payments were allowed by the dummy Indian Directors of PCFS without any due diligence on the instructions of the Country Head Zhang Hong, who directly reported to one Zhou Yahui in China.

    PCFS remitted forex worth Rs 429 Crore to 13 foreign companies located in Hong Kong, China, Taiwan, USA and Singapore in the guise of payments for the License fee for Cash Bean Mobile APP (Rs 245 Crore per annum), Software technical fee (of around Rs 110 Crore), online marketing & advertisement fee (of around Rs 66 Crore).

    According to the Enforcement Directorate, all these services and applications are available in India at a fraction of the cost incurred by PCFS.

    The agency further says that though all the clientele of the NBFC was in India, huge payments were made abroad without any proof of receipt of service. Simultaneously, during the same period of time, PCFS also booked domestic expenditure of a similar amount (of Rs 941 crore) under the same heads of expenditure.

    PCFS management failed to give any justification for these expenses and admitted that all remittances were done to move money out of India and to park it abroad in the accounts of Group Companies controlled by the Chinese promoter.

  • NBFCs: Reserve Bank of India to step up vigil with four-layered regulatory framework

    By PTI

    MUMBAI: The Reserve Bank of India (RBI) will put in place a four-layered regulatory structure for non-banking financial companies to keep a stricter vigil on the shadow banking sector and minimise risks for the overall financial system.

    The detailed set of norms, which will come into force from October 2022, provides for a Scale Based Regulation (SBR) framework that takes into consideration capital requirements, governance standards, prudential regulation and other aspects of the Non-Banking Financial Companies (NBFCs).

    The central bank’s latest move, after extensive stakeholder consultations, also comes against the backdrop of previous instances, including the collapse of IL&FS in 2018 and later DHFL, that had a spillover impact on the entire financial system, especially in terms of liquidity woes.

    Since then, the focus shifted to having tighter regulations rather than a light touch approach for the country’s shadow banking sector.

    Unveiling the four-layered framework, RBI on Friday said that over the years, the NBFC sector has undergone considerable evolution in terms of size, complexity, and interconnectedness within the financial sector.

    Many entities have grown and become systemically significant, and hence there is a need to align the regulatory framework for NBFCs keeping in view their changing risk profile, it said in a statement.

    To begin with, the central bank will issue an integrated regulatory framework for NBFCs, providing a holistic view of the SBR structure, set of fresh regulations being introduced and respective timelines.

    NBFCs will be split into four layers — Base Layer (BL), Middle Layer (ML), Upper Layer (UL) and Top Layer (TL).

    The Base Layer will consist of NBFCs currently classified as non-systemically important NBFCs (NBFC-non deposit taking), besides Type I NBFCs, non-operative financial holding company, NBFC-P2P (Peer to Peer lending platform) and NBFC-AA (Account Aggregator).

    The asset size threshold for this layer will be less than Rs 1,000 crore.

    Currently, the threshold for systemic importance is Rs 500 crore.

    The Middle Layer will consist of all non-deposit taking NBFCs classified currently as NBFC-ND-SI (Non-Deposit Taking Company-Systematically Important) with asset size of over Rs 1,000 crore and all deposit taking NBFCs irrespective of size.

    The upper layer will comprise of those NBFCs which are specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters.

    The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor, RBI said.

    “The Top Layer will ideally remain empty. This layer can get populated if the Reserve Bank is of the opinion that there is a substantial increase in the potential systemic risk from specific NBFCs in the Upper Layer. Such NBFCs shall move to the Top Layer from the Upper Layer,” it noted.

    Regulatory minimum Net Owned Fund (NOF) for NBFC-Investment and Credit Companies (ICC), NBFC Micro Finance Institution (MFI) and NBFC-Factors would be increased to Rs 10 crore and a glide path has been charted out for meeting this requirement.

    However, for NBFC-P2P, NBFC-AA, and NBFCs with no public funds and no customer interface, the NOF will continue to be Rs 2 crore.

    The extant NPA classification norm stands changed to the overdue period of more than 90 days for all categories of NBFCs.

    A glide path is provided to NBFCs in base layer to adhere to the 90 days NPA norm, the statement said.

    In order to enhance the quality of regulatory capital, RBI said that NBFC-UL would maintain Common Equity Tier 1 capital of at least 9 per cent of Risk Weighted Assets while they will be required to hold differential provisioning towards different classes of standard assets.

    In addition to the CRAR, NBFC-UL will also be subjected to leverage requirement to ensure that their growth is supported by adequate capital, among other factors.

    A suitable ceiling for leverage will be prescribed subsequently for these entities as and when necessary.

    According to RBI, Housing Finance Companies would continue to follow specific regulation on sensitive sector exposure, as are currently applicable.

    There shall be a ceiling of Rs 1 crore per borrower for financing subscription to Initial Public Offer (IPO).

    NBFCs can fix more conservative limits, RBI said.

    Further, the central bank has outlined large exposure limit for all counterparties and groups of connected counterparties and for the capital market and commercial real estate.

    To strengthen corporate governance, it has suggested inclusion of independent directors on the board, among other requirements.

  • ED seizes Rs 131-crore funds of Chinese-controlled NBFC for foreign exchange law violation

    By PTI

    NEW DELHI: The Enforcement Directorate Thursday said it has seized over Rs-131 crore funds of a Chinese national-owned NBFC for alleged violation of foreign exchange law.

    The non-banking financial company (NBFC) is PC Financial Services Pvt Ltd and it was in the business of providing instant personal micro loans through its mobile application ‘Cashbean’ for suspicious foreign outward remittances.

    This case came under the ED radar during a separate money laundering probe against a number of NBFCs and FinTech companies which are linked to instant personal loans providing mobile apps.

    These loans were being dished out with a “high rate of interest and recovered using personal data of the customer illegally and threatening and abusing them through call centers”.

    The alleged illegalities of these apps were reported from a number of states last year, especially following the COVID-19 lockdown economic stress, and a number of people were reported to have been driven to end their lives due to the extortion and bullying of these “dubious” companies.

    “PCFS is a wholly owned subsidiary (WOS) of Oplay Digital Services, SA de CV, Mexico, which is in turn a WOS of Tenspot Pesa Limited, Hong Kong which is owned by Cayman Islands based Opera Limited and Wisdom Connection I Holding Inc which are ultimately beneficially owned by Chinese National Zhou Yahui,” the ED said in a statement.

    The original Indian company PCFS was incorporated in 1995 by Indian nationals and it got NBFC license in 2002 and after an RBI approval in 2018, the ownership moved to the Chinese controlled company.

    PCFS, the ED alleged, “illegally” remitted huge funds outside India in the guise of imports of non-existent software and marketing services to park the funds abroad and hold them in the accounts of related foreign companies.

    “Thus, PCFS has contravened provisions of the Foreign Exchange Management Act (FEMS). RBI has been informed about the above contraventions,” it said.

    The ED has seized a total of Rs 131.11 crore worth funds kept in various bank and payment gateway accounts, under the provisions of the FEMA.

    It has similarly seized Rs 106.93 crore worth funds of the same NBFC in August.

    Probe found that the foreign parent companies of PCFS brought FDI (foreign direct investment) of Rs 173 crore for lending business and within a short span of time, made foreign outward remittances of Rs 429.29 crore in the name of payments for software services received from related foreign companies, it said.

    “PCFS also showed high domestic expenditure of Rs 941 crore. Detailed investigation into the foreign expenses paid by the NBFC revealed that most of the payments were made to foreign companies, which are related and owned by the same Chinese nationals, who own the Opera Group.”

    “All foreign service providers were chosen by the Chinese owners and the price of the services was also fixed by them,” it said.

    Exorbitant payments were blindly allowed by the “dummy” Indian directors of PCFS without any due diligence and on the instructions of the country head Zhang Hong, who directly reported to Zhou Yahui, a resident of China, it said.

    PCFS, it said, remitted forex of Rs 429 crore to 13 companies located in Hong Kong, China, Taiwan, USA and Singapore in the guise of payments for license fee for Cashbean mobile app (Rs 245 crore per annum), software technical fee (of around Rs 110 crore) and online marketing and advertisement fee (about Rs 66 crore).

    “All these services and applications are available in India at a fraction of the cost incurred by PCFS,” the ED claimed.

    Moreover, all the clients of the NBFC was in India, despite that huge payments were made abroad and no proof of receipt of service is there, it said.

    During the same period of time, the ED said, PCFS also booked domestic expenditure of similar amount under the same heads of expenditure.

    “PCFS management failed to give any justification for these expenses and admitted that all remittances were done to move money out of India and to park it abroad in the accounts of group companies controlled by the Chinese promoter,” it said.