Banking exposure to open the current account by the banks

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-Siddarth Goel (finserv@vinodkothari.com)

Background

Declaration from current account customers

The RBI issued a circular dated August 06, 2020, whereby the regulator instructed all scheduled commercial banks and payments banks shall not open a current account for customers who have availed credit facilities in form of cash credit (CC)/overdraft (OD) from the banking system. The motive behind the circular being that all the transactions of borrowers should be routed through the CC/OD account.

The genesis of this circular was in RBI circular dated May 15, 2004, where banks were advised that at the time of opening of current accounts for their customers, they have to insist on a declaration form by the account-holder to the effect that he is not enjoying any credit facility with any other bank or obtain a declaration giving particulars of credit facilities enjoyed by such customer. The move was in essence to secure the overall credit discipline in banking so that there is no diversion of funds by the borrowers to the detriment of the banking system. Post-May 15, 2004, a clarification notification was issued by the regulator dated August 04, 2004, stipulating that in case there is no response obtained concerning NOC after waiting a minimum period of a fortnight, the banks may open current accounts of the customers.

Thus there was an obligation on banks to scrupulously ensure that their branches do not open current accounts of entities that enjoy credit facilities (fund based or non-fund based) from the banking system without specifically obtaining a No-Objection Certificate (NOC) from the lending bank(s). Further, the non-adherence by banks as per the circular is to be perceived as abetting the siphoning of funds and such violations which are either reported to RBI or noticed during the regulator inspection would make the concerned banks liable for penalty under Banking Regulation Act.

Establishment of CRILC

The RBI established a Central Repository of Information on Large Credits (CRILC). The CRILC was established in connection to the RBI framework “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy“. As under the framework banks were required to furnish credit information to CRILC on all their borrowers having aggregate fund-based and non-fund based exposure of Rs. 5 Crores and above with them. Besides banks were required to furnish current accounts of their customers with outstanding balance (debit or credit) of Rs 1 Crore and above to the CRILC. The reporting under the extant framework was to determine SMA-0 classification, where the principal or interest payment is not overdue for more than 30 days but account showing signs of stress. An increase in the frequency of overdrafts in current accounts is one of the illustrative methods for determining stress.

Reposting of large credits

Post establishment of CRILC, a subsequent guideline on the opening of current accounts by banks was issued by the RBI via circular dated July 02, 2015, dealing with the same subject. To enhance credit discipline, especially for the reduction in NPA level in banks, banks were asked to use the information available in CRILC and not limit their due diligence to seeking NOC. Banks were to verify from the data available in the CRILC database whether the customer is availing of credit facility from another bank.

The chart below highlights the series and events and relevant circulars.

Credit Discipline- August 06, 2020 Circular

As per the circular dated August 06, 2020, issued by the regulator on Opening of Current Accounts by Banks – Need for Discipline (‘Revised Guidelines’), there are two aspects that need to be considered before opening a CC/OD facility or opening the current account of the customer. The Revised Guidelines provides a clear guiding flowchart for banks to follow when the customer approaches a bank for opening of the current account, the same has been categorised into two scenarios which could be considered by the banks to comply with the revised guideline.

Case 1: Customer wants to avail or is already having a credit facility in form of CC/OD

Case 2: Customer wants to open a current account or have an existing current account with the bank

 

Further, there is a requirement on banks to monitor all CC/OD accounts regularly at least quarterly, especially concerning the exposure of the banking system to the borrower. There has been an ambiguity surrounding what would amount to ‘exposure’ under the Revised Guidelines.

‘Exposure to the banking system’ under Revised Guidelines

The Revised Guidelines provides that exposure shall mean the sum of sanctioned ‘fund based and non-fund based credit facilities’. However, there is a regulatory ambiguity, since neither the term used by the RBI has been specifically defined in the Revised Guideline nor elsewhere under any other regulations. There is no straight jacket exclusive definition for determining as to what exposure banks should include determining funded and non-funded credit facilities. Therefore, based on back-tracing of regulatory regime an inclusive list can be of guidance for banks and borrowers especially large borrowers (like NBFCs and HFCs) and other financial institutions and corporates who rely on banking facilities (current account and CC/OD) extensively for their business.

The CRILC may not be the only source for banks while the collection of borrower’s credit information. Other modes could be information by Credit Information Companies (CICs), National E-Governance Services Ltd. (NeSL), etc., and even by obtaining customers’ declaration, if required. However, since the revised guideline stresses on borrowers having exposure more than 5 crores, therefore, information disseminated by the banks to CRILC is a good point to start with and to comply with under the revised guidelines. The circular dated July 02, 2015, draws reference to the Central Repository of Information on Large Credits (CRILC) to collect, store, and disseminate data on all borrowers’ credit exposures. The guideline further provided banks to verify the data available in the CRILC database whether the customer is availing credit facility from another bank. Further even under the Guidelines on “Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders” dated January 30, 2014, provided that credit information shall include all types of exposures as defined under RBI Circular on Exposure Norms.

The RBI Exposure Norms dated July 01, 2015, defines exposure as;

“Exposure shall include credit exposure (funded and non-funded credit limits) and investment exposure (including underwriting and similar commitments). The sanctioned limits or outstandings, whichever are higher, shall be reckoned for arriving at the exposure limit. However, in the case of fully drawn term loans, where there is no scope for re-drawal of any portion of the sanctioned limit, banks may reckon the outstanding as the exposure.”

The banking exposure norms provide for two exposures; namely credit and investment exposures. Further RBI Exposure Norms defines ‘credit exposure’ and ‘Investment Exposure’ as follows;

“2.1.3.3. Credit Exposure

Credit exposure comprises the following elements:

(a) all types of funded and non-funded credit limits.

(b) facilities extended by way of equipment leasing, hire purchase finance and factoring services.

2.1.3.4 Investment Exposure

  1. a) Investment exposure comprises the following elements:

(i) investments in shares and debentures of companies.

(ii) investment in PSU bonds

(iii) investments in Commercial Papers (CPs).

  1. b) Banks’ / FIs’ investments in debentures/ bonds / security receipts / pass-through certificates (PTCs) issued by an SC / RC as compensation consequent upon sale of financial assets will constitute exposure on the SC / RC. In view of the extraordinary nature of the event, banks / FIs will be allowed, in the initial years, to exceed the prudential exposure ceiling on a case-to-case basis.
  2. c) The investment made by the banks in bonds and debentures of corporates which are guaranteed by a PFI1(as per list given in Annex 1) will be treated as an exposure by the bank on the PFI and not on the corporate.
  3. d) Guarantees issued by the PFI to the bonds of corporates will be treated as an exposure by the PFI to the corporates to the extent of 50 per cent, being a non-fund facility, whereas the exposure of the bank on the PFI guaranteeing the corporate bond will be 100 per cent. The PFI before guaranteeing the bonds/debentures should, however, take into account the overall exposure of the guaranteed unit to the financial system.”

The Revised Guidelines, specifically define exposure in a footnote to the revised guideline stipulating that to arrive at aggregate exposures in the footnote as follows;

“‘Exposure’ for the purpose of these instructions shall mean sum of sanctioned fund based and non-fund based credit facilities”.

Further the RBI in its subsequent FAQs on revised guidelines dated December 14, 2020, guided on what could be included in aggregate exposure.

“4. Whether aggregate exposure shall include Day Light Over Draft (DLOD)/ intra-day facilities and irrevocable payment commitments, limits set up for transacting in FX and interest rate derivatives, CPs, etc.

All fund based and non-fund based credit facilities sanctioned by the banks and carried in their Indian books shall be included for the purpose of aggregate exposure.”

Further in FAQ No. 3 in the circular dated December 14, 2020, the RBI clarified that

“3. For the purpose of this circular, whether exposure of non-banking financial companies (NBFCs) and other financial institutions like National Housing Bank (NHB) shall be included in computing aggregate exposure of the banking system.

The instructions are applicable to Scheduled Commercial Banks and Payments Banks. Accordingly, the aggregate exposure for the purpose shall include exposures of these banks only”

While the regulator evaded assigning express meaning as to what could be included while determining banking exposure and took an inclusive view. However, from the foregoing, it is amply clear that the credit facilities should include credit exposures (funded and not funded) that have been sanctioned by banks. Therefore, only exposures to banks and payments banks are to be included while calculating exposures, any or all the exposure of a borrower to the other financial institutions like NHB, LIC Housing, SIDBI, NABARD, Mutual funds & other development Banks are neither commercial banks nor payments banks hence are to be excluded. [The list of licensed payments banks by the RBI can be viewed here. ]

CIRLC captures credit information of borrowers having aggregate fund-based and non-fund based exposures of Rs. 5 Crores and above including investment exposures. The banks are required to submit a quarterly return to CIRLC. It is pertinent to note that total investment exposure is to be indicated separately under the head total investment exposure. While there is a need for a detailed breakup on fund-based and non-fund based credit facilities in the CIRLC return. The table below is an indicative list of (funded and non-funded) loans to be submitted from the CIRLC return.

 

Non-Funded credit exposure  Funded credit exposure
Letter of Credit Cash Credit/ Overdraft
Guarantees Working Capital Demand Loan (including CPs)*
Acceptances Inland Bills
Foreign Exchange Contracts Packing Credit
Interest Rate Derivatives (incl FX Interest Rate Derivatives) Export Bills
Term Loan
Credit equivalent of OBS/derivative exposure

*CP to be included in WCDL only if part of working capital sanctioned limit. All other CPs are to be considered as investment exposure.

Therefore, all the investment exposures of banks to the borrower such as investments in corporate bonds, shares, PTCs issued by asset reconstruction companies and securitisation companies, and others are to be excluded while arriving at aggregate fund-based and non-fund based credit facilities as under the Revised Guidelines. Nevertheless, the PTCs issued by NBFCs or HFCs are investment exposure of banks on the underlying loan pools and not on the originator entity. Similarly, exposure of a bank in a co-lending transaction is exposure on the ultimate obligor and not the co-originating partner NBFC.

 

 

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RBI refines the role of the Compliance-Man of a Bank

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Notifies new provisions relating to Compliance Functions in Banks and lays down Role of CCO.

By:

Shaivi Bhamaria | Associate

Aanchal Kaur Nagpal | Executive

Introduction

The recent debacles in banking/shadow banking sector have led to regulatory concerns, which are reflected in recent moves of the RBI. While development of a robust “compliance culture” has always been a point of emphasis, RBI in its Discussion Paper on “Governance in Commercial Banks in India’[1] [‘Governance Paper’] dated 11th June 2020 has dealt extensively with the essentials of compliance function in banks.  The Governance Paper, while referring to extant norms pertaining to the compliance function in banks, viz. RBI circulars on compliance function issued in 2007[2] [‘2007 circular’] and 2015[3] [‘2015 circular’], placed certain improvement points.

In furtherance of the above, RBI has come up with a circular on ‘Compliance functions in banks and Role of Chief Compliance Officer’ [‘2020 Circular’] dated 11th September, 2020[4], these new guidelines are supplementary to the 2007 and 2015 circulars and have to be read in conformity with the same. However, in case of or any common areas of guidance, the new circular must be followed.  Along with defining the role of the Chief Compliance Officer [‘CCO’], they also introduce additional provisions to be included in the compliance policy of the Bank in an effort to broaden and streamline the processes used in the compliance function.

Generally, in compliance function is seen as being limited to laying down statutory norms, however, the importance of an effective compliance function is not unknown. The same becomes all-the-more paramount in case of banks considering the critical role they play in public interest and in the economy at large. For a robust compliance system in Banks, an independent and efficient compliance function becomes almost indispensable. The effectiveness of such a compliance function is directly attributable to the CCO of the Bank.

Need for the circular

The compliance function in banks is monitored by guidelines specified by the 2007 and 2015 circular. These guidelines are consistent with the report issued by the Basel Committee on Banking Supervision (BCBS Report)[5] in April, 2005.

While these guidelines specify a number of functions to be performed by the CCO, no specific instructions for his appointment have been specified. This led to banks following varied practices according to their own tailor-made standards thus defeating the entire purpose of a CCO. Owing to this, RBI has vide the 2020 circular issued guidelines on the role of a CCO, in order to bring uniformity and to do justice to the appointment of a CCO in a bank.

Background of CCOs

The designation of a CCO was first introduced by RBI in August, 1992 in accordance with the recommendations of the Ghosh Committee on Frauds and Malpractices in Banks. After almost 15 years, RBI introduced elaborate guidelines on compliance function and compliance officer in the form of the 2007 circular which was in line with the BCBS report.

According to the BCBS report:

‘Each bank should have an executive or senior staff member with overall responsibility for co-ordinating the identification and management of the bank’s compliance risk and for supervising the activities of other compliance function staff. This paper uses the title “head of compliance” to describe this position’.

Who is a CCO and how is he different from other compliance officials?

The requirement of an individual overseeing regulatory compliance is not unique to the banking sector. There are various other laws that the provide for the appointment of a compliance officer. However, there is a significant difference in the role which a CCO is expected to play. The domain of CCO is not limited to any particular law or its ancillaries, rather, it is all pervasive. He is not only responsible for heading the compliance function, but also overseeing the entire compliance risk[6] in banks.

Role of a CCO in a Bank:

The predominant role of a CCO is to head the compliance function in a Bank. The 2007 circular lays down the following mandate of a CCO:

  1. overall responsibility for coordinating the identification and management of the bank’s compliance risk and supervising the activities of other compliance function staff.
  2. assisting the top management in managing effectively the compliance risks faced by the bank.
  3. nodal point of contact between the bank and the RBI
  4. approving compliance manuals for various functions in a bank
  5. report findings of investigation of various departments of the bank such as at frequent intervals,
  6. participate in the quarterly informal discussions held with RBI.
  7. putting up a monthly report on the position of compliance risk to the senior management/CEO.
  8. the audit function should keep the Head of compliance informed of audit findings related to compliance.

The 2020 circular adds additional the following responsibilities on the CCO:

  1. Design and maintenance of compliance framework,
  2. Training on regulatory and conduct risks,
  3. Effective communication of compliance expectations

Selection and Appointment of CCO:

The 2007 circular is ambiguous on the qualifications, roles and responsibilities of the CCO. In certain places the CCO was referred to as the Chief Compliance officer and some places where the words compliance officer is used. This led to difficulty in the interpretation of aspects revolving around a CCO. However, the new circular gives a clear picture of the expectation of RBI from banks in respect of a CCO. The same has been listed below:

Basis 2020 circular 2007 circular
Tenure Minimum fixed tenure of not less than 3 years The Compliance Officer should be appointed for a fixed tenure
Eligibility Criteria for appointment as CCO The CCO should be the senior executive of the bank, preferably in the rank of a General Manager or an equivalent position (not below two levels from the CEO). The compliance department should have an executive or senior staff member of the cadre not less than in the rank of DGM or equivalent designated as Group Compliance Officer or Head of Compliance.
Age 55 years No provision
Experience Overall experience of at least 15 years in the banking or financial services, out of which minimum 5 years shall be in the Audit / Finance / Compliance / Legal / Risk Management functions. No provision

 
Skills Good understanding of industry and risk management, knowledge of regulations, legal framework and sensitivity to supervisors’ expectations No provision
Stature The CCO shall have the ability to independently exercise judgement. He should have the freedom and sufficient authority to interact with regulators/supervisors directly and ensure compliance No provision
Additional condition No vigilance case or adverse observation from RBI, shall be pending against the candidate identified for appointment as the CCO. No provision
Selection* 1.      A well-defined selection process to be established

2.      The Board must be required to constitute a selection committee consisting of senior executives

3.      The CCO shall be appointed based on the recommendations of the selection committee.

4.      The selection committee must recommend the names of candidates suitable for the post as per the rank in order of merit.

5.      Board to take final decision in the appointment of the CCO.

 No provision
Review of performance appraisal The performance appraisal of the CCO should be reviewed by the Board/ACB No provision
Reporting lines The CCO will have direct reporting lines to the following:

1.      MD & CEO and/or

2.      Board or Audit Committee

 No provision
Additional reporting In case the CCO reports to the MD & CEO, the Audit Committee of the Board is required to meet the CCO quarterly on one-to-one basis, without the presence of the senior management including MD & CEO. No provision
Reporting to RBI 1.      Prior intimation is to be given to the RBI in case of appointment, premature transfer/removal of the CCO.

2.      A detailed profile of the candidate along with the fit and proper certification by the MD & CEO of the bank to be submitted along with the intimation, confirming that the person meets the supervisory requirements, and detailed rationale for changes.

 No provision
Prohibitions on the CCO 1.      Prohibition on having reporting relationship with business verticals

2.      Prohibition on giving business targets to CCO

3.      Prohibition to become a member of any committee which brings the role of a CCO in conflict with responsibility as member of the committee. Further, the CCO cannot be a member of any committee dealing with purchases / sanctions. In case the CCO is member of such committees, he may play only an advisory role.

 No provision

*The Governance paper had proposed that the Risk Management Committee of the Board will be responsible for selection, oversight of performance including performance appraisals and dismissal of a CCO. Further, any premature removal of the CCO will require with prior board approval. [Para 9(6)] However, the 2020 circular goes one step further by requiring a selection committee for selection of a CCO.

Dual Hatting

Prohibition of dual hatting is already applicable on the Chief Risk Officer (‘CRO’) of a bank. The same has also been implemented in case the of a CCO.

Hence, the CCO cannot be given any responsibility which gives rise to any conflict of interest, especially the role relating to business. However, roles where there is no direct conflict of interest for instance, anti-money laundering officer, etc. can be performed by the CCO. In such cases, the principle of proportionality in terms of bank’s size, complexity, risk management strategy and structures should justify such dual role. [para 2.11 of the 2020 circular] 

Role of the Board in the Compliance function

Role of the Board

The bank’s Board of Directors are overall responsible for overseeing the effective management of the bank’s compliance function and compliance risk.

Role of MD & CEO

The MD & CEO is required to ensure the presence of independent compliance function and adherence to the compliance policy of the bank.

Authority:

The CCO and compliance function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to enable him/her to carry out entrusted responsibilities in respect of compliance issues.

Compliance policy and its contents

The 2007 circular required banks to formulate a Compliance Policy, outlining the role and set up of the Compliance Department.

The 2020 circular has laid down additional points that must be covered by the Compliance Policy. In some aspects, the 2020 circular provides further measures to be taken by banks whereas in some aspects, fresh points have been introduced to be covered in the compliance policy, these have been highlighted below:

1. Compliance philosophy: The policy must highlight the compliance philosophy and expectations on compliance culture covering:

  • tone from the top,
  • accountability,
  • incentive structure
  • Effective communication and Challenges thereof

2. Structure of the compliance function: The structure and role of the compliance function and the role of CCO must be laid down in the policy

3. Management of compliance risk: The policy should lay down the processes for identifying, assessing, monitoring, managing and reporting on compliance risk throughout the bank.

The same should adequately reflect the size, complexity and compliance risk profile of the bank, expectations on ensuring compliance to all applicable statutory provisions, rules and regulations, various codes of conducts and the bank’s own internal rules, policies and procedures and must create a disincentive structure for compliance breaches.

4. Focus Areas: The policy should lay special thrust on:

  • building up compliance culture;
  • vetting of the quality of supervisory / regulatory compliance reports to RBI by the top executives, non-executive Chairman / Chairman and ACB of the bank, as the case may be.

5. Review of the policy: The policy should be reviewed at least once a year

Quality assurance of compliance function

Vide the 2020 circular, RBI has introduced the concept of quality assurance of the compliance function Banks are required to develop and maintain a quality assurance and improvement program covering all aspects of the compliance function.

The quality assurance and improvement program should be subject to independent external review at least once in 3 years. Banks must include in their Compliance Policy provisions relating to quality assurance.

Thus, this would ensure that the compliance function of a bank is not just a bunch of mundane and outdated systems but is improved and updated according to the dynamic nature of the regulatory environment of a bank.

Responsibilities of the compliance function

In addition to the role of the compliance function under the compliance process and procedure as laid down in the 2007 the 2020 circular has laid down the below mentioned duties and responsibilities of the compliance function:

  1. To apprise the Board and senior management on regulations, rules and standards and any further developments.
  2. To provide clarification on any compliance related issues.
  3. To conduct assessment of the compliance risk (at least once a year) and to develop a risk-oriented activity plan for compliance assessment. The activity plan should be submitted to the ACB for approval and be made available to the internal audit.
  4. To report promptly to the Board/ Audit Committee/ MD & CEO about any major changes / observations relating to the compliance risk.
  5. To periodically report on compliance failures/breaches to the Board/ACB and circulating to the concerned functional heads.
  6. To monitor and periodically test compliance by performing sufficient and representative compliance testing. The results of the compliance testing should be placed before the Board/Audit Committee/MD & CEO.
  7. To examine sustenance of compliance as an integral part of compliance testing and annual compliance assessment exercise.
  8. To ensure compliance of Supervisory observations made by RBI and/or any other directions in both letter and spirit in a time bound and sustainable manner.

 Actionables by Banks:

Links to related write ups –

[1] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49937

[2] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=3433&Mode=0

[3] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9598&Mode=0

[4] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11962&Mode=0

[5] https://www.bis.org/publ/bcbs113.pdf

[6]  According to BCBS report, compliance risk is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organization standards, and codes of conduct applicable to its banking activities”

PSL guidelines reviewed for wider credit penetration

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By Siddarth Goel (finserv@vinodkothari.com)

Introduction

The Reserve Bank of India (RBI) issued Master Directions-Priority Sector Lending (PSL) Targets and Classification on September 4, 2020 (‘Master Directions’)[1]. The Master Directions are in the nature of a consolidating piece, of various circulars and guidelines issued by RBI in regard to PSL. The objective of Master Directions is to harmonise instructions guidelines for Commercial Banks[2], Small Finance Banks (“SFB”)[3], Regional Rural Banks (“RRBs”)[4], Urban Co-Operative Banks (“UCBs”)[5] and Local Area Banks (“LABs”) for PSL targets and classification under single universe.

The objective of Master Directions is to consolidate all the concerning circulars to PSL under one master direction. However, certain changes have been introduced under the Master Directions in line with the recommendations of Expert Committee on Micro, Small and Medium Enterprises (Chairman: Shri U.K. Sinha) and the ‘Internal Working Group to Review Agriculture Credit’ (Chairman: Shri M. K. Jain).

This write up endeavors to highlight major changes which has been implemented through the said Master Direction that were not forming part of the erstwhile notifications or guidelines in this regard.

Changes in Targets / Sub-targets Classification for Priority Sector

The targets and sub-targets set under priority sector lending is computed on the percentage basis of Adjusted Net Bank Credit (ANBC)/ Credit Equivalent of Off-Balance Sheet Exposures (CEOBE). The Master Directions, has increased the total priority sector lending target for Urban Co-Operative Banks, which is to be achieved through milestones-based targets in a phased manner. Further there has been increase in targets for advances to weaker sections and Small Farmer Margins (SMF) in the agriculture sector. The table below summarises the changes along with timelines for complying with Targets/Sub-targets for PSL.

Categories Domestic Commercial Banks Small Finance Banks RRB Urban Co-Operative Bank#
Total Priority Sector No change No Change No Change Increased in total priority sector target from 40 % to 75% of ANBC or CEOBE whichever is higher.
Advances to Weaker Sections Target * Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%]

 Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%]

 No Change Increased to 12% of ANBC or CEOBE, whichever is higher.

[earlier target was 10%] 
Agriculture Target * -No Change Small Marginal Farmers (SMF) target increased to 10% of the 18% of ANBC or CEOBE, whichever is higher.

[earlier it was 8 % of 18%] 

 Small Marginal Farmers (SMF) target Increased to 10% of 18% of ANBC or CEOBE, whichever is higher.

[earlier it was 8% of 18%]

 No Target
Micro Enterprises No Change No Change No Change No Change

# Target of total priority sector to be achieved in phased manner by Co-operative Banks as below.

Existing Target March 31, 2021 March 31, 2022 March 31, 2023 March 31, 2024
40% 45% 50% 60% 75%

 

* Phased manner for achieving Small Marginal Farmers and Weaker Section Targets as below.

Financial Year SMF Weaker Section Target
2020-2021 8% 10%
2021-2022 9% 11%
2022-2023 9.5% 11.5%
2023-2024 10% 12%

Inclusion of Weights in PSL Achievement

From the UK Sinha committee recommendations,[6] in order to address regional disparities in flow of credit to district levels. Adjusted Priority Sector Lending mechanism has been implemented under the new regime, to incentivise flow of credit to underserved districts. There will be no change in the underlying sectors eligible for PSL, however an additional weightage has been given to lending to the more underserved districts. From financial year 2021-2022 onwards weights would be assigned to incremental priority sector credit as follows:

  • Higher weight (125%) would be assigned to the districts where credit flow is comparatively lower, that is per capita PSL less than ₹ 6,000.
  • Lower weight (90%) would be assigned to the districts where credit flow is comparatively higher, that is per capita PSL is greater than ₹ 25,000.

RRBS, Urban Co-operative Banks and Local Area Banks and Foreign Banks have been kept out for the purpose of calculation of PSL weights, due to their limited presence.

Inclusions in Eligible Categories

Along with the inclusion of fresh categories eligible for finance under priority sector there has been some enhancement in the credit limit of the existing categories as well. Some of the changes are as follows-

Agriculture Lending Including Farm Credit (Allied Activities), lending for Agriculture Infrastructure and Ancillary Activities.
  • Inclusion of loans to farmers for installation of stand-alone Solar Agriculture Pumps and for solarisation of grid connected Agriculture Pumps.
  • Inclusion of loans to farmers for installation of solar power plants on barren/fallow land or in stilt fashion on agriculture land owned by farmer
  • Inclusion of loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that are engaged in agriculture and allied services.
  • Inclusion of loans up to ₹2 lakh to individuals solely engaged in Allied activities without any accompanying land holding criteria. This change is in line with recommendation by M.K. Jain Committee[7].
  • Inclusion of loans for construction of oil extraction/ processing units for production of bio-fuels, their storage and distribution infrastructure along with loans to entrepreneurs for setting up Compressed Bio Gas (CBG) plants.
  • Laying of Indicative list conveying permissible activities under Food Processing Sector as recommended by Ministry of Food Processing Industries.
  • A credit limit of ₹5 crore per borrowing entity has been specified for Farmers Producers Organisations (FPOs)/Farmers Producers Companies (FPCs) undertaking farming with assured marketing of their produce at a pre-determined price. This inclusion is as per the M.K Jain Committee Recommendations[8].
Other Finance to MSMEs In line with the series of benefits being extended to MSMEs, loans up to ₹50 crore to Start-ups, as per definition of Ministry of Commerce and Industry, Govt. of India that confirm to the definition of MSME has been included under the PSL catergory. (On the basis of recommendations by UK Sinha Committee, to financially incentivise the startups in India)
Housing Loans

 
  • Increase in Loans up to ₹ 10 lakh (earlier ₹ 5 lakh) in metropolitan centres and up to ₹6 lakh (earlier 2 ₹ Lakh) in other centres for repairs to damaged dwelling units.
  • Bank loans to governmental agency for construction of dwelling units or for slum clearance and rehabilitation of slum dwellers subject to dwelling units with carpet area of not more than 60 square meters. Under the earlier regime, it was based on cost of dwelling unit which was ₹ 10 lakh per unit.
  • Inclusion of bank loans for affordable housing projects using at least 50% of FAR/FSI (Floor Area Ratio/ Floor Space Index) for dwelling units with carpet area of not more than 60 sq.m.
Social Infrastructure

 

 Inclusion of loans up to a limit of ₹ 10 crore per borrower for building health care facilities including under ‘Ayushman Bharat’ in Tier II to Tier VI centres. This is in addition to the existing limit of ₹5 crore per borrower for setting up schools, drinking water facilities and sanitation facilities including construction/ refurbishment of household toilets and water improvements at household level, etc.
Renewable Energy Increase in loan limit to ₹ 30 Crore for purposes like solar based power generators, biomass-based power generators, wind mills, micro-hydel plants and for non-conventional energy based public utilities etc. This is to boost renewable energy sector, the earlier limit was up to ₹ 15 Crore.
Others

 

 Inclusion of loans for meeting local needs such as construction or repair of house, construction of toilets not exceeding ₹2 lakh provided directly by banks to SHG/JLG for activities other than agriculture or MSME.

Investments by Banks in Securitised Assets & Direct Assignment

Earlier the interest rate charged to the ultimate borrower was capped at Base Rate of the investing bank plus 8 percent per annum. Post UK Sinha Committee recommendation,[9] the all-inclusive interest charged to the ultimate borrower by the originating entity should not exceed the External Benchmark Lending Rate (EBLR)/ MCLR of the investing bank plus appropriate spread which will be communicated separately.

The intent of the recommendation stood on the grounds that price caps are not applicable to banks when they originate directly through branches. Therefore, to encourage MSME lending in smaller areas where cost of intermediation is high by the smaller NBFCs, the committee proposed the cap at Base Rate of the investing bank plus 12% per annum initially and periodical review thereafter.

Conclusion

The Master Direction aids in compilation and provides easy understandability of all the guidelines at one place. The two committee reports recommendations have aided in recognising important sub-sectors of economy which were not covered under earlier regimes. Loans to starts-ups in agriculture and allied activities, loans to healthcare, sanitation along with impetus on renewable energy will not only bolster flow of credit in these sectors but also aimed at improving socio-economic conditions in the country. The introduction of incentive on incremental PSL by ranking of districts on basis of per capita credit flow could be an enabler for the deeper penetration of credit in rural economy. Therefore, the new Master Direction is a welcome move and will help in achieving better channeling of credit in the desired sectors of the economy.

[1] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/MDPSL803EE903174E4C85AFA14C335A5B0909.PDF

[2] https://rbidocs.rbi.org.in/rdocs/notification/PDFs/33MD08B3F0CC0F8C4CE6B844B87F7F990FB6.PDF

[3] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11644&Mode=0

[4] https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11604&Mode=0

[5] https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11274&Mode=0

[6] Para 9.24, Report of the Expert Committee on Micro, Small and Medium Enterprises, (UK Sinha Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

[7] Para 1.7.6, Report of the Internal Working Group to Review Agricultural Credit, ( M. K Jain Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=942#CP28

[8] Para 2.7.5, Report of the Internal Working Group to Review Agricultural Credit, ( M. K Jain Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=942#CP28

[9] Para 9.24, Report of the Expert Committee on Micro, Small and Medium Enterprises, (UK Sinha Committee) https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=924

RBI guidelines on governance in commercial banks

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Vinita Nair | Senior Partner

Vinod Kothari & Company

vinita@vinodkothari.com

Prudential Framework for Resolution of Stressed Assets: New Dispensation for dealing with NPAs

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By Vinod Kothari [vinod@vinodkothari.com]; Abhirup Ghosh [abhirup@vinodkothari.com]

With the 12th Feb., 2018 having been struck down by the Supreme Court, the RBI has come with a new framework, in form of Directions[1], with enhanced applicability covering banks, financial institutions, small finance banks, and systematically important NBFCs. The Directions apply with immediate effect, that is, 7th June, 2019.

The revised framework [FRESA – Framework for Resolution of Stressed Accounts] has much larger room for discretion to lenders, and unlike the 12th Feb., 2018 circular, does not mandate referral of the borrowers en masse to insolvency resolution. While the RBI has reserved the rights, under sec.  35AA of the BR Act, to refer specific borrowers to the IBC, the FRESA gives liberty to the members of the joint lenders forum consisting of banks, financial institutions, small finance banks and systemically important NBFCs, to decide the resolution plan. The resolution plan may involve restructuring, sale of the exposures to other entities, change of management or ownership of the borrower, as also reference to the IBC. Read more →

Anticipated boost in liquidity position of NBFCs and HFCs

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By Vineet Ojha (vineet@vinodkothari.com)

Read more →

RBI’s First Monetary Policy for FY 2018-19

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Anita Baid

finserv@vinodkothari.com

 

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: Read more →

RBI discontinues LoUs and LoCs

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Seems to be running ‘the Great Sparrow Campaign’

Vallari Dubey & Nikhil Jain

finserv@vinodkothari.com

The Reserve Bank of India (RBI) via a Notification dated March 13, 2018[1] has discontinued the use of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits with immediate effect. Read more →

Regulations on Prepaid Payment Instruments -Comparing the Master Circular and Master Directions

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By Anita Baid, (finserv@vinodkothari.com)

With an enlarged view of the Government to make India go cashless and straddle towards the concept of digitalisation, many companies, specifically NBFCs are seeking approval from the Reserve Bank of India (RBI) to set up business in Prepaid Payment Instruments (PPI). Before getting into the present regulatory framework of such PPIs, one needs to understand the concept of such instruments. PPIs are a form of digital electronic instruments. PPI issuers open an account for its account holders known as PPI holders and with the help of such account, withdrawal/ deposit is made for some pre-ascertained payments or receipt. A certain amount is deposited into such PPI Account from the holder’s Bank A/c and using the balance deposited in the PPI Account, payments are made and/or even cash is received. The introduction of such mechanism enables a person to go cashless. Such PPI instruments can be of three types: Read more →