UPIs become virtual credit cards: A game changer in credit delivery

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– Vinod Kothari & Abhirup Ghosh | finserv@vinodkothari.com

The recent notification[1] by the RBI permitting banks to provide pre-sanctioned credit facilities to be used by Unified Payment Interface (UPI) is a game changer. The full dimensions of this new mode of extending credit will possibly take some time to develop or demonstrate, but clearly, as UPI itself changed the way the country handles payments, the linking of UPI with pre-sanctioned credit facilities is also a major change.

Currently, UPIs may pull money from the customer’s bank account (current or savings account), overdraft accounts, prepaid wallets or credit cards. Now, UPI may have a linked credit facility as well, and a customer may dip into that credit line while making any payment for which she currently uses UPI.

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Loan Penal Charges: Accounting and GST implications

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Abhirup Ghosh, Qasim Saif & Aanchal Kaur Nagpal  | finserv@vinodkothari.com

Background

Levying of penal charges or late payment charges are claimed as ‘just’, owing to the underlying breach of contract under the Contract Act, 1972. A breach or a non-performance by one party entitles the other party to receive compensation for any loss or damage suffered due to such breach. Penalties may not only be compensatory; they also have a deterrent element.

In order to ensure compliant behaviour, lenders  charge penalties to their borrowers for various ‘events of default’; the predominant ones being penalty for delayed payments (in the form of charges or interest) and prepayment penalties. However, such charges stopped being ‘just’ and ‘reasonable’ when lenders started maneuvering such penalties as revenue enhancement tools, rather than as a deterrent measure and compensation for a breach. Such unreasonable penalties coupled with non-disclosures, compounding of penal interest, etc. were highly prejudicial to consumer interest and accordingly, caught the eye of the regulator. 

The RBI introduced guidelines to the lenders to ensure reasonableness and transparency in the disclosure of penal interest vide its Circular on ‘Fair Lending Practice – Penal Charges in Loan Accounts’(RBI Guidelines on penal charges’)  dated August 18, 2023. Our article and FAQs[1] on the same may be read here[2].Our YouTube video discussing the guidelines may be viewed here.

However, charging penal interest also raises several practical questions for lenders, mainly indirect taxation and accounting of penal charges, which will be discussed in detail in this article.

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FAQs on Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans

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– Team Finserv | finserv@vinodkothari.com

On August 18, 2023, the RBI came up with a circular on Reset of Floating Interest Rate on Equated Monthly Instalments (EMI) based Personal Loans (‘Circular) casting certain obligations and disclosure requirements on Regulated Entities (REs) at the time of reset of floating interest rate on EMI based Personal loans. Accordingly, this Circular shall be adhered to by all applicable entities at the time of reset of floating interest rate on such loans.

We have developed a set of FAQs on the Circular, where we intend to answer some of the critical questions relating to the actionables by the REs at the time of reset of floating rate. 

Further, our detailed article on this topic can be read here – RBI streamlines floating rate reset for EMI-based personal loans

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RBI streamlines floating rate reset for EMI-based personal loans

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Major exercise for home lenders to reflect changes in existing home loans by year-end

– Team Finserv | finserv@vinodkothari.com

As indicated in the last Monetary Policy review, the RBI introduced new regulations for rate-based variations in floating rate loans, requiring lenders to mandatorily provide as many as 6 options to borrowers. The new regulations, vide the August 18, 2023[1] circular, will require all long-term consumer credit lenders, mainly home lenders, to incorporate changes in their policies and agreements by the end of the calendar year. We are of the view that this will also necessitate lenders to provide a meaningful fixed rate borrowing option, both at the start of the loan as also at the time of interest rate variations.

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Penal Charges get regulated; cannot accrue interest

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– Aanchal Kaur Nagpal | Senior Manager | aanchal@vinodkothari.com

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Our Resources on the topic are:

  1. Penal charges not a cash-cow for lenders
  2. The Dos and Don’ts of Penal Charges

KYC/AML risk categorisation of customers

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Key Points as per the RBI’s Directions on Risk Management under the KYC and PML Regime

-Anita Baid | Vice President | anita@vinodkothari.com

In line with the Reserve Bank of India’s (RBI) directions on risk management under the Know Your Customer (KYC) norms and Anti-Money Laundering (AML) standards, Non-Banking Financial Companies (NBFCs) are required to categorize their customers into low, medium, and high-risk categories. This risk categorization plays a crucial role in determining the level of due diligence to be undertaken by the NBFC while establishing and maintaining relationships with customers. Here are some key points to consider regarding the risk categorization process for legal entities (corporate borrowers, LLPs, trust, etc.) as well for individual borrowers:

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Risk-based Internal Audit for NBFCs – Applicability & Implementation

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– Subhojit Shome, Assistant Manager | subhojit@vinodkothari.com

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Read our other resources on RBIA here:

  1. Risk-based Internal Prescription for Audit Function

Rise, Fall & Subsequent Legitimisation of Default Loss Guarantees

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Anita Baid & Subhojit Shome | finserv@vinodkothari.com

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Read our FAQs on Default Loss Guarantee in Digital Lending

YouTube live: RBI Guidelines on Default Loss Guarantee

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Anita Baid in conversation with Vinod Kothari

Live on YouTube – 20th June, 2023 | 5:00 P.M. – https://www.youtube.com/@vinodkotharicompany3966/videos

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A comprehensive framework for compromise settlement and technical write offs

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Dayita Kanodia | Executive finserv@vinodkothari.com

The first bad bank loan was, no doubt, made around the time as the opening of the first bank.

James Grant[1]

Background

RBI  released the Framework for Compromise Settlements and Technical Write-offs[2] (Framework) on June 8 2023. This framework, issued exactly four years after the release of the Prudential Framework for Resolution of Stressed Assets[3] (PFRSA), aims to rationalize and harmonize the instructions earlier issued. Additionally, while PFRSA was applicable only to banks and systemically important NBFCs (among others), the present Framework is applicable across all REs, including base layer NBFCs.

Subsequently, to clear the ambiguities that may have arisen after the issuance of the Framework, the RBI also released a set of Frequently Asked Questions[4] on the topic: of these, these FAQs were largely intended to respond to certain questions of intent that were being thrown at the regulator in releasing the Framework.

This article discusses the Framework along with its applicability, as also it intends to help REs to make a calculated decision on choosing between compromise settlements, writedowns, restructuring, or doing nothing at all. For either of the options, the article also discusses  the other requirements which need to be ensured while pursuing the option. 

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