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RBI clarifications on computation of Tier 1 capital

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– Siddharth Pandey, Assistant Manager | finserv@vinodkothari.com

Over time, RBI has received multiple representations from NBFCs seeking a review of the provisions and clarity on certain aspects for the computation of Owned Funds and Tier I capital. In response, RBI has reviewed the relevant directions and guidelines and has now proposed a set of clarifications and revisions aimed at aligning capital computation with the latest available financial position. 

RBI had issued Draft Amendment Directions vide its press release dated January 13, 2026, on ‘Clarification on Owned Fund / Tier 1 Capital computation for NBFCs / ARCs and applicability to “Credit / Investment Concentration” Norms’ proposing amendments to various relevant Master Directions. The said proposals have now been notified by the Reserve Bank of India through its press release dated March 10, 2026. 


Tier 1 is the core component of an NBFC’s regulatory capital. The same is arrived at by deducting exposure taken in group companies and other NBFCs (to the extent the same exceeds 10% of the owned funds) from the owned funds. NBFCs are required to maintain 15% of their risk-weighted assets as capital, in the form of Tier 1 and Tier 2, on an ongoing basis. In addition to maintaining the capital adequacy, Tier 1 capital also serves as an important benchmark to compute the maximum exposure an NBFC can take in a single borrower/group of borrowers. 

Analysis of the proposed changes

Owned Fund forms a key component of regulatory capital and includes free reserves, which, in simple terms, represent accumulated profits retained by an NBFC and available for unrestricted use. By including adjusted quarterly profits in the Owned Fund, NBFCs will be allowed to factor in profits earned during the current financial year without having to wait for completion of the year-end audit.

However, crucial points that comes to light on the reading of the above mentioned amendments are:

  1. Inclusion of quarterly profits has been specifically included in the computation of owned funds for the purpose of determining the capital adequacy. 
  2. Tier 1 capital for the purpose of concentration risk management is to be seen from the last available financial statements (audited or subject to limited review). Here, the definition of Tier 1 capital has to be referred from the capital adequacy directions; further, the same shall be based on the latest audited financial statements.

Accordingly, based on the above, it can be said that while determining Tier 1 capital for calculating the maximum exposure an NBFC can take, both adjusted quarterly profits as well as any capital raised during the year will be considered. However, for the purpose of capital adequacy, only adjusted quarterly profits have been included. There is no clarity being provided for the inclusion of capital raised during the quarter for capital adequacy computation. This creates a distinction between the two provisions with respect to the computation of Tier 1 capital. There is therefore a requirement to provide further clarity on the same since there seems to be no proper rationale for such divergence. 

It is also pertinent to note that the amendments are introduced in the definition of owned funds and thus affects the Tier 1 capital of an NBFC. However, the minimum net owned funds (NOF) that NBFCs are required to maintain is governed by section 45-IA(7)(i) of the RBI Act, 1934. These amendments therefore do not have any impact on the NOF computation. 

What was proposed and what has been notified?

While the final notification broadly retains the approach proposed in the draft amendment directions, RBI has also replaced the definitions of “Owned Fund” and “Tier 1 Capital” in the Concentration Risk Management Directions, 2025 by linking them directly to the definitions contained in the Prudential Norms on Capital Adequacy Directions, 2025. 

Further, an additional procedural requirement has been introduced for recognising capital augmentation while computing exposure limits. Specifically, the amended definition of Tier 1 capital provides that,

“2) Paragraph 4 (8) shall be replaced by:

“Tier 1 capital” shall have the same meaning as given in Chapter II of the Reserve Bank of India (Non-Banking Financial Companies – Prudential Norms on Capital Adequacy) Directions, 2025. However, for the purpose of concentration norms, the NBFC shall obtain an external auditor’s certificate on completion of the augmentation of capital and submit the same to the Department of Supervision of the RBI before reckoning the additions to capital funds.”

This clarification further reinforces the distinction noted earlier in the draft amendments. Accordingly, even though an NBFC may raise fresh capital during the year (for instance, through issuance of shares or infusion of additional equity), such capital cannot immediately be used for expanding exposure limits under the concentration norms. Before counting the increased capital, the NBFC must:

  • Complete the capital augmentation process (actually receive the funds).
  • Obtain a certificate from its external auditor confirming that the capital increase has been completed.
  • Submit that certificate to the RBI’s Department of Supervision.

Only after abiding by this process can the NBFC include the additional capital in Tier 1 capital for calculating concentration limits.

Key Changes Notified

  1. Amendment to the computation of Owned Funds 

RBI vide amendment in the Prudential Norms on Capital Adequacy directions has allowed NBFCs to consider the quarterly profits as a part of the owned funds computation, subject to certain adjustments. 

Earlier, as per the RBI Circular dated April 19, 2022, RBI permitted the inclusion of current-year profits in CET 1 capital, which was applicable only to NBFCs classified in the Upper Layer. Thus, other NBFCs were not specifically allowed to consider such quarterly profits as a part of their owned funds. 

The inclusion of quarterly profits as a part of the owned funds and consequently in Tier 1 capital is subject to certain conditions (adjusted quarterly profits):

  • The quarterly financial statements are subjected to limited review by the statutory auditors, and
  • The profits included are reduced by the average dividend paid during the preceding three financial years.
  • Further, any losses incurred during the year should also be fully reduced from the owned funds. 

Illustration:

In a simple illustration, an NBFC-ML earns a profit of ₹ 4 crores up to Q3 of FY 25-26. Let’s assume the average dividend paid during the last three years is ₹3 crore per annum.

Position under the Existing Norms:

Only audited, year-end profits could be considered as a component of the Owned Fund for capital computation. Thus ₹4 crore profits earned during the current year (up to December 2025) could not be included in free reserves and consequently under Owned Funds.

Proposed amendment:

Under the draft amendment, adjusted quarterly profits are permitted to be included in free reserves and Owned Fund, computed as per the below formula:

EPt = NPt – 0.25 *D*tWhere:EPt = Eligible profit up to quarter ‘t’ of the current financial year, t varies from 1 to 4NPt = Net profit up to quarter ‘t’D = average dividend paid during the last three years

In our example,

NPt = ₹4 crores (profit up to Q3)

D = ₹3 crore (average dividend of last three years)

t = 3 (up to December)

EP = 4−(0.25×3×3) = 1.75

Hence, ₹1.75 crore can be taken as an eligible profit for capital computation. 

  1. Amendments to Tier I Capital for credit/investment concentration norms

To give effect to the proposed revisions in the computation of Tier 1 capital, consequential amendments have been done in the Master Direction – RBI (NBFC – Concentration Risk Management) Directions, 2025, vide the RBI (NBFC – Concentration Risk Management) Second Amendment Directions, 2026. These amendments modify the manner of determining Tier I capital solely for the purpose of credit and investment concentration norms. In this regard, the following insertion has been proposed:

“The applicable Tier 1 Capital for compliance with the norms stated in paragraphs 13 and 14 above, shall be determined based on the NBFC’s latest available financial statements (audited or subject to limited review).”

“Tier 1 Capital shall be as defined in paragraph 10 of the RBI (NBFC – Prudential Norms on Capital Adequacy) Directions, 2025.”

Our Resources:

  1. Like banks, NBFC-UL to maintain CET-1 capita
  2. Harmonising computation for concentration limits across NBFC
  3. Should OCI be included as a part of Tier I capital for financial institutions?

Profit, Prudence and Payouts: New RBI Regulation for Dividends by Banks

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Dayita Kanodia and Simrat Singh | finserv@vinodkothari.com

RBI on March 10, 2026 issued the Reserve Bank of India (Commercial Banks – Prudential Norms on Declaration of Dividend and Remittances of Profits) Directions, 2026 (‘Dividend Directions’). Earlier, a draft was issued on January 6, 2026 seeking comments from stakeholders. The Dividend Directions replaces the existing directions entirely and introduces concepts like Adjusted PAT, CET1-based dividend bucket framework and prescribes a list of ‘ineligible profits’ for the payment of dividend. 

This article discusses the key changes in the regulatory requirements for the payment of dividends by banks.

Adjusted PAT: A risk-adjusted base for dividend distribution

Dividend has to be paid as a percentage of adjusted PAT. Adjusted PAT is the PAT of the financial year for which the dividend is proposed to be paid minus 50% of Net NPA as on March 31 of the financial year for which the dividend is to be paid. By linking dividend payouts with asset quality, the framework ensures that banks with higher stressed assets retain a larger portion of earnings rather than distributing them as dividends.

Maximum Permissible Dividend Payable

Under the earlier directions, whether a bank could declarate dividend or not depended, inter-alia, on a matrix combining CRAR and NNPA ratios and the maximum dividend payout ratio was capped at 40% of net profit, depending on capital adequacy and asset quality. 

The Dividend Directions replace the earlier CRAR-NNPA based matrix with a CET1 capital ratio bucket framework. Under the new system, banks fall within the various ranges of CET1 capital buckets (10 in total), each prescribing the maximum percentage of dividend that may be declared out of Adjusted PAT. At the same time, the overall dividend distribution is capped at 75% of PAT.

An illustration of the computation of the maximum permissible dividend payable is shown below:

(₹ in crores)
Total Assets500000
PAT3000
Net NPA (NPA – Prov)500
Adjusted PAT (PAT – 50%* NNPA)2,750
CET 1 Capital (end of PY)12%
Dividend allowed (new directions) [max of (30%*Adj. PAT) or (75% of PAT)]825
Dividend allowed (erstwhile directions) (35%*PAT)1050

Ineligible Profits for the payment of dividends

The Directions identify 4 kinds of profits that cannot be used for payment of dividends or remittance of profits:

  1. Extra-ordinary or exceptional profits: banks cannot distribute one-time or abnormal profits. The definition of exceptional profits has to be taken from the applicable accounting standards. Banks will therefore have to ascertain the items which lead to extraordinary profits and exclude them while declaring dividends. Any profits from activities or transactions that are not in the ordinary course of business will therefore have to be excluded. 
  2. Overstatement of PAT flagged by auditor: If the audit report contains a modified opinion indicating overstatement of PAT, the overstated portion cannot be used for dividend payments.
  3. Unrealised gains on level 3 financial instruments: RBI (Commercial Banks – Classification, Valuation and Operation of Investment Portfolio) Directions, 2025 provides that dividends cannot be paid out of net unrealised gains recognised in the Profit and Loss Account arising on fair valuation of Level 3 investments on its Balance Sheet. The same has now been specified under the Dividend Directions as well. 
  4. Reversal of excess provisions or unrealised gains from transfer of loans/ SRs guaranteed by GoI: In terms of the RBI (Commercial Banks – Transfer and Distribution of Credit Risk) Directions, 2025, the non cash component of the excess provision remaining with the bank at the time of transfer (Excess provision minus cash received as consideration for transfer) cannot be used for the payment of dividend. Further, with respect to the SRs guaranteed by the GOI, it has been provided that any unrealised gain recognised in the Profit and Loss Account on account of fair valuation of such SR investments shall be deducted from CET 1 capital, and no dividends can be paid out of such unrealised gains. 

Changes in Eligibility Criteria

The earlier directions required banks to maintain CRAR of at least 9% for the preceding two financial years and the relevant financial year, along with an NNPA ratio below 7%, and permitted dividends only out of current year profits. 

The revised framework removes the NNPA threshold and historical CRAR requirements and instead adopts a simple prudential condition, ie., Banks must be in compliance with regulatory capital requirements and must continue to remain compliant even after the proposed dividend payment. In addition, the bank must have a positive Adjusted PAT for the relevant financial year in which the dividend has to be paid. 

Other Relevant Changes

Board Oversight

The Dividend Directions require the Board to evaluate certain factors before approving the declaration of dividend. In particular, the Board must consider RBI supervisory findings relating to divergence in asset classification and NPA provisioning, the statutory auditor’s report including any modified opinion or emphasis of matter, the bank’s current and projected capital position vis-à-vis regulatory capital requirements and the bank’s long-term growth plans. 

Definition of Dividend

Dividend has been clarified to mean to include interim dividend as well. Further, it shall consider dividend payable on equity shares and excludes dividend on Perpetual Non-Cumulative Preference Shares (PNCPS). Dividend payable on compulsorily convertible preference shares will, however, be included. 

Reporting Mechanism

A bank paying dividend or remitting profits to the head office will be required to report details as per the format prescribed under Annex II of the Dividend Directions. The report is required to be furnished to the DoS within a fortnight of declaration of dividend / remitting profits to head office. Earlier, such a report was required to be furnished to the DoR. 

Representation on the draft Amendment Directions for exemption from registration to eligible NBFCs

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Representation on the Draft Directions for ‘Advertising, Marketing and Sales of Financial Products and Services by Regulated Entities’

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Leading to the world of LBOs: RBI opens up acquisition finance

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Vinod Kothari, Payal Agarwal and Simrat Singh | finserv@vinodkothari.com

The RBI recently opened the avenues for banks to provide funding for acquisitions. For domestic banks, enabling changes were made vide Amendment Directions on Capital Market Exposure dated 13.02.2026, covered in our write up here, and for global banks, the enabling amendments were made in ECB Regulations by relaxing the end-use restrictions vide notification here, covered in our write up here.

This write up discusses what is acquisition finance, what are the global structures and risks, and whether India will now be ushered in the new, arguably risky world of leveraged finance.

What is acquisition finance?

Acquisition finance, known by various names such as M&A finance, leveraged finance, LBO finance, etc is globally practiced by banks. Wherever there are inflexibilities or restrictions on banks lending for acquisitions, the gap has given room for private credit lenders, special situation funds and alternative investment funds to chip in – which is what accounts for the sharp rise in private credit funds. See our  article on private credit AIFs here. 

LBO financing added to approximately US $214 Billion globally for 2024. As per a 2024 S&P report, banks funded only about 23% of LBO financing globally with private debt players covering the other 77%. The reasons for such reduced share for banks include intensive capital charge applicable to banks, lower profitability on such loans and over-leverage risks (see discussion below). 

Source: S&P Global

How is acquisition finance structured?

The end-use of acquisition finance is the control or significant holding over the target. Therefore, quite naturally, the collateral for acquisition finance are the shares of the target. Taking the collateral is intuitive, but the issue is, how is the loan repayment structured? The most logical way to structure an LBO is to align the loan repayment with the residual cash flows from the target. Hence, it is returns on equity from the target that pay the loan.

Lenders may quite structure the loan with the possibility of refinancing the acquisition, such that the initial funding term is not as long as the payback period of the target is. For example, a company borrows ₹500 Crores to acquire a business generating ₹100 Crores annually, repays only ₹20 Crores of loan each year for 5 years, leaving ₹400 Crores outstanding at maturity, which it then refinances with a new ₹400 Crores loan instead of fully repaying from operating cash flows. The key risk in such a case would be refinancing risk i.e. if credit markets tighten, the company may be unable to roll over the ₹400 Crores at maturity. There is also interest rate risk, as the new loan may be available only at a higher cost, increasing the debt burden.

Acquisition finance is quite risky, as it is funding the residual return which itself is impacted by all the risks of the target’s business; any downturn in performance directly impairs debt servicing capacity. It is a leverage created on structure, which itself is leveraged. Therefore, lenders may quite often be comfortable with the strength of the acquirer’s own business, etc. But the standalone strength of the cash flows of the target’s business is the ultimate comfort for an LBO investor.

Debt tranching in acquisitions

Usually a LBO is undertaken by multiple lenders so as to cut down on individual exposure and risk further and in such cases each lender may have varying risk and return expectations. In such a multi-lender LBO, instead of issuing one big, uniform loan, the capital stack is layered into tranches with different priority, pricing, maturity and covenants. Therefore, there can be senior and mezzanine debt, with tranches itself within these such as high-yield debt within the mezzanine tranche. The senior tranche typically ranks first in repayment and is secured against the company’s assets and cash flows, carrying lower interest with tighter covenants and amortization requirements. 

Below this sits the mezzanine or subordinated debt, which ranks junior in the repayment waterfall, bears higher interest to compensate for greater risk. This is usually provided by non-banks and is secured by second-lien and may also be partially unsecured.. 

Equity sits at the bottom of the capital structure and represents the residual ownership in the company. It has no fixed repayment or guaranteed return; instead, equity holders receive whatever value remains after senior and mezzanine debt are fully repaid. Because it is last in priority, equity bears the highest risk and absorbs first losses if the company underperforms.

However, equity also captures all upside beyond debt obligations. As leverage increases, the amount of equity invested decreases, which magnifies potential returns if the company performs well and is sold at a higher value.

Sometimes, subordinated tranches may also carry a PIK or pay-in-kind feature, which implies that the periodic interest will not be serviced, but will be added to the outstanding exposure.

This layered structure allows risk to be allocated according to each lender’s appetite, reduces the overall cost of capital by pricing safer debt more cheaply and increases total borrowing capacity without overexposing any single lender. 

The following chart is an illustration of a typical LBO capital structure with a bank (senior) debt of 50%, high yield debt is 15%, mezzanine is 15% and common equity is 20%. (source: hold.co):

Risks in acquisition finance

Acquisition finance is risky because it combines ownership transition, financial leverage and forward-looking projections all in one. The risks are interlinked; operational underperformance quickly becomes financial stress. Few of the risks for the lender are as follows:

Over-leverage risk: The acquisition is funded with high debt relative to cash flows. A small decline in earnings can disproportionately hurt repayments. For example, a company acquired at 6x EBITDA (₹600 debt on ₹100 EBITDA). EBITDA drops 20% to ₹80. Leverage jumps from 6.0x to 7.5x overnight.

Acquisition finance combines operating leverage (extent of fixed costs in the operating cashflows, from which the residual cashflows will arise) and financial leverage (such residual cash flows being financed by debt which carries fixed interest burden). That is what makes acquisition finance a bunch of two mutually exacerbating risks. Typically, the presence of operating leverage is balanced by keeping the financial leverage low: however, in this case, the two forms of leverage co-exist.

Projection/business case risk: Acquisition pricing may be based on forecasted synergies,  ie , the combined disproportionate increase when the target comes into the group as well as growth, or margin expansion that may not materialize.

Beyond the above, financially, acquisition finance also faces valuation and cyclicality risk if the business was acquired at peak multiples or during an economic upcycle. Operationally, some of the risks in a typical M&A deal may also loom for the lender such as inadequate due diligence, top-talent attrition and integration issues.

Acquisition finance versus leveraged finance:

The two terms quite often overlap, but both refer to distinct aspects of a lending transaction. Acquisition finance specifically refers to purpose; leveraged finance, though mostly used for acquisitions, refers to the prevalence of high leverage, lower rating and cashflow-based funding structure.

Some definitions of “leveraged finance” may be pertinent, for instance, a 2021 thematic note by EBA on leveraged loans refers to a loan as ‘leveraged’, if some of the given conditions are met:

  • high indebtedness of the borrowing firm (e.g. debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) ratio of four times (4x) or higher); 
  • below investment grade credit rating for the loan (or borrower) (i.e. below BBB); 
  • loan purpose to finance an acquisition (e.g. leveraged buyouts); 
  • presence of a private equity sponsor (e.g. financing of borrowers owned by financial sponsors); 
  • high loan spread at issuance.

This is based on a combination of definitions used by various regulators and data providers. 

A definition based on combination of various aspects as per the policies prevalent in the financial sector industry was also given in the 2013 guidelines published by the US FRB as follows: 

  • Proceeds used for buyouts, acquisitions, or capital distributions.
  • Transactions where the borrower’s Total Debt divided by EBITDA (earnings before interest, taxes, depreciation, and amortization) or Senior Debt divided by EBITDA exceed 4.0X EBITDA or 3.0X EBITDA, respectively, or other defined levels appropriate to the industry or sector.
  • A borrower recognized in the debt markets as a highly leveraged firm, which is characterized by a high debt-to-net-worth ratio.

Transactions when the borrower’s post-financing leverage, as measured by its leverage ratios (for example, debt-to-assets, debt-to-net-worth, debt-to-cash flow, or other similar standards common to particular industries or sectors), significantly exceeds industry norms or historical levels.

The end-use of leveraged finance are variegated: including mergers, acquisitions, re-capitalizations, refinancings, and equity buyouts, as well as for business and product line buildouts and expansions, whereas, acquisition finance has limited end-use.   

Waves of regulatory concerns on leveraged finance: 

Regulatory concerns on leveraged finance have been coming in waves – they come and recede.
The oft-quoted “warning” was issued by the IMF in 2018 in its Global Financial Stability Report. The concerns lie in the ever-increasing volume of leverage loans coupled with deteriorating underwriting standards and credit quality as well as strong investor demands, resulting in fewer investor protection covenants. The BIS also raised concerns on the rise of the leveraged loans causing an increasing default rate in the US.

Since the Global Financial Crisis in 2008, regulators have, time and again, taken policy decisions to regulate the risks emanating from leveraged lending. In the context of US, reference may be made of a 2013 Interagency Guidance on Leveraged Lending read with the 2014 FAQs thereon setting out the expectations from financial institutions w.r.t. leveraged loans. In fact, guidelines for leveraged financing were issued in the US as early as in April 2001, subsequently replaced by the 2013 version. 

Regulatory directives have been issued by the EU, coupled with a 2017 Guidance on Leveraged Transactions by the European Central Bank to address the risks of excessive leverage. The ECB Guidance lays down the minimum expectations from the credit institutions on leveraged transactions. A March 2019 briefing states that the 2017 guidance issued by ECB seems less effective than expected. It also refers to the warnings issued by international institutions as well as the US and EU authorities in relation to the potential risks of leveraged finance. 

However, come the end of 2025, at least the US regulators have withdrawn their regulatory statements on leveraged finance, leaving it for banks to use their own prudence. The agencies, in fact, went to term leveraged finance as vital: “Leveraged lending plays a vital role in the U.S. financial system. It provides a wide range of businesses, including those that are highly indebted or highly leveraged or that have low obligor ratings..” It said the 2013 guidelines were overly restrictive and led to reduced activity by US banks. 

The 2025 Global Financial Stability Report, however, continues to highlight the vulnerabilities associated with leveraged financing and the degrading credit quality: “Despite the wave of restructurings, liquidity remains strained among the more vulnerable borrowers in the leveraged loan and private credit markets. This has contributed to an increase in borrower downgrades”. “In reality, default rates, especially for leveraged loans, have been climbing, even though some of the defaults are voluntary liability management exercises, including debt exchanges…”

Impact of the RBI move

Are banks bracing up to jump into acquisition finance? Therefore, is the growing segment of the AIF market, private performing credit, going to be put to challenge?

In our estimate, it will be quite sometime before banks will really pose a competition to the fund industry. At the end of the day, banks are highly rule-driven, with multiple layers of approval processes and very tight corporate governance structures. Banks have RBI supervisors breathing down the neck. Acquisition finance needs flexibility, fast turnaround, structuring skills and bespoke terms which may be difficult for banks to match. At the same time, it is also important to note that most of the private credit funds also have a bank behind. Therefore, the move surely adds to the funding muscle that private credit funds will now enjoy – they will be able to “syndicate” acquisition finance by roping in bank lenders to take a share. In essence, it is a cake that will be shared. We also see distinct possibilities of structured funding transactions with banks taking a senior slice, and AIFs taking the role of a deal maker and risk taker.

Will the RBI move set the sails for leverage financing in India? There are several reasons to contend that the RBI’s move is far more conservative than expected by the typical leveraged finance landscape:

  • First, the RBI expects the acquirer’s rating to be at least BBB- (where the acquirer is an unlisted company),  whereas leveraged finance is mostly below investment grade;
  • Second, the RBI has put a limit of D/E at consolidated level of 3: 1,  leveraged finance, definitionally as well as by its very structure, works on higher levels  of leverage;
  • Third, Section 19(2) of the Banking Regulation Act, 1949 imposes a limitation on banks by restricting them from holding shares in any company, whether as owner, pledgee or mortgagee, beyond 30% of the company’s paid-up share capital or 30% of the bank’s own paid-up capital and reserves, whichever is lower. Since leveraged buyouts commonly involve acquisition of controlling stakes with shares offered as primary security, this statutory cap constrains the extent to which banks can take equity as collateral, thereby further tempering the scope for large-ticket LBO financing.
  • Lastly, the apparent text of the RBI regulations on acquisition finance suggest that acquisition finance is permitted only to non-financial companies which also excludes a Core Investment Company (CIC) hence barring CICs from availing acquisition finance under the RBI framework.

Factoring DLG into ECL: Relief, But Not A Free Pass

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Vinod Kothari & Chirag Agarwal | finserv@vinodkothari.com

RBI had earlier directed NBFCs to compute expected credit loss (ECL) without considering the impact of any default loss guarantees (DLGs) obtained from its lending service provider (LSP). We had published a short note explaining why this position was debatable (See our article on the topic here) and had also made a formal representation to RBI on the issue. 

Back to the present, RBI has issued an amendment to the IRACP Directions, 2025 (dated February 13, 2026), permitting lenders to factor in DLG while determining provisions under the ECL framework across all stages.

Further, RBI has also specified that upon every event of invocation of DLG, the DLG cover reduces to the extent of invocation. Accordingly, REs shall recompute their ECL provisioning requirements across stages, after duly adjusting for the reduced DLG cover.

With these clarifications now in place, the next question that arises is: How should Regulated Entities (REs) appropriately factor DLG into their ECL computations? The article below discusses the above question at length.

How to factor in DLG in ECL computation?

Let us understand this in simple terms. Suppose a lender estimates that the expected loss on a loan pool is 3.8%. If the lender has received a guarantee of 5%, backed by fixed deposits that are lien-marked in its favour. The  guarantee is sufficient to cover the expected loss. In such a case, effectively, the lender does not expect to bear any loss. On the other hand, if the expected loss is 6.8% and the guarantee covers only 5%, then the lender’s net expected loss would be the balance 1.8%.

However, this adjustment assumes that the guarantee will actually be honoured when required. A guarantee does not, however, eliminate risk completely; it merely shifts the risk of default or loss from the borrower to the guarantor, up to the guaranteed amount.  

DLG & bankruptcy remoteness

The DLG guidelines specify the forms in which a DLG can be obtained. DLG can be accepted in any one of the following forms:

  • Cash deposited with the RE; 
  • Fixed Deposit maintained with a Scheduled Commercial Bank with a lien marked in favour of the RE; 
  • Bank Guarantee in favour of the RE

Accordingly, DLG can only be obtained in fully funded forms, thus eliminating any question of incurring credit loss on such a guarantee. Does that mean that even in case of insolvency of the DLG provider the lender will have the right to invoke the guarantee? The answer to this is negative. Because unlike in the case of bankruptcy-remote SPV, the guarantor is an operating entity, and is prone to the risk of insolvency.

In case of initiation of insolvency proceedings, all the assets of an insolvent entity form part of the insolvency administration/liquidation estate and are beyond the reach of the creditors. The proceeds from the realisation of assets are paid to the creditors in accordance with the waterfall mechanism as specified under section 53 of the IBC, 2016 . 

Accordingly, it becomes important to determine how each permitted form of DLG would be treated in the event of insolvency of the DLG provider.

  • Cash deposited with RE: The cash deposited with the lender is actually a liability held in the books till the same is invoked. As per Section 36 of IBC 2016, assets that may or may not be in possession of the corporate debtor including but not limited to encumbered assets form part of the liquidation estate. Accordingly, cash deposited by the DLG provider with RE would form part of the liquidation estate of the guarantor.
  • Lien marked FD: Similar to cash deposited with RE, the lien marked FD will also form part of the liquidation estate.
  • Bank Guarantee: In the case of a bank guarantee, the credit exposure effectively shifts from the original guarantor to the issuing bank. Given that scheduled commercial banks are subject to stringent regulation and supervision, the risk of insolvency in banks is generally remote. Accordingly, the probability of default in such a structure is unlikely to be impacted.

So, even if the DLG is structured as a funded guarantee, the actual invocation can become complicated if the DLG provider goes into insolvency before such invocation. In such a situation, the lender may not be able to simply invoke the guarantee and take the money. Instead, it may have to submit its claim and wait for distribution under the insolvency process, where payments are made in the statutory priority order. 

Under the waterfall mechanism, secured creditors rank alongside workmen’s dues. Now, in most DLG structures, the guarantor is a fintech entity or a co-lender. These entities typically do not have significant workmen-related liabilities. This may mean that the lender’s priority position is relatively stronger. 

Further, the actual invocation process of the DLG should also be considered. For instance, cash held with the lender can be easily invoked and adjusted as compared to a lien-marked FD or bank guarantee, where there could be procedural delays. 

Illustration: Consider a loan pool of ₹100 crore where the gross ECL rate is estimated at 6.8% (for the static pool covered by the guarantee), resulting in a gross ECL of ₹6.8 crore. The lender has a DLG cover of 5% of the pool (₹5 crore), structured as a lien-marked fixed deposit provided by a fintech sourcing partner. While the DLG is funded, there remains a risk that the guarantor may become insolvent. The first relevant question here is whether we will take a probability of default (PD) as per Stage 1 (12 months PD), or Stage 2/3 (lifelong PD). While the guarantor in question is not in default at all, however, given that the 6.8% ECL is a combination of Stage 1 as well as Stage 2/3 loans, in our view, the PD for the guarantor, to remain conservative, should be the lifelong PD over the tenure of the loans. Let us assume a 20% Probability of Default (PD) for the guarantor. Next question is assessment of Loss Given Default (LGD). As discussed above, the lender has the benefit of full security in form of lien on the fixed deposit, however, there may be depletion of the same on account of first priority in the waterfall, that is, costs of insolvency and bankruptcy process. On a conservative basis, we may, therefore, assume a 10% LGD. Thus, the expected loss on the DLG cover would therefore be 20% × 10% = 2%. 

As a result, the ECL computation may now be:

= 5%*2% + 1.8% = 1.9%

Based on the aforesaid discussion, in our view, while the guarantee is funded the lender may have to adjust the probability of default to factor in the risk of insolvency, particularly where the guarantee is funded in the form of a cash deposit or a lien marked FD. 

Which funded form of DLG is most suited?

As per the analysis, the various options of funded DLG can be ranked basis the maximum consideration allowable for ECL computation:

  1. Bank guarantee:  Being bankruptcy remote and easiest to invoke
  2. Cash deposit: May have to consider the risk of guarantor’s bankruptcy but the invocation would be easier
  3. Lien marked Fixed Deposit: May have to consider the risk of guarantor’s bankruptcy and invocation may involve procedural delays

However, given that there will not be a sizable or material difference in the quantum of counter guarantee risk, the selection of the options for ECL computation may not be significant. 

Can we help this situation?

One of the ways to mitigate the risk of insolvency is by structuring the guarantee in such a way that the guarantee may be invoked upon the occurrence of an adverse material change in the financial condition of the guarantor. In other words, other than the occurrence of losses in the pool, if there are events of default such as adverse material change, insolvency of the guarantor etc., the lender may invoke the guarantee.

Early invocation upon identifiable stress on the part of the guarantor could help the lender realise the guarantee amount before the commencement of insolvency proceedings.

However, such clauses must be appropriately incorporated and drafted in the DLG agreement to ensure the following:

  • A clear definition of “adverse material change”
  • Identifiable trigger events
  • Clarity on invocation mechanism

Impact of DLG invocation on ECL computation 

RBI has also provided a clarification that upon every event of invocation of DLG, the DLG cover reduces to the extent of invocation. Accordingly, REs would be required to recompute their ECL provisioning requirements across stages, after duly adjusting for the reduced DLG cover.

Pool-based guarantees presuppose that the pool is static. This is purely intuitive because if the pool is dynamic, new loans will continue to enter the pool, and therefore, the guarantor’s exposure will keep spreading over a continuing flow of new loans. 

Where the pool is static, the loans gradually get repaid (amortised) over time. As borrowers repay their instalments, the outstanding amount of the loan pool keeps reducing. Since the exposure is shrinking, the ECL on that pool will also typically reduce over time, assuming normal performance. Therefore, whether the utilisation of the DLG on account of pool defaults may cause the ECL computation to increase? This may be so for 2 reasons: one, usual terms of DLG invocation will be the full amount of the defaulted loan will be recovered (due to escalation of the entire principal outstanding). Thus, while the performing loans amortise over time, the non-performing loans are fully recovered once they reach “default”, causing the utilisation of the DLG to run faster than the amortization of the performing loans. Second reason is that once the pool actually starts defaulting, there may be a reason to provide higher estimates of probability of default as well.

Integral part of the contractual terms: Is DLG required to form part of the loan agreement? 

Para 36A of the IRAC Directions read with the principles under Ind AS 109 provides that credit enhancements may be considered while computing ECL only where such enhancements are “integral to the contractual terms.”  The expression “integral to the contractual terms” is taken from the definition of “credit loss” in Ind AS 109. Credit losses are measured after considering the expected cashflows from an asset. Those cashflows will factor in the recovery of any collateral, or credit enhancements, as long as the said credit enhancement is integral to the contractual terms.

What exactly is the meaning of “integral to the contractual terms”? Are we expecting the guarantee (DLG in the present case) to be a part of the terms of the loan contract? That would never be the case, as the so-called guarantee (which may legally be regarded as an indemnity contract) is a bilateral contract between the lender and the DLG provider. Neither is the borrower aware of the guarantee, nor is it desirable to have the borrower know of the guarantee, for obvious reasons. 

IFRS 9 uses the same language. US ASC has more elaborate discussion on this. Para 326-20-30-12 says:

The estimate of expected credit losses shall reflect how credit enhancements (other than those that are freestanding contracts) mitigate expected credit losses on financial assets, including consideration of the financial condition of the guarantor, the willingness of the guarantor to pay, and/or whether any subordinated interests are expected to be capable of absorbing credit losses on any underlying financial assets. However, when estimating expected credit losses, an entity shall not combine a financial asset with a separate freestanding contract that serves to mitigate credit loss. As a result, the estimate of expected credit losses on a financial asset (or group of financial assets) shall not be offset by a freestanding contract (for example, a purchased credit-default swap) that may mitigate expected credit losses on the financial asset (or group of financial assets)

There has been a significant discussion on whether the benefit of a guarantee or credit enhancement which is not a part of the contractual terms of the loan can be factored in ECL computation. From discussions before the IASB, as back as in 2018, two conditions for recognising the benefit of credit enhancements were discussed:

  1. part of the contractual terms; and
  2. not recognised separately by the entity.

The second condition is easy to understand. For example, if the risk of default is hedged by a credit default swap, the value of the same, amounting to a derivative, is separately recognised. Hence, the question of factoring the same while computing ECL does not arise. However, the first condition, relating to contractual terms of the asset, still remains vague.

One may try to get some clues in the US FASB discussions, where para 326-20-30-12 has been interpreted in technical interpretations. In addition, there is a definition of “freestanding contracts” under the Glossary of ASC 326:

A freestanding contract is entered into either:

a. Separate and apart from any of the entity’s other financial instruments or equity transactions

b. In conjunction with some other transaction and is legally detachable and separately exercisable.

The “forming integral part of the contractual terms” does not warrant the principal contract to provide for the guarantee or the credit enhancements. Insisting on the same will be counter-intuitive, except in case of trilateral contracts. However, the conditions indicate that the guarantee or credit enhancement integrates and becomes an inseparable part of the underlying loan or group of loans. For example, if the group of loans was to be transferred, is it such that the benefit of the guarantee may stay iwth the originator and loans may be transferred, or the guarantee travels along with the loans? If the latter is the case, there is no doubt that in reality, the guarantee has become an embedded part of the loan transaction.

Another factor may be the contractual association between the loan cashflows and the payout from the credit enhancements. Some relevant considerations:

  • Is the guarantee specific to the contractual cashflows from the loans?
  • Does the guarantor pay what the original loan asset would have paid, or pays independent of the contractual cashflows?
  • If the lender subsequently recovers the cashflows from the asset, is the payout from the guarantee restored back to the guarantor?

The presence of these factors will suggest the integration or embedding of the guarantee into the contractual cashflows from the loans.

Conclusion

While the recent amendment by the RBI brings welcome clarity by allowing DLG to be factored into ECL computation, lenders must approach this carefully and realistically. A DLG can reduce the expected loss, but it does not make the risk disappear, as the DLG provider itself faces the risk of insolvency. The form of the guarantee, its enforceability, and the possibility of invocation- all of these matter in assessing the true level of protection. REs should not treat DLG as a mechanical deduction from ECL, but as a risk mitigant that requires thoughtful evaluation, continuous monitoring, and recalibration as the pool amortises and the cover reduces.

See our other resources:

  1. Expected credit losses on loans: Guide for NBFCs;
  2. Expected to bleed: ECL framework to cause ₹60,000 Cr. hole to Bank Profits;
  3. Impact of restructuring on ECL computation.

Not a Broker, Not an Insurer: Welcome to the world of MGAs

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Introduction

The insurance industry globally has witnessed the emergence of several hybrid operating models that do not fit neatly within traditional regulatory classifications. One such model is that of the Managing General Agent (‘MGA’), an entity that performs significant insurance functions such as underwriting and risk assessment, pricing of insurance products, binding of policies, etc on behalf of the insurer.

While MGAs are well-recognised in mature insurance markets such as the USA, UK and Canada, their position under Indian insurance law has recently begun to take shape. An MGA typically acts as a middleman between the insurer and the insured.

In this article, we dive into the functioning of an MGA and how it differentiates from the existing insurance intermediaries, prevalent in the insurance sector in India. 

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Webinar on Selling of Financial Products by Banks and NBFCs

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From Consent to Compensation: RBI’s Draft Directions for REs on Sales Practices

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Highlights

  • Mis-selling, among others, will include selling an unsuitable financial product; consequences include compensation                                                                                                                               
  • Prohibition on Compulsory Bundling, eg., sale of insurance policy along with a loan
  • Explicit consent, wherever required, to be based on unambiguous affirmative action
  • Bank to do a due-diligence of a third party financial product that it markets, to avoid reputational risk
  • DSAs and DMAs of banks to come for tighter scrutiny; with undertaking for compliance with bank’s code and disciplinary action upon violation
  • Pricing difference, if any, between directly marketed bank products and indirectly (through agents) to be disclosed
  • Banks to take after-sale feedback from customers, and make necessary amendments in selling practices
  • Dark patterns not be used by regulated entities; periodic audit mandated
  • Controls over incentives favouring mis-selling
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Disrupting Traditional Card based Payments – Smart Contract based Payment Infrastructure using Stablecoin

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Subhojit Shome, Senior Manager | Finserv@vinodkothari.com 

Introduction

The payments ecosystem is often described as the “plumbing” of commerce—rarely visible to consumers, yet fundamental to economic activity. For decades, this plumbing has been dominated by credit and debit card systems, operated by banks and card networks under tightly regulated frameworks. In recent years, however, global technology platforms have begun experimenting with alternative payment infrastructures, particularly those built on blockchain technology, with the aim of reducing remittance fees and achieving faster settlement.1

One such initiative is the payment infrastructure jointly developed by Shopify and Coinbase (“Shopify–Coinbase Payment Infrastructure”), which enables merchants to accept payments using stablecoins, most notably USD Coin (USDC), without relying on traditional card networks.

Shopify–Coinbase Payment Infrastructure has been initially launched in at least 34 countries where merchants can accept USDC payments via the Base (blockchain) network. This includes a range of markets across the United States, most of Europe, Canada, Australia, Japan, Singapore2. A number of these countries/ regions (e.g. United States3, EU4,  Japan5, Singapore6) have statutorily recognised, and regulate the use of stablecoins.

This article examines the Shopify–Coinbase Payment Infrastructure in comparison with traditional card payment rails and analyses the regulatory concerns that would arise if such a system were to operate in India, with particular reference to the Payment and Settlement Systems Act, 2007 (“PSS Act”) and the regulatory stance of the RBI.

Understanding Payment “Rails” and the Card System

To appreciate what Shopify and Coinbase seek to replace, it is first necessary to understand the traditional debit/ credit card “payment rails”. The term “rails” is a metaphor, referring to the underlying infrastructure that carries a payment transaction from the payer to the payee—much like railway tracks carry trains.

In a credit or debit card transaction, the rails consist of several interconnected elements. When a customer uses a card, the merchant does not receive money immediately. Instead, the transaction is routed through the card network (such as Visa, Mastercard, or RuPay), which communicates with the customer’s bank (the issuer) and the merchant’s bank (the acquirer). The customer’s bank first checks whether sufficient funds or credit are available and places a temporary hold on that amount. This is known as authorisation (“auth”). The actual transfer of money happens later, when the merchant confirms the transaction—a step known as capture. Settlement between banks typically occurs after a delay of one or two business days.

This system is heavily regulated in India – card networks operate under RBI oversight, settlement occurs through RBI-regulated banking channels, and consumers are protected through structured dispute resolution mechanisms, including chargebacks7. The entire system functions within the legal framework of the PSS Act and the RBI’s directions on payment systems and card networks, payment aggregators, and consumer protection.

The Shopify–Coinbase Payment Infrastructure

The Shopify–Coinbase Payment Infrastructure proposes a fundamentally different way of moving money. Instead of using banks and card networks as intermediaries, it relies on stablecoins, which are digital tokens designed to maintain a stable value by being backed by traditional currency reserves. The stablecoin USDC, for example, is designed to track the value of the US dollar.

In this system, when a customer pays a merchant, the payment is executed on a blockchain network. The funds are first locked in a digital escrow mechanism controlled by software (a “smart contract”) and once the merchant fulfils the order, the funds are automatically released to the merchant. This process replicates the familiar card concepts of authorisation and capture (“auth and capture”), but replaces banks and card networks with software rules and cryptographic verification.

From the user’s perspective, the checkout experience may look familiar. From a legal perspective, however, the system represents a shift from institution-based trust (banks and regulators) to code-based execution. Settlement is near-instant, global, and does not depend on banking infrastructure.

Auth/ Capture using Stablecoins and Smart Contracts

In card payment systems, authorisation and capture are two distinct but linked stages in how a transaction is processed and settled. One of the unique characteristics of the Shopify–Coinbase Payment Infrastructure is that it is able to replicate such an auth/ capture settlement process which is observed in traditional card rails.8

Authorisation is the preliminary step. When a customer enters card details at checkout, the merchant seeks confirmation that the cardholder has sufficient funds or credit and that the transaction is permitted. At this stage, no money actually moves. Instead, the issuing bank places a temporary hold on the relevant amount, effectively earmarking those funds. From a legal perspective, authorisation represents a conditional and revocable promise by the issuer to honour the transaction, subject to subsequent validation and compliance with network rules.

Capture occurs later, when the merchant confirms that the goods or services have been provided (or are about to be provided) and formally requests payment. Upon capture, the transaction becomes final for settlement purposes. The temporary hold created at the authorisation stage is converted into an obligation to transfer funds through the card network’s clearing and settlement process. Only after capture does the merchant acquire an enforceable right to receive payment, subject to chargeback and dispute mechanisms.

The Shopify–Coinbase Payment Infrastructure seeks to recreate this familiar commercial logic—authorisation first, settlement later—while removing traditional card networks entirely. In this model, the customer pays using a stablecoin (typically denominated in a foreign currency such as the US dollar). Rather than immediately transferring funds to the merchant, the payment is first routed into a smart contract–based escrow. This escrow functions as the economic equivalent of card authorisation. The funds are not credited to the merchant and cannot be unilaterally withdrawn. They are effectively “locked,” signalling the payer’s intent and financial capacity, much like a card authorisation hold. The legal character of this stage differs fundamentally from card authorisation. In card systems, the issuer’s promise is conditional and revocable, and the funds remain within the regulated banking system. In a blockchain escrow, by contrast, the customer has already transferred the funds out of their wallet. Control is no longer exercised by a regulated intermediary but by pre-programmed contractual logic embedded in code.

The equivalent of capture occurs when the merchant satisfies predefined conditions—such as confirmation of shipment or lapse of a dispute window. Once those conditions are met, the smart contract automatically releases the stablecoins to the merchant’s wallet. Settlement is thus executed not through interbank clearing, but through an on-chain state change that is immediate, final, and typically irreversible. From a legal standpoint, this mechanism replaces discretionary decision-making by regulated institutions with deterministic execution by software.

Comparing Card Rails with Stablecoin-Based Payments

The contrast between card rails and the Shopify–Coinbase model is not merely technical; it is institutional and legal.

Card payments are embedded within a regulated financial ecosystem. Every participant—issuer banks, acquirers, networks, payment aggregators—is subject to licensing, capital requirements, audit obligations, and RBI supervision. Settlement occurs in Indian Rupees, and consumer protection is enforced through mandatory refund and dispute resolution frameworks.

By contrast, the stablecoin model shifts settlement outside the traditional banking system. Funds are represented not as bank deposits but as digital tokens. Settlement does not occur through RBI-regulated systems such as RTGS, NEFT, or card clearing arrangements, but on a distributed ledger maintained by a global network of computers. While this may reduce costs and increase speed, it also raises fundamental questions about regulatory oversight, legal accountability, and consumer protection.

The Indian Legal Framework Governing Payment Systems

The Payment and Settlement Systems Act, 2007 establishes a comprehensive legal framework under which the RBI is the sole authority empowered to regulate and supervise payment systems.

No person, other than the Reserve Bank, shall commence or operate a payment system except under and in accordance with an authorisation issued by the Reserve Bank under the provisions of this Act (Section 4 of the PSS Act)

Under the PSS Act, no person may operate a payment system in India without authorisation from the RBI. A “payment system” is defined broadly to include any arrangement that enables payments to be effected between a payer and a beneficiary. This definition is technology-neutral and focuses on function rather than form. Consequently, even a novel digital arrangement may fall within the regulatory perimeter if it facilitates payment and settlement.

In addition to the PSS Act, the RBI has issued detailed regulations governing card payments, payment aggregators and payment gateways, which impose obligations relating to customer funds, escrow arrangements, settlement timelines, dispute resolution, and grievance redressal. These regulations reflect the RBI’s core concern: protecting consumers and preserving the integrity of the payment system.

From an Indian statutory and regulatory standpoint, several concerns arise if a Shopify–Coinbase-type payment infrastructure were to be used by Indian merchants or consumers.

First, there is the issue of authorisation under the PSS Act. A stablecoin-based payment system that enables Indian users to make payments would likely qualify as a “payment system” under the Act. In the absence of explicit RBI authorisation, operating such a system in India would be impermissible, regardless of its technological sophistication.

Second, there is the question of settlement in Indian Rupees. Domestic payment systems in India settle in INR through RBI-regulated channels. Online card payments made in India using Indian cards cannot be routed through foreign banks or settled in foreign currency — they must be handled by Indian banks and settled in INR.9 Also, “Wallets”, i.e., prepaid payment instruments (PPI) essentially need to be loaded in INR.10 Stablecoin settlement, particularly when denominated in a foreign currency such as the US dollar, bypasses these channels. While stablecoins may be created so as to be denominated in INR, no recognition currently exists for stablecoins as settlement instruments for domestic payments.

Third, custody and consumer protection pose significant challenges. RBI regulations require that customer funds be held with regulated entities, typically banks, and that clear mechanisms exist for refunds, reversals, and dispute resolution. Blockchain-based escrow mechanisms are governed by software rather than law, and once a transaction is final, reversing it may be impossible without voluntary cooperation by the merchant. This stands in tension with RBI’s consumer-centric regulatory approach.

Fourth, there are foreign exchange and monetary policy considerations. Stablecoins backed by foreign currency reserves raise concerns under India’s foreign exchange regime and broader monetary sovereignty objectives. RBI has repeatedly expressed caution about private digital currencies and stablecoins, citing risks to financial stability and policy transmission.11

Conclusion

The Shopify–Coinbase Payment Infrastructure represents a significant evolution in global commerce, demonstrating how technology can replicate—and potentially outperform—traditional card systems in terms of speed and cost. However, from an Indian legal perspective, innovation in payments is not evaluated solely on efficiency. It is assessed through the lens of statutory compliance, regulatory oversight, consumer protection, and monetary stability.

While the logic of authorisation and capture may be technologically reproduced through blockchain-based escrow mechanisms, the legal foundations of payment systems in India remain firmly anchored in the PSS Act and RBI regulation. Until stablecoin-based payment infrastructures are brought within this framework—through authorisation, INR settlement mechanisms, and enforceable consumer protections—their direct adoption in the Indian domestic payments landscape would face substantial legal and regulatory hurdles.

  1. Stablecoins on the Blockchain – Stablecoins offer significant advantages over traditional remittance rails, primarily through reduced fees and faster settlement. While the World Bank reports a global average cost of ~6.6% for a ~$200 remittance, and annual transaction costs exceeding $41 billion, stablecoins can cut fees dramatically, often to ~$0.01 for high-volume transactions. Beyond cost, stablecoins provide near real-time settlement, a stark contrast to traditional cross-border remittances that can take days, with additional delays from holidays or bank closures. Ref. https://www.dbresearch.com/PROD/RI-PROD/PDFVIEWER.calias?pdfViewerPdfUrl=PROD0000000000610103&rwnode=REPORT
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  2. Ref. https://coinspaidmedia.com/news/shopify-launches-usdc-payments-34-countries/
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  3. In 2025, the GENIUS Act was enacted, creating a regulatory framework specifically for payment stablecoins – https://www.congress.gov/bill/119th-congress/senate-bill/1582
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  4.  EU Markets in Crypto-Assets Regulation (MiCA) places stablecoins under a category of asset-referencing tokens that are allowed to circulate and be used for payments – https://eur-lex.europa.eu/eli/reg/2023/1114/oj/eng ↩︎
  5.  Amendments to Japan’s Payment Services Act define certain types of fiat-pegged stablecoins as electronic payment instruments – https://www.fsa.go.jp/en/newsletter/weekly2023/540.html
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  6.  The Monetary Authority of Singapore (MAS) has developed a stablecoin regulatory framework under its Payment Services Act – https://www.mas.gov.sg/news/media-releases/2023/mas-finalises-stablecoin-regulatory-framework
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  7. A chargeback is a consumer protection process that allows a cardholder to dispute a transaction they believe is fraudulent, unauthorized, or not as described. The cardholder requests their bank to reverse the transaction, and the funds are debited from the merchant’s account. Ref. https://razorpay.com/blog/what-is-a-chargeback/
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  8. Ref. https://shopify.engineering/commerce-payments-protocol ↩︎
  9.  …where cards issued by banks in India are used for making card not present payments towards purchase of goods and services provided within the country, the acquisition of such transactions has to be through a bank in India and the transaction should necessarily settle only in Indian currency, in adherence to extant instructions on security of card payments.Ref. https://www.rbi.org.in/commonperson/english/scripts/Notification.aspx?Id=1496 ↩︎
  10. PPIs shall be permitted to be loaded / reloaded by cash, debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by regulated entities in India and shall be in INR only. – https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=12156 ↩︎
  11.  Widespread adoption of stablecoins would undermine central banks’ ability to control money supply and interest rates. ‘If both an official currency and a crypto asset are used for pricing goods and services, domestic prices could become highly unstable due to the inherent volatility of the crypto asset.’ (IMF-FSB 2023). If residents increasingly hold or transact stablecoins, changes in domestic policy rates may have limited influence on economic decisions, weakening the effectiveness of monetary policy. – Keynote address by Mr T Rabi Sankar, Deputy Governor of the Reserve Bank of India, available here – https://www.bis.org/review/r251216i.htm. ↩︎

See our other resources

  1. Tokenisation of Real World Assets – The Way Ahead for Creating Securities;
  2. Cryptos: Are They Back in Business?;
  3. Security Token Offerings & their Application to Structured Finance;
  4. Decentralised Finances;
  5. Cryptocurrency on the path to Legalisation?;
  6. Cryptocurrency – A Cautionary Tale for India;
  7. Trustless System;
  8. Blockchain based lending; A peer-to-peer system;
  9. Financial Services firms foray into the metaverse.