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Monday, 29 June 2020

FRA tightens prudential regulations on consumer finance companies

REGULATION WATCH- The FRA has set new solvency standards for consumer finance companies in a bit to curb concentration risk and strengthen financial stability, according to a statement (pdf). Under the new rules companies will only be allowed to lend up to 10% of their capital base to a single borrower to prevent them from becoming overexposed to a small number of clients. Companies will also be allowed to take loans worth up to 9x their equity value to support their activities.

The statement also notes that stricter capital requirements will be introduced to shore up balance sheets but didn’t disclose the specifics. We were unable to reach the FRA for comment yesterday.

Companies will have to comply with the new rules by the end of FY2020-2021 and submit quarterly compliance reports to the FRA.

NBFS players may, in the future, be able to raise funds from both retail and institutional investors through a new type of fund. That’s the primary takeaway from a decision by the FRA last week that will allow the creation of funds dedicated to providing liquidity to leasing, mortgage and consumer finance, factoring, and microfinance companies. These NBFS players will be able to transfer their receivables to those funds, which the authority labels as “specialized in transferable value.” The funds will in exchange pay the companies the present value of their portfolio. This will help NBFS firms to comply with the increased capital requirements as both retail and institutional investors will be able to invest in the securitized debt of the companies by buying into the dedicated funds.

Think of it like securitization, with a twist: Companies with substantial unrealized revenues — such as NBFS and real estate firms — often pool their receivables into special purpose vehicles and sell them to institutional investors. Those institutional investors provide immediate liquidity for the issuers to finance working capital. This dedicated type of fund will function in a similar way, except it will be open to both institutional and retail investors, introducing a whole new layer of funding. The FRA hopes this will increase capital inflows and make it easier for NBFS firms to access liquidity.

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