India Regulatory Roundup - April 2024

Limits for investment in debt and sale of Credit Default Swaps by Foreign Portfolio Investors (FPIs)

The RBI has notified investment Limits for the financial year 2024-25 in debt and sale of Credit Default Swaps by FPIs. The limits for FPI investment in government securities, state government securities, and corporate bonds shall remain unchanged at 6 %, 2 %, and 15 % respectively of the outstanding stocks of securities for 2024-25. The allocation of incremental changes in the G-sec limit (in absolute terms) over the two sub-categories – ‘General’ and ‘Long-term’ – shall be retained at 50:50 for 2024-25. Further, the aggregate limit of the notional amount of Credit Default Swaps sold by FPIs shall be 5 % of the outstanding stock of corporate bonds. Accordingly, an additional limit of Rs.2,54,500 crore is set out for 2024-25.

Unauthorised foreign exchange transactions

The RBI issued an alert against unauthorised entities offering foreign exchange (forex) trading facilities to Indian residents with promises of exorbitant returns. RBI has advised Banks authorised to deal in foreign exchange to be more vigilant and exercise greater caution to prevent the misuse of banking channels in facilitating unauthorised forex trading and report such cases to the Directorate of Enforcement. AD Cat-I banks are required to advise their customers to deal in forex only with ‘Authorised Persons’ and on ‘Authorised ETPs’ and give wide publicity to the 'alert list' and press releases issued by the RBI in this regard.

Dealing in Rupee Interest Rate Derivative products - Small Finance Banks ?

Small Finance Banks (SFBs) were permitted to use only Interest Rate Futures (IRFs) for the purpose of proprietary hedging. In order to expand the avenues available to the SFBs for hedging interest rate risk in their balance sheet and commercial operations more effectively as well as with a view to provide them with greater flexibility, RBI has decided to allow them to deal in permissible rupee interest derivative products in terms of Rupee Interest Rate

Master Circular on SHG-Bank Linkage Programme

Recognising the importance of SHG Bank linkage, banks have been advised to meet the credit requirements of SHG members, as envisaged in Union Budget announcement and Monetary Policy Statements of RBI from time to time. Accordingly, all scheduled commercial banks have been advised to follow the example set by some public sector banks and meet the entire credit requirements of SHG members, namely, (a) income generation activities, (b) social needs like housing, education, marriage, etc. and (c) debt swapping". The SHGs, whether registered or unregistered engaged in promoting savings habits among their members are eligible to open savings bank accounts with banks. Further, bank lending to SHGs should be included in the branch credit plan, block credit plan, district credit plan, and state credit plan of each bank.

Key Facts Statement (KFS) for Loans & Advances

The RBI has asked lenders to provide ‘Key Fact Statement’ (KFS) to the borrowers of all new retail and MSME term loans sanctioned on or after October 1, 2024, including fresh loans to existing customers. Currently, KFS is specifically mandated in respect to loans by scheduled commercial banks to individual borrowers; digital lending by REs; and microfinance loans. Providing critical information about the terms of the loan agreement including all-inclusive interest cost would greatly benefit the borrowers in making an informed decision.

Hedging of Gold Price Risk in Overseas Markets

Resident entities have now been permitted to hedge their exposures to price risk of gold using OTC derivatives in the IFSC in addition to the derivatives on the exchanges in the IFSC.

Standardization of the Private Placement Memorandum (PPM) Audit Report

To have uniform compliance standards and for ease of compliance reporting, SEBI has introduced a standard reporting format for AIFs in the PPM audit report. The PPM audit reports shall be submitted to SEBI by AIFs online on the SEBI Intermediary Portal (SI Portal) as per the format.

Re-appointment of RBI Deputy Governor

The Central Government has re-appointed Shri T. Rabi Sankar as Deputy Governor, the Reserve Bank of India for a period of one year with effect from May 03, 2024.

Fair Practices Code for Lenders – Charging of Interest

The Reserve Bank came across instances of lenders resorting to certain unfair practices in charging of interest during onsite inspections. The regulator found that lenders have been charging interest from the date of sanction of loan or date of execution of the loan agreement and not from the date of actual disbursement of the funds to the customer. In some cases, it was observed that lenders were collecting one or more installments in advance but reckoning the full loan amount for charging interest. REs have been advised to review their practices and take corrective action where required.

Guidance Note on Operational Risk Management and Operational Resilience

The RBI updated its "guidance note" on operational risk management for the financial sector, and also extended it to all Non-Banking Financial Companies (NBFCs), all Co-operative Banks, and All India Financial Institutions (AIFIs). This Guidance Note aligns the RBI’s regulatory guidance with the Basel Committee on Banking Supervision (BCBS) Principles issued in March 2021. It aims to promote and further improve the effectiveness of Operational Risk Management of the REs, and enhance their Operational Resilience given the interconnections and interdependencies, within the financial system, that result from the complex and dynamic environment in which the REs operate.

Relaxation in requirement of intimation of changes in the terms of Private Placement Memorandum of Alternative Investment Funds through Merchant Banker

To facilitate ease of doing business, it has been decided that certain changes in the private placement memorandum of alternative investment funds can be submitted directly to the SEBI rather than through a merchant banker. The move would also rationalise the cost of compliance for alternative investment funds (AIFs). Further Large Value Fund for Accredited Investors (LVF)s may directly file any changes in the terms of PPM with SEBI, along with a duly signed and stamped undertaking by the CEO of the Manager of the AIF and Compliance Officer of Manager of the AIF, in a prescribed format.

Voluntary transition of Small Finance Banks to Universal Banks

The RBI guidelines for the voluntary transition of Small Finance Banks (SFBs) to Universal Banks, prescribe eligibility criteria such as minimum net worth of Rs.1,000 crore, net profit in the last two financial years, low non-performing asset (NPA) ratio and diversified loan portfolio. Additionally, shares of the SFB to be listed on a recognized stock exchange and a satisfactory track record of performance for at least five years are prerequisites. After the transition to a universal bank, there will be no new mandatory lock-in requirement for the promoters. Also, there will be no revision to the promoter shareholding dilution plan already approved by the RBI.

Cross Margin benefits for offsetting positions having different expiry dates

The SEBI has extended cross-margin benefits on offsetting positions having different expiry dates subject to certain conditions related to spread margins for index / stock futures.

RBI invites comments on the Draft Circular on “Digital Lending – Transparency in Aggregation of Loan Products from Multiple Lenders”

Based on the recommendation of the RBI Working Group on Digital Lending, it has been decided to bring loan aggregation services offered by the Lending Service Providers (LSPs) under a comprehensive regulatory framework for web aggregators of loan products (WALP). WALP entails aggregation of loan offers from multiple lenders on an electronic platform which enables the borrowers to compare and choose the best available option to avail loan from one of the available lenders. The framework will focus on enhancing the transparency in the operations of WALPs, increase customer centricity and enabling the borrowers to make informed choices.

Minutes of the Monetary Policy Committee Meeting, April 3 to 5, 2024

The Monetary Policy Committee (MPC) at its meeting held during April 3 to 5, 2024 took the following decisions for the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 percent within a band of +/- 2 percent, while supporting growth.

?- Keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50

?- Keep the standing deposit facility (SDF) rate unchanged at 6.25 percent and the marginal standing facility (MSF) rate and the Bank Rate at 6.75 percent.

- Remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Penalty Corner - Supervisory Actions

• A penalty of Rs 1 crore imposed on IDFC First Bank Ltd for non-compliance with RBI direction on Loans and Advances – Statutory and Other Restrictions. The Bank had sanctioned term loans to a public sector undertaking for financing infrastructure projects, without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations and the repayment / servicing of the said term loans was made out of budgetary resources.
• Imposed a monetary penalty of Rs.49.70 lakh on LIC Housing Finance Limited for non-compliance with the Non-Banking Financial Company - Housing Finance Company (Reserve Bank) Directions, as it did not disclose rate of interest and approach for gradation of risk and rationale for charging different rate of interest to different categories of borrowers in loan application forms and sanction letters and ii) had charged pre-payment penalty in housing loans on (a) floating rate basis which were pre-closed from any source and (b) fixed rate basis which were pre-closed from borrowers’ own sources.
• Imposed a monetary penalty of Rs. 10 lakhs on NABFINS Limited, a subsidiary of NABARD, for non-compliance with Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016. for restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by it.

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