Posts

Investment valuation norms for banks: RBI aligns rules with global accounting standards

– Vinod Kothari | vinod@vinodkothari.com

Vide a 12th Sept notification, the RBI has brought in Master Directions for Classification, Valuation and Operation of Investment Portfolio of Commercial Banks. The new norms bring the accounting and valuation of investments by banks closer to global accounting standards.

While the apparent focus of these Directions would have been valuation of investment portfolios, however, the Directions may also impact investment policies and investment operations  of banks as well.

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Loan Penal Charges: Accounting and GST implications

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 Penal Charges in Loan Accounts

– Team Finserv | finserv@vinodkothari.com

Updated as on 4th March 2024

The Circular is applicable from April 01, 2024. Please feel free to drop your queries in the comment box below and we will try our best to reply at the earliest.

RBI on August 18, 2023 came up with the circular Fair Lending practice – Penal charges in Loan accounts (‘Circular’). The Circular restricts entities from charging penal interest on loan accounts, instead they should levy penalty or penal charges..

We have developed a set of FAQs on the press release and updated the same based on this Circular read along with the RBI Notification on Fair Lending Practice – Penal Charges in Loan Accounts: Extension of Timeline for Implementation of Instructions dated December 29, 2023 and FAQs released by RBI where we intend to answer some of the critical questions relating to the penal charges in loan accounts.

Our write-up on the topic can be read here – Penal charges not a cash-cow for lenders

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

– 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

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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NBFC- Enterprise Risk Assessment

-Subhojit Shome, Assistant Manager | finserv@vinodkothari.com

Our Youtube video on the topic can be accessed here – https://www.youtube.com/watch?v=7EFeIdb-Wkc
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Workshop on Co-Lending and Loan Sourcing Arrangements

Register here: https://forms.gle/LBNKATZ8rxL3KvPz6
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Read our articles on the subject: https://vinodkothari.com/?s=co-lending

Rise, Fall & Subsequent Legitimisation of Default Loss Guarantees

Anita Baid & Subhojit Shome | finserv@vinodkothari.com

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Read our FAQs on Default Loss Guarantee in Digital Lending

Inter-operable regulatory sandbox: A playground for fintechs ?

– Dayita Kanodia, Executive | finserv@vinodkothari.com

A regulatory sandbox allows live testing of innovative products/services under regulatory supervision and with regulatory relaxations. This in turn allows regulators to design evidence-based and innovation-friendly regulations.

An Inter-Operable Regulatory Sandbox or IoRS as defined by both RBI and SEBI is therefore a mechanism to facilitate testing of innovative hybrid financial products / services falling within the regulatory ambit of more than one financial sector regulator.

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YouTube live: RBI Guidelines on Default Loss Guarantee

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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