RBI’s First Monetary Policy for FY 2018-19

Anita Baid



The Reserve Bank of India (RBI) released its first monetary policy statement for FY 2018-19 on April 05, 2018[1] (‘Policy Statement’). The aforesaid statement sets out various developmental and regulatory policy measures for the financial sector. It aims at strengthening regulation and supervision; broadening and deepening financial markets; improving currency management; promoting financial inclusion and literacy; and, facilitating data management. Some of the major issues from the Policy Statement have been discussed herein below:

Deferment of Indian Accounting Standards (Ind AS) implementation

Ministry of Corporate Affairs (MCA), Government of India had notified the Companies (Indian Accounting Standards) Rules, 2015 on February 16, 2015[2]. MCA had also issued a Press Release dated January 18, 2016[3] outlining the roadmap for implementation of International Financial Reporting Standards (IFRS) converged Indian Accounting Standards (Ind AS) for banks, non-banking financial companies, select All India Term Lending and Refinancing Institutions and insurance entities.

Banks were advised to take note of the Press Release which stated that notwithstanding the roadmap for companies, the holding, subsidiary, joint venture or associate companies of banks shall be required to prepare Ind AS based financial statements for accounting periods beginning from April 01, 2018 onwards, with comparatives for the periods ending March 31, 2018 and thereafter. The Press Release further provided that NBFCs having net worth of rupees five hundred crore or more and their holding, subsidiary, joint venture or associate companies, if not covered specifically are required to comply with the Ind AS for accounting periods beginning on or after the April 01, 2018. Accordingly, Scheduled Commercial Banks (SCBs), excluding regional rural banks (RRBs) and Insurer/Insurance Companies, were required to implement Ind AS from April 01, 2018.

It was also clarified therein that SCBs/NBFCs/insurance companies/insurers shall apply Ind AS only if they meet the specified criteria and they shall not be allowed to voluntarily adopt Ind AS. Though an insurer/insurance company/NBFC are not prohibited from providing Ind AS compliant financial statement data for the purposes of preparation of consolidated financial statements by its parent/investor, as required by the parent/investor to comply with the existing requirements of law.

For banks, however, necessary legislative amendments to make the format of financial statements, prescribed in the Third Schedule to Banking Regulation Act 1949, compatible with accounts under Ind AS, are still under consideration of the government. As a consequence of which, the RBI has deferred the implementation of Ind AS specifically for SCBs excluding RRBs, by one year by when the necessary legislative changes are expected.

Since the said exemption has been notified only for SCBs, the same cannot be inferred to be applicable for other financial entities as well. Therefore, the aforesaid exemption for banks shall not be deemed to be extended for non-banking financial companies (NBFCs) until a specific notification is issued by RBI in this regard. Accordingly, they shall be required to prepare their financial statement in accordance with Ind AS, according to the previously prescribed timelines.

Storage of Payment System Data

According to the Policy Statement, recently the payment ecosystem in India has expanded considerably with the emergence of new payment systems, players and platforms. Such systems are highly technology dependent which necessitate adoption of adequate safety and security measures on a continuous basis. The RBI, as a regulator of payment systems in our country, must ensure a healthy pace of growth in digital payments. In this regard the safety and security of payment systems data is fundamental. Further, it is also crucial that the payment system data is continuously monitored to reduce the risks from data breaches.

The last financial year witnessed the introduction of a new set of regulations by RBI for monitoring the operations of Peer to Peer (P2P) lending platforms. As per the said master directions, an NBFC-P2P is required to store and process all data relating to its activities and participants on hardware located within India.

The outsourcing directions issued by RBI also provides for off-shore outsourcing of financial services. The guidelines issued by RBI in this regard specifically state that the activities outsourced outside India by an NBFC shall be conducted in a manner so as not to hinder efforts to supervise or reconstruct the India activities of the NBFC in a timely manner. Further, it mandates the NBFC to maintain all original records in India.

RBI had also issued the guidelines for regulating the issuance and operation of Prepaid Payment Instruments (PPIs). The regulations require PPI issuers to maintain a log of all the transactions undertaken using the PPIs for at least ten years at a centralised database. However, the regulations do not specifically provide the location for maintenance of such data.

Recently, it has been observed that very few payment system operators and their outsourcing partners store the payment system data either partly or completely in India. In such cases where the data is stored abroad, it acts as a hindrance for the RBI to have an autonomous access to such payment data for supervisory purposes. The spotlight on data security has come at a time when Facebook has faced a global criticism over breach of user data.

In order to have an unfettered right to monitor the payment system data, it has been now been mandated that all payment system operators shall be required to store the data, relating to the payment systems operated by them, within the country in six months. A potential change for companies with data centres outside India would be to build such centres in India to comply with RBI’s guidelines.

The RBI has also issued a directive under Section 10(2) and Section 18 of Payment and Settlement Systems Act 2007 on April 06, 2018[4]. As per the said notification, all system providers, including authorised payment systems and payment banks, are required to ensure that the entire data relating to payment systems operated by them, including the full end-to-end transaction details / information collected / carried / processed as part of the message / payment instruction, are stored in a system only in India. In case required, for the foreign leg of the transaction, if any, the data can also additionally be stored in the foreign country.

The RBI has also directed compliance with the aforesaid requirement within a period of six months and upon completion of the requirement the system providers shall report compliance of the same to RBI latest by October 15, 2018. Additionally, a System Audit Report (SAR) duly approved by the Board of the system provider shall also be submitted to the RBI by December 31, 2018. The said audit is to be conducted by CERT-IN empaneled auditors certifying completion of activity.

Introduction of Single Master Form for Reporting of Foreign Direct Investment in India

Non-residents make investment in India (Foreign Direct Investment), on a repatriable basis, through eligible instruments such as Equity Shares, Compulsory Convertible Preference shares, Compulsorily Convertible Debentures, Share Warrants etc., issued by the investee company or by contributing to the capital of a Limited Liability Partnership (LLP).

Presently, the reporting of the above transactions resulting in foreign investment are in a disintegrated manner across various platforms/modes. RBI intends to introduce an online reporting by June 30, 2018 via a Single Master Form which would subsume all reporting requirements, irrespective of the instrument through which the foreign investment is made.

Ring-fencing regulated entities from virtual currencies

The Finance Minister had in his Budget speech on February 1, 2018, said that cryptocurrencies are not legal and he affirmed to eliminate their usage. RBI has also repeatedly cautioned users, holders and traders of virtual currencies, including Bitcoins, regarding various risks associated in dealing with such virtual currencies. In view of the associated risks, RBI has with immediate effect, instructed entities regulated by RBI to not deal with or provide services to any individual or business entities dealing with or settling VCs. The services flagged by the RBI include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, among others. The instructions are applicable to all commercial, co-operative banks, payments banks, small finance banks, NBFCs and payment system providers.

Regulated entities which already provide such services shall exit the relationship within a specified time of three months. RBI has also issued a detailed circular in this regard on April 06, 2018[5].

To conclude, it seems that the gradual elimination of crypto-currency dealing through unregulated private entities is a welcome move by the RBI for the ensuing financial year. Further, the Policy Statement brings a relief for the banks by the deferring the applicability of Ind AS. Also, better supervision and monitoring of payment system data shall be ensured by RBI by having access within the country.

[1] https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=43574

[2] http://mca.gov.in/Ministry/pdf/Notification_20022015.pdf

[3] http://pib.nic.in/newsite/PrintRelease.aspx?relid=134578

[4] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11244&Mode=0

[5] https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11243&Mode=0

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