INDIA Law and Practice Contributed by: Shilpa Mankar Ahluwalia, Purva Anand and Ansh Jain, Shardul Amarchand Mangaldas & Co
and anti-money laundering checks on prospective borrowers at the time of onboarding. 4.3 Sources of Funds for Fiat Currency Loans Different lender categories in India rely on varied sources of capital for lending. Traditional lenders primarily rely on deposits for providing loans to bor - rowers and are governed by capital requirements and prudential norms prescribed by the RBI. Further, the RBI restricts banks from sanctioning loans for certain specified end uses, such as the following: • banks are prohibited from sanctioning loans against the security of their own shares; • banks are prohibited from sanctioning such loans that are to be used for buy-back of securities; and • banks are restricted from granting loans to their directors or their relatives, except where approved by the bank’s board of directors and subject to compliance with other specified restrictions. NBFCs NBFCs primarily rely on borrowed funds (either from domestic banks or external commercial borrowings – ie, borrowings taken from eligible overseas lend - ers) and equity funds, to provide loans to customers. NBFCs are also regulated by prudential regulations prescribed by the RBI, which include maintenance of leverage ratio and capital adequacy norms. The Bond Market The bond market in India is growing and investors in corporate debt securities primarily include banks, mutual funds and wealth management funds. The investor entities in debt securities may either be domestic or foreign portfolio investors registered with SEBI. In the case of foreign portfolio investors, there are restrictions on end uses – in other words, funds raised from such foreign portfolio investors can - not be used for investments in real estate business, capital markets and purchase of land. Given the rating requirements linked to the issuing of debt securities, access to debt capital markets tends to be restricted to larger corporates and has not been fully tapped into by the newer fintech platforms. Eligible entities are permitted to borrow funds as external commercial borrowings from eligible over -
seas lenders, subject to compliance with require - ments such as all-in cost ceilings, minimum average maturity periods and end use restrictions. P2P Lending The RBI also permits P2P lending via REs which act as facilitation platforms for lenders to identify prospective borrowers through a digital platform. Under such P2P lending arrangements, only unsecured plain vanilla loans are permitted. Such loans are also subject to maximum exposure limits on lenders sanctioning loans to borrowers through such platforms. The P2P lending platform itself is restricted from providing any loans or granting credit support to loans disbursed on its platform. 4.4 Syndication of Fiat Currency Loans Syndication of loans is a common practice in India for funding large borrowing requirements, primarily by corporates. Syndication primarily involves dis - tribution of credit exposure among a consortium of lending banks with a common security agent/trustee appointed to hold security for the benefit of the lend - ing banks. The arrangement typically also involves the appointment of a “lead bank” for administrative and decision-making purposes. The lending banks typically also enter into a securi - ty-sharing or inter-creditor arrangement, which sets out their respective rights and obligations and the approach to be followed in the case of a default by the borrower and enforcement of security. The RBI has mandated information-sharing measures to be followed by banks while granting loans under multiple banking/consortium arrangements. The key measures mandated by the RBI include obtaining declarations from the borrower of the credit facilities availed by them from other banks, and establishing a system of exchange of information with respect to the borrower’s credit facilities between banks (upon obtaining appropriate consent from the borrower).
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