Reserve Bank of India (RBI) has published its annual report for the financial year 2023-24. 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)
- A framework for acceptance of green deposits was issued to encourage Regulated Entities (REs) to offer green deposits to customers, protect depositors' interest, address greenwashing risks and help augment the flow of credit to green activities / projects. Green deposits are issued as cumulative / non-cumulative deposits and in Indian Rupees only.
- A draft disclosure framework on climate-related financial risks, 2024 includes guidelines to the REs for climate-related financial disclosures under 4 thematic pillars – governance, strategy, risk management, and metrics and targets.
- A dedicated section was created on RBI's website, containing RBI's communication on climate risk and sustainable finance.
- The provisioning norms for standard assets applicable to Urban Co-Operative Banks (UCBs) across all tiers were harmonised. Tier I UCBs, were permitted to achieve the revised requirement of 0.40% as standard asset provisioning vis-à-vis the earlier requirement of 0.25% in a staggered manner by March 31, 2025. The revised standard asset provisioning norms shall be as under –
- Direct advances to agriculture and small and medium enterprise (SME) sectors – 0.25%
- Advances to Commercial Real Estate (CRE) sector – 1%
- Advances to CRE-Residential Housing (CRE-RH) sector – 0.75%
- For all other advances – uniform general standard asset provision of a minimum of 0.40% of the funded outstanding on a portfolio basis.
- The timeline for achieving overall Priority Sector Lending (PSL) target and sub-target for advances to weaker sections by UCBs was extended by additional 2 years, i.e., up to March 2026 with milestones recalibrated for each year. UCBs shall contribute to Rural Infrastructure Development Fund (RIDF) and other eligible funds against their shortfall in PSL target / sub-targets vis-à-vis the prescribed targets with effect from March 31, 2023 (instead of March 31, 2021).
- An automatic route was introduced for branch expansion in the approved area of operation for Financially Sound and Well Managed (FSWM) UCBs in all tiers (except salary earners' banks).
- RBI increased the monetary ceiling of gold loans that can be granted under the bullet repayment scheme from ₹2 lakh to ₹4 lakh for the UCBs who met the overall priority sector lending targets and sub-targets as on March 31, 2023 and continue to meet the prescribed targets and sub-targets.
- RBI revised the eligibility norms for inclusion of UCBs in the Second Schedule to RBI Act, 1934. The licensed Tier 3 and Tier 4 UCBs satisfying the following criteria will be considered eligible for inclusion –
- Maintenance of minimum deposits required for categorisation as a Tier 3 UCB for 2 consecutive years.
- Fulfilling the criteria stipulated by RBI for FSWM UCBs.
- Capital to Risk (Weighted) Asset Ratio (CRAR) of at least 3% more than the minimum CRAR requirement applicable to the UCB.
- Having no major regulatory and supervisory concerns.
- A co-operative bank desirous of change in its name shall approach RBI for grant of no-objection certificate (NOC) under Section 49B and 49C of the Banking Regulation Act, 1949.
- RBI enhanced the bulk deposit limit. Accordingly, ‘Bulk Deposit’ would mean –
- Single Rupee term deposits of ₹1 crore (earlier ₹15 lakh) and above for Regional Rural Banks (RRBs).
- Single Rupee term deposits of ₹1 crore (earlier ₹15 lakh) and above for scheduled UCBs categorised as Tier 3 and 4 UCBs.
- Single Rupee term deposits of ₹15 lakh and above for all other UCBs, i.e., other than scheduled UCBs in Tier 3 and 4.
- The following limits of bulk deposit were enhanced in June 2024 –
- Single Rupee term deposits of ₹3 crore (earlier ₹2 crore) and above for Scheduled Commercial Banks (excluding RRBs) and Small Finance Banks.
- Single Rupee term deposits of ₹1 crore and above for Local Area Banks as applicable in case of RRBs.
- A comprehensive regulatory framework governing compromise settlements and technical write-offs covering all REs was issued.
- Arrangements between REs and lending service providers (LSPs) or between two REs involving default loss guarantee (DLG) in digital lending, commonly known as first loss default guarantee (FLDG) was permitted up to 5% of the outstanding loan portfolio. DLG shall be offered only against cash, fixed deposit or bank guarantee. DLG arrangements conforming to the guidelines shall not be treated as ‘synthetic securitisation’ and / or shall also not attract the provisions of ‘loan participation’.
- A new standardised approach (Basel III standardised approach) was prescribed for operational risk capital calculation, replacing the existing basic indicator approach (BIA) and requiring banks to consider the following in their operational risk regulatory capital calculation methodology –
- A financial statement-based business indicator component (BIC).
- Loss data-based internal loss multiplier (ILM) (for larger banks).
- Banks and other lending institutions were advised that penalty, if charged, for non-compliance with terms and conditions of a loan contract by the borrower, shall be treated as ‘penal charges’ and shall not be levied in the form of ‘penal interest’ that is added to the rate of interest charged on the advances. Further, there shall be no capitalisation of penal charges i.e., no further interest shall be computed on such charges. REs shall implement the instructions in respect of all fresh loans availed from April 01, 2024 onwards. In the case of existing loans, the switchover to new penal charges regime shall be ensured on the next review / renewal date falling on or after April 01, 2024, but not later than June 30, 2024.
- RBI revised the guidelines for Infrastructure Debt Fund - Non-Banking Financial Companies (IDF-NBFCs), which, inter alia –
- Withdraws the requirement of a sponsor for an IDF-NBFC.
- Allows IDF-NBFCs to finance toll operate transfer (TOT) projects as direct lenders.
- Makes tri-partite agreement optional for public private partnership (PPP) projects.
- Permits IDF-NBFCs to raise funds through loan route under external commercial borrowings (ECBs).
- RBI issued guidelines to reset equated monthly instalments (EMIs) based on floating rate personal loans, including allowing borrowers to switch over to a fixed rate. RBI directed REs to clearly communicate at the time of sanction to the borrowers about the possible impact of a change in the benchmark interest rate on the loan leading to changes in EMI, tenor or both.
- A revised regulatory framework put in place by RBI for the investment portfolio included –
- Principle-based classification of investment portfolio into 3 categories, viz., Held to Maturity (HTM), Available for Sale (AFS), and Fair Value through Profit and Loss Account (FVTPL).
- Clearly identifiable trading book under Held for Trading (HFT), a sub-category within FVTPL.
- Removal of 90-day ceiling on holding period under HFT category.
- Removal of ceiling on investments in HTM category.
- Tightening of regulation around transfer to / from HTM category and sales out of HTM.
- Inclusion of non-statutory liquidity ratio (SLR) securities in HTM category, subject to fulfilling certain conditions.
- Symmetric recognition of gains / losses for investments under AFS and FVTPL categories.
- Granular disclosure on investment portfolio.
- Directions were issued to banks and other lenders, including NBFCs, housing finance companies and cooperative banks –
- To release all original movable or immovable property documents including removal of charges registered with any registry within 30 days of full repayment or settlement of personal loans by borrowers.
- In case of delay, the lenders will have to compensate the borrowers by paying ₹5,000 for each day of delay.
- The Directions will be applicable to all cases where release of original property documents is due on or after December 01, 2023.
- In the event of loss of or damage to original property documents, either in part or in full, the lender will have to assist the borrower in obtaining duplicate or certified copies of the documents and will have to bear the associated costs. This cost will be in addition to the daily compensation of ₹5,000 for each day of delay. However, in such cases, an additional time of 30 days will be available to the lender to complete this procedure, and the penalty for delay will be calculated thereafter, that is, after a total period of 60 days.
- 15 companies were identified for classification in NBFC-upper layer.
- Credit information is reported by Credit Institutions (CIs) to Credit Information Companies (CICs) under 3 reporting segments, i.e., consumer, commercial and microfinance. Earlier, Data Quality Index (DQI) was being provided by CICs for the data submitted under the consumer segment only. DQI has now been introduced for the commercial and microfinance segments also.
- RBI directed CIs and CICs to compensate customers at the rate of ₹100 per calendar day in case their complaint is not resolved within 30 calendar days from the date of the initial filing of the complaint by the complainant with a CI / CIC.
- CICs have been advised to notify customers via SMS / e-mail regarding access to their credit information report. CIs have been advised to notify their borrowers via SMS / e-mail while submitting information to CICs regarding default or days past due in the existing credit facilities.
- CICs have been advised to ingest the credit information data into their database within 7 days of receipt from CIs.
- The Basel III capital regulations, currently applicable to banks, were extended to All India Financial Institutions (AIFIs), replacing the currently applicable Basel I capital regulations.
- RBI directed REs, which are secured creditors as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to display information in respect of the borrowers whose secured assets have been taken into possession by the REs under the Act, on their website.
- RBI advised the banks to ensure the presence of at least 2 Whole Time Directors (WTDs), including the Managing Director and Chief Executive Officer (CEO), on their Boards. The banks that currently do not meet the requirement are advised to submit their proposals for the appointment of WTDs under Section 35B(1)(b) of the Banking Regulation Act, 1949.
- RBI increased the minimum amount for offering non-callable term deposits (TDs) from ₹15 lakh to ₹1 crore. This shall also be applicable for Non-Resident (External) Rupee (NRE) Deposit / Non-Resident Ordinary (NRO) Deposits.
- ‘Pension Fund’ was replaced with ‘Central Recordkeeping Agency’ as the Financial Information Provider (FIP) in the Account Aggregator (AA) ecosystem.
- REs joining the AA ecosystem as Financial Information User (FIU) shall necessarily join as FIP also, if they hold the specified financial information and fall under the definition of FIP.
References
Reserve Bank of India. (2024, June 07). 'Amendment to Master Direction - Reserve Bank of India (Interest Rate on Deposits) Directions, 2016'. Retrieved from https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12690&Mode=0
Reserve Bank of India. (2024, May 30). 'RBI Annual Report 2023-24'. Retrieved from https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2024
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