India Regulatory Roundup - October 2022
The pilot launch of the CBDC for the Wholesale segment (e?-W) has gone live on November 1, 2022. Nine Banks including State Bank of India, Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank, and HSBC have been identified for participation in the pilot. The use case for this pilot is the settlement of secondary market transactions in government securities. The use of e?-W is expected to make the interbank market more efficient. Press reports state that nearly 50 transactions cumulatively worth ? 275 crores were settled. Going forward, other wholesale and cross-border transactions will be the focus of future pilots. Digital Rupee for the Retail Segment (e?-R) is expected to be launched within a month and operational guidelines may be announced shortly.
SPDs have been permitted to take up foreign exchange as a part of their non-core activities subject to obtaining the necessary authorisation. As per the prudential regulations for SPDs, the capital charge for market risk in FX exposures shall be the higher of the charges worked out by the standardised approach and the internal risk management framework-based Value at Risk (VaR) model. Under the standardised approach, SPDs should maintain a market risk capital charge of 15% for net open positions (limits or actual, whichever is higher) arising out of FX business with a risk weight of 100%. Additionally, the market risk capital charge for all permissible non-core activities including FX, shall not be more than 20% of the Net Owned Fund of the SPD as per the last audited balance sheet. SPDs have been further permitted to take up trading and a self-clearing membership with SEBI-approved stock exchanges/clearing corporations for undertaking proprietary transactions in the equity and equity derivatives market subject to compliance with SEBI’s regulatory norms and all the eligibility criteria/rules of stock exchanges and clearing corporations.
Based on the recommendations of the Committee to undertake a comprehensive review of the working of ARCs, RBI has amended the regulatory framework for ARCs effective immediately. The detailed framework outlines the measures to enhance governance of ARCs, the constitution of required committees to enhance oversight, a need to obtain prior approval from RBI for a change in shareholding, Fit and Proper criteria for Directors and CEO, enhanced disclosures to be made to enable investments from a broader set of Qualified Buyers (QBs), terms for engagement with Credit Rating Agencies (CRAs) and Rating of SRs. The Minimum NOF requirement has been increased from Rs 100 crore to Rs 300 crore for obtaining CoR for commencement of business as ARC and a glide path for existing ARC? to achieve ?200 Crores by March 31, 2024, and ?300 Crores by March 31, 2026. ARCs have been further permitted to deploy available surplus funds in short-term instruments subject to certain conditions and act as a Resolution Applicant under the Insolvency and Bankruptcy Code, 2016 (IBC) subject to certain conditions.?
Banks are permitted to derive risk weights for their unrated exposures based on the ratings published by ECAI for a specific rated debt subject to certain conditions. RBI had advised ECAIs to disclose the name of the banks and the corresponding credit facilities rated by them in the PRs issued on rating actions by August 31, 2021, after obtaining requisite consent from the borrowers. However, such disclosures are not available in a large number of PRs issued by ECAIs owing to the absence of requisite consent by the borrowers to the ECAIs. RBI has therefore advised that a bank loan rating without the above disclosure by the ECAI shall not be eligible for being reckoned for capital computation by banks. Banks shall treat such exposures as unrated and assign applicable risk weights w.e.f. March 31, 2023.
The disclosure of details of divergence in asset classification and provisioning where such divergence assessed by the RBI exceeds certain specified thresholds has been revised. For the year ending March 31, 2023, banks are required to make suitable disclosures in the manner specified, if either or both of the following conditions are satisfied i.e., the additional provisioning for non-performing assets (NPAs) assessed by the RBI exceeds 10% of the reported profit before provisions and contingencies for the reference period; and the additional Gross NPAs identified by the RBI exceed 10% of the reported incremental Gross NPAs for the reference period. These thresholds will be further reduced to 5% respectively for disclosures in financial statements for the year ending March 31, 2024.?
To improve and strengthen the internal grievance redressal mechanisms within the Credit Information Company (CIC) by enabling a review of customer complaints before rejection, by an independent apex-level authority within the CIC. RBI had announced its decision to bring CICs under the Internal Ombudsman (IO) Framework. Accordingly, CICs will be required to comply with RBI’s Credit Information Companies - Internal Ombudsman Directions, 2022. These Directions outline the requirements applicable for the appointment of IO, their roles and responsibilities, expectations pertaining to Regulatory reporting and Supervisory oversight, in addition to the reporting formats annexed. CICs are expected to adhere to these directions by April 1, 2023.
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The RBI, in its regulatory framework on the Scale Based Regulation for NBFCs, advised that in line with the existing policy on consolidation of assets of the NBFCs in a Group, the total assets of all the NBFCs in a Group shall be consolidated to determine the threshold for their classification in the Middle Layer. W.e.f. October 1, 2022, if the consolidated asset size of the Group is ?1000 crore and above, then each Investment and Credit Company (NBFC-ICC), Micro Finance Institution (NBFC-MFI), NBFC-Factor and Mortgage Guarantee Company (NBFC-MGC) lying in the Group would be classified as NBFC-ML and consequently, shall adhere to the regulations applicable to NBFCs-ML.
SEBI has advised all CRAs to align their rating scales with the rating scales prescribed under the guidelines of the respective financial sector regulators or authorities. Guidelines on rating scales to be used by CRAs for Issuer/Corporate Credit Rating, Standard descriptors for Rating Watch & Outlook and Ratings of Capital Protection Oriented Schemes have been outlined. The circular will take effect from January 1, 2023, and CRAs will furnish a board-approved report of compliance with these directions to SEBI within one quarter from the specified date of applicability by March 31, 2023, and will be monitored by half-yearly internal audits for CRAs.
RBI has been taking various initiatives in strengthening supervision, which among other initiatives include the adoption of the latest data and analytical tools as well as leveraging technology for implementing more efficient and automated work processes. In continuation of this effort, Shri Shaktikanta Das, Governor, launched a new SupTech initiative named “?????(DAKSH)’ which means ‘efficient’ & ‘competent’, reflecting the underlying capabilities of the application which is expected to make the Supervisory processes more robust. This is a web-based end-to-end workflow application through which RBI shall monitor compliance requirements in a more focused manner with the objective of further improving the compliance culture in Supervised Entities (SEs) like Banks, NBFCs, etc. The application will also enable seamless communication, inspection planning and execution, cyber incident reporting and analysis, provision of various MIS reports, etc., through a Platform that enables anytime-anywhere secure access.
Penalty Corner - Supervisory Actions and Implications
SEBI has cancelled the CoR of Brickwork Ratings India Private Limited as a Credit Rating Agency (CRA) and has ordered the entity to cease its operations within six months. It was observed that the CRA had failed to exercise proper skill, care and due diligence in discharging its duties as a CRA, which has defeated the very purpose of the regulations i.e. investor protection and orderly development of the securities market. The lapses include not providing correct disclosures in the press release as mandatory after assigning a rating, failure to include critical information in the press release of assumptions/covenants made while carrying out a review of Structured Finance Products, and addressing conflict of interest issues. Despite repeated lapses observed during multiple inspections and monetary penalties imposed, SEBI observed that they have not proved a deterrent to the CRA in addressing the very basic requirements of running a CRA. RBI has also advised RE/Market participants not to obtain fresh ratings/evaluations from the rating agency.
RBI has imposed a monetary penalty of ? 1.76 Crores on Vakrangee Limited for contravention with directions on deployment targets under the White Label ATM (WLA) Directions.
LIC Housing Finance has been penalised ?5.00 lakh by the RBI for non-compliance with? Housing Finance Companies (NHB) Directions, 2010 to create a floating charge in favour of its depositors on a portion of the assets invested by it and non-registration of such charge with the Registrar of Companies.
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