Highlights of RBI Annual Report 2023-24 – Chapter 6 (Part II)

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 fourth article in the series. 

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

• District Central Co-Operative Banks (DCCBs) may shift their branches / offices / extension counters located in the rural or semi-urban or urban / metropolitan areas, within the same village or town or locality / municipal ward, respectively, without prior permission of RBI. 
• DCCBs are allowed to close their un-remunerative branches without prior permission of RBI, subject to fulfilment of certain conditions.
• Higher risk weights were prescribed for ‘consumer credit’ and ‘bank credit to Non-Banking Financial Companies (NBFCs)’. 
• Certain instances of regulatory arbitrage through investments in Alternate Investment Funds (AIFs) by the Regulated Entities (REs) were observed. To address these concerns, following directions were issued –
• REs shall not invest in any of the AIF schemes which has downstream investment, excluding the equity investments (but including other investments), in any of the debtor companies of the concerned RE. 
• REs shall liquidate their existing investments in AIFs within 30-days if AIF scheme had invested or subsequently invests in RE’s debtor company, failing which REs shall proportionately (to extent of RE’s investment in AIF) make provisions for their investments in AIFs.
• REs have also been mandated that any investment in junior tranche, irrespective of the motive of such investment, will be deducted in full, from its regulatory capital fund. 
• Proposed deductions from capital affect both Tier-1 and Tier-2 capital, encompassing all forms of subordinated exposures including sponsor units.
• Investments in AIFs through intermediaries such as fund of funds or mutual funds are beyond the scope of the circular.
• In order to develop secondary market operations of receivables acquired as part of ‘factoring business’, RBI decided that transfer of such receivables by eligible transferors will be exempted from minimum holding period (MHP) requirement, provided the residual maturity of such receivables, at the time of transfer, is not more than 90 days.
• Framework for Dealing with Domestic Systemically Important Banks (D-SIBs) was revised.
• RBI included Export-Import (EXIM) Bank and National Bank for Financing Infrastructure and Development (NaBFID) as National Development Banks (NDBs) for net stable funding ratio (NSFR) computation, besides National Bank for Agriculture and Rural Development (NABARD), National Housing Bank (NHB) and Small Industries Development Bank of India (SIDBI).
• RBI issued comprehensive guidelines on inoperative accounts which have come into effect from April 01, 2024.
• NBFC-Middle Layer (NBFC-ML) and NBFC-Base Layer (NBFC-BL) permitted to offset exposures to the original counterparty using eligible credit risk transfer instruments. To be eligible as credit risk transfer instruments, guarantees from central / state government shall be direct, explicit, irrevocable and unconditional. Further, direct exposures to central / state government as well as exposures fully guaranteed by the central government have been exempted from concentration limits. 
• While no concentration limit is prescribed for NBFC-BL, they are advised to put in place an internal Board approved policy for concentration limits.
• RBI revised the remuneration of Non-Executive Directors (NEDs) from the ceiling of ₹20 lakh per annum to ₹30 lakh per annum for all private sector banks including small finance banks and payment banks as well as the wholly owned subsidiaries of foreign banks.
• RBI had laid down the framework for the participation of Indian banks’ branches in GIFT International Financial Services Centre (GIFT-IFSC) as professional clearing member (PCM) of India International Bullion Exchange (IIBX). On a review, it was decided to additionally allow –
• Participation of Indian banks (through branch / subsidiary / joint venture) as trading member (TM) / trading and clearing member (TCM) of IIBX.
• Banks authorised by RBI to import gold / silver as special category client (SCC) of IIBX.
• Government of India has allowed extension of the interest equalisation scheme (IES) on pre and post shipment Rupee export credit to eligible exporters up to June 30, 2024. Further, Directorate General of Foreign Trade (DGFT) which administers the scheme has made amendments to the scheme in respect of average interest rate (Repo Rate + 4%) and cap on subvention amount (₹10 crore per annum per Importer-Exporter Code (IEC)). 
• Asset reconstruction companies (ARCs) were advised to submit applications to RBI, with respect to appointment or re-appointment of Director, Managing Director or Chief Executive Officer (CEO), at least 90 days before the vacancy arises / the proposed date of appointment or re-appointment.
• Amendments to Master Direction - Credit Card and Debit Card - Issuance and Conduct Directions, 2022 included –
• General permission to all banks and NBFCs registered with RBI to become co-branding partners of card issuers.
• Permission to issue credit card in other form factors (wearables, keychain, etc.).
• Monitoring end-use of funds for business credit cards.
• Restrictions on sharing card data, including transaction data, with outsourcing partners.
• An omnibus framework for recognising self-regulatory organisations (SROs) for the REs was issued.
• Draft framework for recognising Self-Regulatory Organisations (SROs) for FinTech sector was issued.
• The interoperability between the Unified Payments Interface (UPI) and the Central Bank Digital Currency (CBDC) was introduced to leverage the UPI acceptance infrastructure. The scope of the e₹-W was expanded to include interbank lending and borrowing transactions.
• Public Tech Platform For Frictionless Credit (PTPFC) was conceptualised by RBI and developed by Reserve Bank Innovation Hub (RBIH) (a wholly owned subsidiary of RBI), drawing upon the learnings from the pilot in digital Kisan Credit Card (KCC) and digital dairy projects conducted in 2022. The platform is on an open and shared application programming interface (API) framework and available to the lenders as a plug and play service. It has obviated the need of cumbersome one-to-one integration of lenders with multiple data providers. The lenders in turn need to connect only to the platform to source multiple data / information required for making credit assessment and decision. As on March 31, 2024, the platform has 5 loan journeys, viz., (a) KCC loans up to ₹1.6 lakh; (b) dairy loans; (c) micro, small, and medium enterprise (MSME) loans (unsecured); (d) personal loans; and (e) home loans.
• During 2023-24, the ongoing pilot projects for end-to-end digitalisation of KCC lending have been scaled up further to include 4 more states (Andhra Pradesh, Odisha, and select districts of Uttar Pradesh and Maharashtra, apart from Tamil Nadu, Madhya Pradesh and Karnataka) and 7 banks.
• RBI opened the 5th cohort of Regulatory Sandbox (RS) which was 'Theme Neutral', i.e., innovative products / services / technologies cutting across various functions in RBI's regulatory domain were eligible to apply.
• 'On Tap' application facility under RS is currently open for themes 'Retail Payments', 'Cross-Border Payments' and 'MSME Lending'. (In June 2024, the Cohort on ‘Prevention and Mitigation of Financial Frauds’ opened for ‘On Tap’ application.)
• The timelines of the various stages of the RS process were revised from 7 months to 9 months. The updated framework also requires sandbox entities to ensure compliance with provisions of the Digital Personal Data Protection Act, 2023.
• Prompt Corrective Action (PCA) framework for NBFCs was extended to government NBFCs (except those in base layer) with effect from October 01, 2024, based on the audited financials of the NBFCs as on March 31, 2024, or thereafter. 
• Master Direction on 'Reserve Bank of India (Internal Ombudsman for Regulated Entities), 2023' brought uniformity in various matters in addition to introduction of the post of Deputy Internal Ombudsman.
• A new ‘Office of the Reserve Bank of India Ombudsman (ORBIO)’ was operationalised at Shimla and additional ORBIOs have been operationalised at Chennai and Kolkata. All Ombudsman offices operate under the overarching 'One Nation One Ombudsman' principle.
• The existing standalone contact centre at Chandigarh was upgraded to a state-of-the-art facility, with additional facilities at Bhubaneswar and Kochi, positioned as Disaster Recovery (DR) and Business Continuity Plan (BCP) facilities.
• Committee to review the customer service standards in regulated entities, chaired by Shri B. P. Kanungo, former Deputy Governor, RBI, submitted its report.
• RBI issued certificate of registration (CoR) to National Urban Cooperative Finance and Development Corporation Ltd. (NUCFDC), the proposed Umbrella Organisation (UO) for Urban Cooperative Banks (UCBs), as a non-deposit accepting type-II NBFC.
• RBI conducted the 2nd edition of the global hackathon 'HARBINGER 2023 - Innovation for Transformation' with the theme 'Inclusive Digital Services'. 
• RBI was among 13 international regulators participating in the 1st ever Greenwashing TechSprint of the global financial innovation network (GFIN). One of the applicants mentored by RBI won the 'Fast Solution' award in the TechSprint.
• Under India’s G20 Presidency, RBI and the BIS Innovation Hub (BISIH) of the Bank for International Settlements (BIS) jointly launched the 4th edition of the G20 TechSprint with the theme 'Technology Solutions for Cross-Border Payment Platforms'. 
• An assessment of bank group-wise fraud cases indicates that –
• While private sector banks reported maximum number of frauds, public sector banks continued to contribute maximum to the fraud amount. 
• Frauds have occurred predominantly in the category of digital payments (card / internet), in terms of number. In terms of value, frauds have been reported primarily in the loan portfolio (advances category). 
• While small value card / internet frauds contributed maximum to the number of frauds reported by the private sector banks, the frauds in public sector banks were mainly in loan portfolio.
• A ‘Charter of Customer Rights’ formulated by RBI enunciates the following 5 basic rights of bank customers – (i) fair treatment; (ii) transparency; fair and honest dealing; (iii) suitability; (iv) privacy; and (v) grievance redress and compensation.
• The deposit insurance cover is 2.9 times per capita income in 2023-24. Reserve ratio (Deposit Insurance Fund / Insured Deposits) as on September 30, 2023 stood at 2.02%. The number of protected accounts (281.8 crore) as on September 30, 2023 constituted 97.9% of the total number of accounts (287.9 crore). In terms of amount, the total insured deposits as on September 30, 2023 were 44.2% of assessable deposits. 
• To facilitate the depositors to search the unclaimed deposits across multiple banks at one place, RBI developed a centralised web portal UDGAM (Unclaimed Deposits Gateway to Access information).

References

Reserve Bank of India. (2024, May 30). 'RBI Annual Report 2023-24'. Retrieved from https://www.rbi.org.in/Scripts/AnnualReportPublications.aspx?year=2024

Reserve Bank of India. (2024, June 18). 'Regulatory Sandbox: Fourth Cohort on ‘Prevention and Mitigation of Financial Frauds’ – Exit'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=58117

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