Amendments to Credit Card and Debit Card Master Direction: Enhancing Consumer Protection

-Archisman Bhattacharjee I finserv@vinodkothari.com

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Expected credit losses on loans: Guide for NBFCs

– Vinod Kothari | finserv@vinodkothari.com

One of the most important, and often the most complicated issues in applying IndAS 109 to financial assets, particularly loan portfolios, is to the computation of expected credit losses (ECL). The following points need to be noted about ECL computation:

  • ECL is not relevant for assets which are subject to FVTPL. Hence, ECL computation is relevant for assets subject to amortised cost and FVOCI. This means, practically, all loan assets of NBFCs will be covered.
  • ECL is not a provision – it is a loss allowance. Therefore, ECL is debited to P/L account.
  • ECL is to be measured and re-measured every reporting period.
  • ECL is a present value measure. Therefore, even if there is no change in the estimates of the delays or defaults, there will still be a change in the ECL estimates, due to unwinding of the discount. The unwinding of the discount results in reduction of the ECL allowance.
  • The assessment of ECL has to be done even if the loan is perfectly performing. In fact, ECL computation has to be done at the very inception of the loan, when the question of monitoring its performance does not arise. As to why ECL is relevant for a performing loan, see discussion below.
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Streamlined Regulatory Reporting Across Specified Entities

– Archisman Bhattacharjee & Kaushal Shah | finserv@vinodkothari.com

What is the circular about?

In order to harmonise the procedure of filing of regulatory returns across Supervised Entities (SEs) and create a single reference point, the RBI has issued Master Directions RBI (Filing of Supervisory Returns) Directions, 2024 (‘Returns Master Directions’) on February 27, 2024. As stated in the Statement on Developmental and Regulatory Policies dated August 10, 2023, these directions consolidate and harmonize instructions for filing supervisory/ regulatory returns.  

Who is it applicable on?

The Returns Master Directions cover the following entities, collectively referred to as Supervised Entities (‘SEs’):  

  • All Commercial Banks including:
    • Public Sector Banks,  
    • Private Sector Banks,  
    • Small Finance Banks,  
    • Payments Bank,  
    • Local Area Banks, and 
    • Foreign Banks.
    • (excluding Regional Rural Banks)
  • Primary (Urban) Co-operative Banks. 
  • All India Financial Institutions (including Exim Bank, NABARD, NHB, SIDBI, and NABFID)
  • All NBFCs (excluding HFCs)
    • HFCs are excluded as their supervisory role is undertaken by NHB
  • All Asset Reconstruction Companies

From when are the new Returns Master Directions effective?

These Master Directions are effective immediately as on the date of notification (i.e. February 27, 2024)

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IT Governance: Upgrade needed by April 01, 2024

– Subhojit Shome, Manager | finserv@vinodkothari.com

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Tech-driven compliance monitoring and validation of internal models

– Anita Baid, finserv@vinodkothari.com 

Streamlining internal compliance monitoring function

The recent RBI directive on streamlining the internal compliance monitoring function by leveraging technology has raised concerns regarding actionable on the part of regulated entities covered thereunder. The notification on Streamlining of Internal Compliance monitoring function – leveraging use of technology dated January 31, 2024 is based on RBI’s review of of the prevailing system in place for internal monitoring of compliance with regulatory instructions and the extent of usage of technological solutions to support this function.

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Online Workshop on Regulatory Concerns on Fair Lending Practices and KYC

Register here: https://forms.gle/cQ3RYWAwhqd3hqTs7
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Our resources on KYC can be accessed here.

Our resources on SBR:

NBFC Regulation turned sixty

Vinod Kothari, finserv@vinodkothari.com

Not sure if any cake was cut[1], but NBFC regulation turned 60, on 1st Feb., 2024. It was on 1st Feb., 1964 that the insertion of Chapter IIIB in the RBI Act was made effective. This is the chapter that gave the RBI statutory powers to register and regulate NBFCs.

1964: Insertion of regulatory power

What was the background to insertion of this regulatory power? Chapter IIIB was inserted by the Banking Law (Miscellaneous Provisions) Act, 1963. The text of the relevant Bill, 1963  gives the object of the amendment: “The existing enactments relating to banks do not provide for any control over companies or institutions, which, although they are not treated as banks, accept deposits from the general public or carry other business which is allied to banking. For ensuring more effective supervision and management of the monetary and credit system by the Reserve Bank, it is desirable that the Reserve Bank should be enabled to regulate the conditions on which deposits may be accepted by these non-banking companies or institutions. The Reserve Bank should also be empowered to give to any financial institution or institutions directions in respect of matters, in which the Reserve Bank, as the central banking institution of the country, may be interested from the point of view of the control of credit policy.”

Therefore, there were 2 major objectives – regulation of deposit-taking companies, and giving credit-creation connected directions, as these entities were engaged in quasi-banking activities.

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RBI (Commercial Paper and Non-Convertible Debentures of original or initial maturity upto one year) Directions, 2024

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Harmonising computation for concentration limits across NBFCs

– Kaushal Shah, finserv@vinodkothari.com 

Reserve Bank of India (RBI) has recently announced amendments to the Credit and Investment concentration norms, specifically targeting Base and Middle Layer Non-Banking Financial Companies (NBFCs). The circular, dated January 15, 2024, brings about notable changes aimed at ensuring uniformity and consistency across NBFCs while computing the concentration norms. 

What has RBI done?

For Middle Layer NBFCs (NBFC-MLs) :

  1. In addition to the use of Credit Default Swaps (‘CDS’), RBI has now allowed NBFC MLs to offset the aggregate exposure with the following additional Credit Risk Transfer (CRT) instruments: 
  • Cash margin/caution money/security deposit held as collateral on behalf of the borrower against the advances for which right to set off is available;

It is pertinent to note that, as per para 84 of the SBR Directions, already requires the NBFC for the purpose of assignment of risk weight to net off the amount of cash margin/ caution money/security deposits held as collateral against the advances out of the total outstanding exposure of the borrower. 

  • Central Government guaranteed claims which attract 0 per cent risk weight for capital computation;
  • State Government guaranteed claims which attract 20 per cent risk weight for capital computation; and 
  • Guarantees issued under Credit guarantee Schemes of Credit Guarantee Fund Trust for Micro and Small Enterprises, Credit Risk Guarantee Fund Trust for Low Income Housing and individual schemes under National Credit Guarantee Trustee Company Ltd
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RBI mandates appointment of an Internal Ombudsman by NBFCs

Updated as on December 29, 2023

– Team Finserv | finserv@vinodkothari.com

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Our Resources on the topic:

  1. RBI mandates appointment of an Internal Ombudsman by NBFCs
  2. RBI’s Ombudsman storm- Tough road ahead for NBFCs
  3. Ombudsman Scheme for PPI issuers
  4. Extension of Ombudsman Scheme to remaining class of notified NBFCs