Inquisitive Mind

Reserve Bank of India (RBI) has revised norms of provisioning for standard assets by Primary (Urban) Co-operative Banks (UCBs). What is standard asset? Standard asset is one which does not disclose any problems and which does not carry more than normal risk attached to the business.  What was the earlier categorization of UCBs? Earlier, the UCBs were categorised as – Tier I UCBs – Banks having deposits below ₹100 crore operating in a single district. Banks with deposits below ₹100 crore operating in more than one district, provided the branches are in contiguous districts and deposits and advances of branches in one district separately constitute at least 95% of the total deposits and advances respectively of the bank. Banks with deposits below ₹100 crore, whose branches were originally in a single district but subsequently, became multi-district due to reorganisation of the district. Tier II UCBs – All other banks. What is the basis of revised regulatory framework for UCBs? Reserv...

Reserve Bank of India (RBI) has issued draft directions on lending of Government securities. Which transactions will be covered under the directions? The directions will be applicable to all Government securities lending transactions, undertaken in Over-the-Counter (OTC) markets. What is Government Securities Lending (GSL) transaction? “Government Securities Lending (GSL) transaction” refers to dealing in government securities involving lending of eligible Government securities for a GSL fee by the owner of those securities (the lender) to a borrower, on the collateral of other Government securities, for a specified period of time, with an agreement that the borrower shall return the security borrowed to the lender and the latter shall return back the security received as collateral to the former at the end of the agreed period. “GSL Fee” means the fee paid by the borrower to the lender of the Government security for lending the security as mutually agreed between them for undertaking ...

Reserve Bank of India (RBI) has issued draft circular on penal charges in loan accounts to ensure fair lending practice by the regulated entities. Why are penal interest / charges levied? The intent of levying penal interest / charges is essentially to inculcate a sense of credit discipline among borrowers through negative incentives and to ensure fair compensation to the lender.  Penal interest / charges are not meant to be used as a revenue enhancement tool over and above the contracted rate of interest.  What is rationale behind the draft circular? Under the extant guidelines, lending institutions have the operational autonomy with regard to levy of penal rates of interest.  During supervisory reviews of regulated entities (REs) it was observed that – Many REs use penal rates of interest, over and above the applicable interest rates, in case of defaults / non-compliance by the borrower with the terms on which credit facilities were sanctioned. Divergent practices among...

Reserve Bank of India (RBI) had issued guidelines on governance, measurement and management of Interest Rate Risk in Banking Book. What is Interest Rate Risk in Banking Book (IRRBB)?  Interest Rate Risk in Banking Book (IRRBB) refers to the current or prospective risk to banks’ capital and earnings arising from adverse movements in interest rates that affect its banking book positions.  How does the change in interest rates affect banks? When interest rates change, the present value and timing of future cash flows change. These changes in turn affect the underlying value of banks’ rate sensitive assets, liabilities, and off-balance sheet items and, hence, their economic value (EV).  Changes in interest rates also affect banks’ earnings by altering interest rate-sensitive income and expenses, affecting their net interest income (NII).  What is the impact of excessive IRRBB? Excessive IRRBB can pose a significant risk to banks’ current capital base and / or future earn...

Reserve Bank of India (RBI) has issued a framework for acceptance of Green Deposits by the regulated entities, to foster and develop green finance ecosystem in the country. What is Green Deposit and Green Finance? “Green deposit” means an interest-bearing deposit, received by the regulated entities (REs) for a fixed period and the proceeds of which are earmarked for being allocated towards green finance. “Green finance” means lending to and / or investing in the activities / projects that contributes to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives - including biodiversity management and nature-based solutions. What is the purpose of framework for acceptance of green deposits? To encourage REs to offer green deposits to customers. To protect interest of the depositors and aid customers to achieve their sustainability agenda. To address greenwashing concerns and help augment the flow of credit to green activities / proj...

The bi-monthly monetary policy of Reserve Bank of India (RBI) was announced on April 06, 2023. Here are some of the highlights of the monetary policy announcement. Rates and reserves   Change Revised rate Policy repo rate Unchanged 6.50% Standing deposit facility (SDF) rate 6.25% Marginal standing facility (MSF) rate 6.75% Bank rate 6.75% Monetary policy stance Withdrawal of accommodation to ensure that inflation progressively aligns with the target, while supporting growth. Economy    GDP growth projection CPI inflation projection FY 2023-24 6.5% 5.2% Q1 of FY 2023-24 7.8% 5.1% Q2 of FY 2023-24 6.2% 5.4% Q3 of FY 2023-24 6.1% 5.4% Q4 of FY 2023-24 5.9% 5.2% The banking and non-banking financial service sectors in India remain healthy and financial markets have evolved in an orderly manner.  Economic activity remains resilient and real GDP growth is expected to have been 7% in 2022-23.  Consumer price inflation, however, has increased since December 2022, driven...