Tag: RBI regulations

How RBI plans to regulate digital lending, BFSI News, ET BFSI

Banking & Finance

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The Reserve Bank of India has come out with norms that aim to regulate digital lending specifically, with a focus on consumer interest.

While lending is highly regulated in India, digital lending is not, and the central bank saw a regulatory gap in such lending and constituted a working group.

Highlighting “renting an NBFC” or off-balance sheet lending models as an area of concern, the working group has proposed that all lending, including the buy now pay later products, must be done only “on balance sheet” by licensed entities.

This, if implemented, is set to alter the business models of several products, where the non-licensed entities provide some credit support such as first loan default guarantees, and assume part of the credit risk of the loan.

Maintaining transparency

To maintain transparency on the loan servicing front, the Group proposes that all loan services, repayments, and other related activities should be executed directly in a bank account of the balance sheet lender. A similar approach is envisaged for the disbursement of loans.

It has recommended the setting up of a nodal agency to primarily verify the technological credentials of Digital Lending Apps (DLAs) of balance sheet lenders along with maintenance of a public register of verified apps.

The digital lending apps will have to disclose their data and credit assessments and defend credit underwriting strategies. Unlike the credit bureaus, which rely on historical data trends and are highly regulated, the lending apps rely on AI and algorithms to analyse and price credit risk that remains highly unregulated. This will give consumers access to their credit underwriting data.

Interest rate regulation

While the RBI has stayed away from interest rate caps, the working group discusses the concept of an annual percentage rate (APR) that includes interest rates and all other costs associated with a loan to prevent over-charging by way of “hidden costs”. The report talks about the “need to bring in” interest rate regulation. The proposed transparency in pricing could have serious implications for the sector.

The report lays the groundwork for opening digital-only NBFCs/ banks, and the possible inclusion of digital/ neo-banks under the RBI regulations. and suggests measures for broadening credit reporting to enable better credit decisions.

Technology front

The second set of regulations are focused on strengthening the tech part of regulation given that technology is the backbone of the fintech revolution. For this, it has suggested observing prescribed baseline technology standards, storage of data in servers located in India, detailed disclosures on the app/ website coupled with increased emphasis on digitally signed documents.

The report envisages a self regulating organisation (SRO) for the segment, which will evolve codes of conduct for all participants, develop standardised contracts, build a model to calculate APR, prescribe and monitor technology standards that ensure the security of mobile-based apps, and institutionalise a consumer redressal mechanism. The reasoning of the RBI working group is that in the scenario of rapid technological changes, an SRO is well-positioned to understand the risks of newer business models.

Further, the names of identified unscrupulous lenders should be made available to the regulated entities to enable them to do enhanced due diligence while allowing customers to use banking/payment/telecom channels. Policies around anti-predatory lending and anti-usurious lending are urged.

The implications

For consumers, the new norms are likely to improve standards of transparency and disclosure, prevent unfair lending practices and give greater control over data.

However, the smaller players and technology intermediaries are likely to be affected by the proposed regulations and the sector is likely to see consolidation as rising cost of compliance and certain business models becoming unviable.



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Crypto users see the light at the end of the tunnel

Banking & Finance

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Banking troubles for crypto enthusiasts and investors in the country seem to have abated to some extent with at least a handful of banks permitting such transactions.

According to cryptocurrency exchange owners, there has been some easing in the stance by banks towards crypto transactions in the last three to four months. Smaller private sector banks as well as a few public sector banks are understood to be now permitting these transactions.

“Till three to four months ago, there were problems but the situation in terms of banking is now under control. All options are fully functional and one can do INR deposits through bank accounts,” said Sumit Gupta, co-founder and CEO, CoinDCX.

Also see: Millennials pull crypto out of the shadows

In an interaction with BusinessLine, he said that members of CoinDCX are not facing any banking related problems.

“Banks also have a reasonable understanding of cryptocurrency now. The progress on bank front is very encouraging. Smaller banks are opening up to crypto to get a larger market share,” Gupta said.

Relaxed positions

Another crypto exchange owner said that the position varies from bank to bank but it has significantly relaxed from the blanket ban towards cryptocurrency transactions that was seen earlier in the year.

Also see: Bitcoin hovers near 6-month high on ETF hopes, inflation worries

“It is not as if the industry doesn’t have any problem with banks. In most cases users are not facing the kind of problems they had earlier when they wanted to transact for crypto investments,” he said, adding that banks are no longer blocking accounts of crypto investors or warning of action.

Payment gateways

Apart from banks, crypto investors also have the option to use payment gateways and UPI, both of which are working well, industry experts said.

“Payment gateways are largely used by investors. Multiple payment gateways are working and plan to continue working with crypto,” Gupta said.

Regulatory uncertainty

The lack of regulatory certainty continues to be a challenge to some extent but there is now more of an understanding towards the sector.

With growing investor interest in cryptocurrency, a number of banks had earlier this year warned users about virtual currency transactions, citing the Reserve Bank of India’s 2018 circular.

However, the RBI had on May 31 asked regulated entities to not cite its April 2018 circular on “Prohibition on dealing in Virtual Currencies” as it is no longer valid following the Supreme Court ruling.

Also see: More than 2 lakh crypto accounts blocked in India over 6 months

It had also asked them to continue to carry out customer due diligence processes in line with regulations governing standards for Know Your Customer, Anti-Money Laundering (AML), Combating of Financing of Terrorism (CFT) and obligations of regulated entities under Prevention of Money Laundering Act, 2002.

However, a banker noted that it still depends on the judgment of individual banks and how they wish to proceed on the issue.

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CA firm Haribhakti barred from auditing RBI-regulated entities for two years

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The Reserve Bank of India has barred Haribhakti & Co LLP, Chartered Accountants, from undertaking any type of audit assignments in any of the entities regulated by the RBI for two years with effect from April 1, 2022.

Although the RBI did not specify the exact reason for its action, Haribhakti was the auditor for Srei Infrastructure Finance (SIFL) for 2019-20. On October 4, the RBI superseded the boards of SIFL and Srei Equipment Finance (SEFL) over governance concerns and payment defaults.

This is the first case of debarment of a CA firm under Section 45MAA of the Reserve Bank of India Act, 1934, dealing with the central bank’s powers to take action against auditors.

“This action has been taken on account of the failure of the audit firm to comply with a specific direction issued by RBI with respect to its statutory audit of a Systemically Important Non-Banking Financial Company,” the RBI said in a statement

But the central bank said its action will not impact audit assignment(s) of Haribhakti in RBI-regulated entities for 2021-22. A central statutory auditor of a public sector bank said Haribhakti can challenge the RBI order in a High Court just as Price Waterhouse & Co opposed SEBI’s two-year ban in the Satyam Computers case. Since the RBI’s is not a “speaking order”, it is difficult to assess why the action was taken, he added.

Meanwhile, Shailesh Haribhakti dissociated himself from the firm founded by his father. “I ceased to be a partner of Haribhakti & Co LLP with effect from March 31, 2018 and from all responsibilities associated with it.”

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RBI moves to ease overseas direct investment regulations under FEMA

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The Reserve Bank of India is planning to rationalise the existing provisions governing overseas direct investment regulations under the Foreign Exchange Management Act (FEMA), 1999.

This is to further liberalise the regulatory framework and promote ease of doing business, per the RBI’s draft Foreign Exchange Management/FEM (Non-debt Instruments – Overseas Investment) Rules, 2021 and the draft Foreign Exchange Management (Overseas Investment) Regulations, 2021.

Where a person resident in India wants to make any financial commitment or disinvesting such financial commitment has an account appearing as a Special Mention Account-1/2 or non-performing asset (NPA) or wilful defaulter or is under investigation by a regulatory body or investigative agencies in India, a no-objection certificate has to be obtained from these entities before making financial commitment or undertaking disinvestment of such financial commitment.

Where the disinvestment by the person resident in India pertains to ODI, the transferor shall not have any dues outstanding for receipt.

Restrictions

A person resident in India is prohibited from making ODI in a foreign entity engaged in (i) Real estate activity; (ii) Gambling in any form; and (iii) Offering financial products linked to Indian Rupee except for products offered in an International Financial Services Centre (IFSC).

Overseas investment by a person resident in India shall not be made in a foreign entity located in countries/ jurisdictions that are not FATF (Financial Action Task Force)and IOSCO (International Organisation of Securities Commission) compliant country or any other country/ jurisdiction as may be prescribed by the Central Government.

The Financial Commitment by a person resident in India in a foreign entity that has invested or invests into India which is designed for the purpose of tax evasion/ tax avoidance by such person is not permitted and any contravention under this rule shall be considered to be a contravention of serious/sensitive nature.

Acquisition of immovable property outside India (1) A person resident in India may acquire immovable property outside India by way of inheritance or gift or purchase from a person resident in India who has acquired such property as per the foreign exchange provisions in force at the time of such acquisition.

ODI in financial entity

An Indian entity which is engaged in financial services activity in India may make ODI in a foreign entity, which is directly or indirectly engaged in financial services activity subject to conditions, including the regulated Indian entity Indian entity posting net profits during the preceding three financial years.

An listed India entity having a minimum net worth of ₹500 crore based on the last audited balance sheet, can make ODI including by way of contribution in an Overseas Technology Fund, for the purpose of investing in overseas technology start-ups engaged in an activity which is in alignment with the core business of such Indian entity.

An Indian entity may engage in agricultural operations, including purchase of land incidental to such activity, either directly or through an office outside India.

Financial commitment

The total financial commitment made by an Indian entity, excluding capitalization of retained earnings, in all the foreign entities taken together at the time of undertaking such commitment shall not exceed 400 per cent (or as directed by the Reserve Bank from time to time) of its net worth as on the date of the last audited balance sheet.

However, financial commitment made by “Maharatna” public sector undertakings (PSUs) or “Navratna” PSUs or subsidiaries of such PSUs in foreign entities outside India engaged in strategic sectors shall not be subject to the limits laid down above.

The limit shall not apply where the investment is made out of the balances held in its EEFC (Exchange Earners Foreign Currency) account.

Overseas portfolio investment

A listed Indian company may make Overseas Portfolio Investment including by way of reinvestment within the limit of 50 per cent of its net worth as on the date of its last audited balance sheet.

An Indian entity, which is a software exporter, or any other entity as may be prescribed by the Central government in this regard, may receive foreign securities up to 25 per cent of the value of exports made to a foreign software company irrespective of whether such company is listed or not.

A registered trust or a registered society engaged in the educational sector or which has set up hospital(s) in India, with the prior approval of the Reserve Bank, may make ODI in a foreign entity. This is subject to the foreign entity being engaged in the same sector that the Indian trust or society is engaged in.

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Study, BFSI News, ET BFSI

Banking & Finance

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Several banks, including State Bank of India (SBI), have been imposing excessive charges on certain services provided to poor persons having zero-balance or Basic Savings Bank Deposit Accounts (BSBDA), a study by the IIT-Bombay has revealed.

The study observed that the SBI’s decision to levy a charge of Rs 17.70 for every debit transaction beyond four by the BSBDA account holders cannot be considered as “reasonable.”

It highlighted that the imposition of service charges resulted in undue collections to the tune of over Rs 300 crore from among nearly 12 crore Basic Savings Bank Deposit Account (BSBDA) holders of SBI during the period 2015-20.

India’s second-largest public sector lender Punjab National Bank, which has 3.9 crore BSBD accounts, collected Rs 9.9 crore during the same period.

“There had been systematic breach in the RBI regulations on BSBDAs by few banks, most notably by the SBI that hosts the maximum number of BSBDAs, when it charged @ Rs 17.70 for every debit transaction (even via digital means) beyond four a month.

“This imposition of service charges resulted in undue collections to the tune of over Rs 300 crore from among nearly 12 crore BSBDA holders of SBI during the period 2015-20, of which the period 2018-19 alone saw a collection of Rs 72 crore and the period 2019-20, Rs 158 crore,” the study by IIT Bombay professor Ashish Das stated.

Levying of charges on BSBDA is guided by September 2013 RBI guidelines. As per the direction these accounts holders are ‘allowed more than four withdrawals’ in a month, at the bank’s discretion provided the bank does not charge for the same.

“While defining the features of a BSBDA, the regulatory requirements made it amply clear that in addition to mandatory free banking services (that included four withdrawals per month), as long as the savings deposit account is a BSBDA, banks cannot impose any charge even for value-added banking services that a bank may like to offer at their discretion,” the study said.

The RBI considers a withdrawal, beyond four a month, a value-added service, it said.

“We assess the dereliction in SBI’s duty towards the PMJDY when the BSBDA users were unduly (and against the extant regulations) forced to part with such high charges for their day-to-day (noncash) digital debit transactions that the bank allowed in a BSBDA,” it said.

SBI, in breach of RBI regulations set forth as early as 2013, had been charging the BSBDA holders for every debit transaction beyond four a month, it said, adding, the charges were as high as Rs 17.70 even for digital transactions like NEFT, IMPS, UPI, BHIM-UPI and debit cards for merchant payments.

“On the one hand, the country strongly promoted digital means of payments, while on the other hand, SBI discouraged these very people, to transact digitally for their day-to-day expenditures, by charging an exploitative Rs 17.70 per digital transaction. This dwarfed the spirit of financial inclusion,” it said.

The RBI’s nonchalant attitude to supervise its own regulations encouraged other banks to become unreasonable towards charges beyond four debits a month, it said.

For example, it said, effective January 1, 2021, IDBI Bank’s Board of Directors considered it reasonable to impose a service charge of Rs 20 for every non-cash digital debit (including UPI/BHIM-UPI/IMPS/NEFT and debit card use for merchant payments).

Even ATM cash withdrawals come at an exorbitant fee of Rs 40. Needless to mention that the bank also imposes a debit freeze beyond 10 debits a month by IDBI Bank.

“Although not by intent, but in practice RBI has allowed victimisation of these BSBDA customers despite being duty-bound to protect them. Two of its specialised departments – the ‘Consumer Education and Protection Department’ and the ‘Financial Inclusion and Development Department’ – allowed this to continue over years even though RBI regulations for “ensuring reasonableness of service charges” were in place,” the study claimed.

When SBI charged for every UPI/BHIM-UPI and RuPay digital payments though RBI was approached first to address the same under extant laws, it remained silent, the study said, adding it was the government, which when subsequently approached, that came forward to instruct the banks (on August 30, 2020), to retrospectively (since January 1, 2020) return the money to the depositors or face penal consequences.

Despite this respite, the RBI still needs to ensure compliance of its own regulations when SBI still considers itself compliant while charging as high as Rs 17.70 for every digital debit transaction, through means other than UPI/BHIM-UPI and RuPay-digital, carried out since January 2020.



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