Highlights of RBI Annual Report 2022-23– Chapter 6 (Part I)

Reserve Bank of India (RBI) had released its annual report for the financial year 2022-23. In a series of articles, we will go through the highlights of the report. This is the third article in the series. 

Chapter 6 – Regulation, Supervision and Financial Stability (Part I)

• Stressed assets are exposures classified as non-performing assets (NPA) or as special mention accounts (SMA). Task Force on Development of Secondary Market for Corporate Loans (Chair: Shri T. N. Manoharan) constituted by RBI, had specifically recommended that securitisation of NPAs may be considered as an alternative investment route in stressed assets. Accordingly, it was decided to enable securitisation of NPAs on the lines of securitisation of standard assets.
• Senior tranche means a tranche which is effectively backed or secured by a first claim on the entire amount of the assets in the underlying securitised pool; mezzanine tranche is sub-ordinated to the senior tranche; and junior tranche (equity tranche) has the last claim on the underlying assets (bearing the maximum risk).
• The eligibility criteria for offering internet banking facility by Regional Rural Banks (RRBs) relaxed.
• In October 2020, risk weights for individual housing loans were linked only to loan to value (LTV) ratios, irrespective of the amount, for all new housing loans sanctioned up to March 31, 2022. The above dispensation was extended to cover all new individual housing loans sanctioned up to March 31, 2023.
• In 2018, the amended Section 17 of RBI Act, 1934 empowered RBI to introduce the Standing Deposit Facility (SDF) – an additional tool for absorbing liquidity without any collateral. The SDF replaced the fixed rate reverse repo (FRRR) as the floor of the Liquidity Adjustment Facility (LAF) corridor. The balances held by banks with RBI under the SDF shall be an eligible Statutory Liquidity Ratio (SLR) asset, however, not be eligible for cash reserve ratio (CRR) maintenance.
• The overnight balances held by banks with RBI under SDF shall be eligible as ‘Level 1 high quality liquid assets (HQLA)’ for computation of Liquidity Coverage Ratio (LCR).
• Due to the reduction in permissible drawdown under the marginal standing facility (MSF) from 3% to 2% of net demand and time liabilities (NDTL), banks were permitted to reckon government securities as level-1 HQLA under Facility to Avail Liquidity for Liquidity Coverage Ratio (FALLCR) within the mandatory SLR requirement up to 16% of their NDTL from existing limit of 15% so as to maintain the total HQLA carve out from the mandatory SLR for meeting LCR requirement at 18% of NDTL (2% MSF and 16% FALLCR).
• Rural co-operative banks (RCBs) permitted to raise capital by issuance of preference shares.
• A scale based regulatory framework was implemented for Non-Banking Financial Companies (NBFCs) during 2022-23.
• Disclosure requirements applicable to lower layers of NBFCs will be applicable to NBFCs in higher layers.
• Urban Co-operative Banks (UCBs) were directed not to create any honorary positions / titles or confer any such titles, such as chairman emeritus, group chairman, etc., that are non-statutory in nature. UCBs have been provided time of 1 year to comply with the instructions.
• Legal entity identifier (LEI) was mandated for all entities having total exposure of ₹50 crore and above. On a review, LEI requirement was extended to all non-individual borrowers of scheduled commercial banks (SCBs), All India Financial Institutions (AIFIs), local area banks (LABs), small finance banks (SFBs), UCBs and NBFCs (including housing finance companies (HFCs)) with a total fund and non-fund based exposure of ₹5 crore and above, to be obtained in a phased manner.
• Deposit taking NBFCs / HFCs are not permitted to accept public deposit unless they have obtained minimum investment grade credit rating (MIGR) for fixed deposits from any one of the approved credit rating agencies (CRAs). The MIGR for deposits of NBFCs / HFCs shall not be below ‘BBB–’ from any of the Securities and Exchange Board of India (SEBI) registered Credit Rating Agencies (CRAs).
• The validity of interest equalisation scheme (IES) for pre and post shipment rupee export credit was extended up to March 31, 2024. The extended scheme would also be available to such beneficiaries for segments other than for which they have availed of production-linked incentive (PLI) benefits, subject to submission of a self-declaration by the exporters.
• RBI laid down regulatory framework for participation of Indian banks’ branches in Gujarat International Finance Tech-city (GIFT) - International Financial Services Centre (IFSC) to provide clearing and settlement services on India International Bullion Exchange IFSC Limited (IIBX).
• The limits on the amount of housing loans that can be sanctioned by rural co-operative banks (RCBs), i.e., state co-operative banks (StCBs) and central co-operative banks (CCBs), were increased from ₹20 lakh and ₹30 lakh to ₹50 lakh and ₹75 lakh for RCBs having asset net worth less than ₹100 crore and those having net worth of ₹100 crore and more, respectively. The limit of ₹60 lakh and ₹140 lakh was made applicable to UCBs in tier-1 and tier-2 to 4, respectively. 
• RCBs permitted to extend finance to commercial real estate – residential housing (CRE-RH) within the aggregate limit of 5% of total assets for housing sector. 
• The ceiling on loans extended by UCBs to individuals for carrying out repairs / additions / alterations to their dwelling units was revised upwards to ₹10 lakh in metropolitan centres (those centres with population of ₹10 lakh and above) and ₹6 lakh in other centres, in alignment with the limits prescribed under the priority sector guidelines.
• UCBs classified as financially sound and well managed (FSWM) can offer doorstep banking services to the customers without prior approval of RBI. 
• UCBs permitted to include revaluation reserves in tier-I capital.
• Based on the recommendations of Expert Committee on UCBs (Chairman: Shri N. S. Vishwanathan, Former Deputy Governor, RBI), revised regulatory framework was issued for UCBs.
• As per the Punjab and Maharashtra Co-operative Bank Limited (Amalgamation with Unity Small Finance Bank Limited) Scheme, 2022, 80% of uninsured deposits of institutional depositors with erstwhile PMC bank will be converted into perpetual non-cumulative preference shares (PNCPS) and remaining 20% will be converted into equity warrants. UCBs shall make full provisions for their investment in PNCPS, and no provisions are required for investment in equity warrants. The resulting provisions may be spread equally over 2 financial years such that the entire loss is fully provided for by March 31, 2024. Further, investment in PNCPS and equity warrants shall be classified as non-SLR investments and shall be exempt from the prudential limits applicable on investment in non-SLR securities.
• When investment by Scheduled Commercial Bank (SCB) in security receipts (SRs) backed by stressed loans transferred by it is more than 10% of all SRs linked to the transferred loans, the valuation of the SRs on the books of the transferor shall be the lower of: (a) the redemption value of SRs based on the Net Asset Value (NAV) declared by the asset reconstruction company (ARC); (b) Net Book Value (NBV) of the transferred stressed loan at the time of transfer; and (c) face value of the SRs reduced by the notional provisioning rate applicable if the loans had continued on the books of the transferor. These instructions were made applicable to lenders other than SCBs, which led to large provisioning requirement for some of the lenders on outstanding SRs held by them. To ensure smooth implementation, regulated entities (REs) other than SCBs were advised that the additional provisions as above, required to be held towards valuation of outstanding SRs, can be spread over a 5-year period starting with the financial year ending March 31, 2022, i.e., from 2021-22 till 2025-26. It has also been advised that provisions created every financial year as above shall not be less than 1/5th of the required provisioning on this count.
• Incremental foreign currency non-resident (Bank) [FCNR (B)] deposits and non-resident external (NRE) term deposits with reference to base date of July 1, 2022, mobilised by banks till November 4, 2022, were exempted from maintenance of CRR and SLR. 
• The interest rate ceiling was temporarily withdrawn for incremental FCNR (B) deposits and incremental NRE deposits mobilised by banks until October 31, 2022.
• Unity Small Finance Bank Limited included in the second schedule to RBI Act, 1934.
• A survey undertaken in January 2022 on climate risk and sustainable finance covered 12 public sector banks, 16 private sector banks and 6 foreign banks in India. The objective of the survey was to assess the approach, level of preparedness and progress made by leading SCBs in managing climate-related financial risks.
• All scheduled SFBs, after completion of at least 2 years of operations as authorised dealer (AD) category-II, will be eligible for AD category-I license.
• Regulated entities (REs) have been allowed to compute their counterparty credit risk on net basis under the bilateral netting framework for qualified financial contracts [over the counter (OTC) derivatives and repo contracts]. Consequently, based on references received, (a) the exemption for foreign exchange (except gold) contracts which have an original maturity of 14 calendar days or less shall henceforth be applicable only to RRBs, LABs and co-operative banks, where the bank has not adopted the bilateral netting framework; (b) sold options can be exempted provided they are outside the netting set; and (c) the exposure of a credit default swap (CDS) seller to its buyer may be capped at the amount of premium unpaid provided the CDS are outside the legal netting set.
• ‘Factoring transactions’ excluded from Unhedged Foreign Currency Exposure (UFCE) for certain entities; and threshold for smaller entities based on total exposure from banking system raised to ₹50 crore (from ₹25 crore). 
• 16 NBFCs were identified in the Upper Layer as per the methodology specified under scale-based regulation for NBFCs.
• Amounts received by a bank from National Credit Guarantee Trustee Company Ltd. (NCGTC) towards claims in respect of guarantees invoked and held by them pending adjustment of the same towards the relative advances need not be treated as outside liabilities for the purpose of computation of NDTL for CRR and SLR.
• With a view to facilitating cash flow-based lending to Micro Small and Medium Enterprises (MSMEs), goods and service tax network (GSTN) was included as a financial information provider under the account aggregator framework. Department of Revenue, GoI, shall be the regulator of GSTN for this specific purpose and two GST Returns, viz., Form GSTR-1 and Form GSTR-3B, have been included as financial information.
• The cases admitted with National Company Law Tribunal (NCLT) / National Company Law Appellate Tribunal (NCLAT) under the Insolvency and Bankruptcy Code (IBC), 2016 are required to be reported by credit institutions (CIs) to credit information companies (CICs) under suit-filed cases.
• State Bank of India, ICICI Bank, and HDFC Bank continue to be identified as domestic systemically important banks (D-SIBs) under the same bucketing structure.
• Reserve Bank of India (Financial Statements - Presentation and Disclosures) Directions, 2021, which was initially applied to all commercial banks and UCBs, was made applicable to State Cooperative Banks and Central Cooperative Banks.
• To address the prudential concerns related to recognition of unrealised management fees even though the said fee had not been realised for more than 180 days, ARCs preparing their financial statements as per Ind AS, shall reduce stipulated amounts from the net owned funds for calculation of capital adequacy ratio and amount available for payment of dividend.
• All type of reverse repos with RBI, including those under the LAF shall be presented under sub-item (ii) ‘In Other Accounts’ of item (II) ‘Balances with RBI’ under Schedule 6 ‘Cash and Balances with RBI’.
• Thresholds for disclosing details of divergence in asset classification and provisioning have been revised for all commercial banks as under: (a) for additional gross NPAs, if it exceeds 5% of the reported incremental NPAs for the reference period; and (b) for additional provisioning for NPAs, if it is 5% of the reported profit before provisions and contingencies for the reference period. Disclosure requirements for UCBs for the divergence have also been made applicable for the annual financial statements for the year ending March 31, 2024 and onwards.
• Banks shall disclose the particulars of all such items in the notes to accounts wherever any item under the Schedule 5(IV) - Other Liabilities and Provisions – ‘Others (including provisions)’ or Schedule 11(VI)- Other Assets – ‘Others’ exceeds 1% of the total assets. 
• Payments banks shall disclose particulars of all such items in the notes to accounts, wherever any item under the Schedule 14(I) - Other Income – ‘Commission, Exchange and Brokerage’ exceeds 1% of the total income.
• A discussion paper on Introduction of Expected Credit Loss Framework for Provisioning by banks was released. The key requirement under the proposed framework shall be for the banks to classify financial assets into one of the 3 categories - stage 1, stage 2, and stage 3, depending upon the assessed credit losses on them, at the time of initial recognition as well as on each subsequent reporting date and to make necessary provisions.
• Standalone Primary Dealers (SPDs) permitted to offer all foreign exchange market making facilities as currently permitted to category-I authorised dealers.

References

Reserve Bank of India. (2023, May 30). 'RBI Annual Report 2022-23'. Retrieved from https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2023

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