Review of Major RBI Circulars – September 2019
Large Exposures Framework
The RBI on September 12, 2019 decided that a bank’s exposure to a single NBFC (excluding gold loan companies) will be restricted to 20 per cent of that bank’s eligible capital base. Bank finance to NBFCs predominantly engaged in lending against gold will continue to be governed by limits as prescribed in the circular dated May 18, 2012. To read more, please click here.
Basically this was done for harmonisation and providing extra room for lending to NBFCs. Let assume, SBI has only Rs.100 with it so as per the previous guidelines it can lend Rs.20 to Reliance Industry while only upto Rs.15 to Reliance Capital ( an NBFC). With this guideline in force, SBI can lend upto Rs.20 to Reliance Capital. If you remember, in our vol 1 of Sakshatkar bank’s reluctance to lend funds to NBFC was one of the major issue. By this circular RBI has actually tried to address that concern apart from the stated.
Draft guidelines on “on Tap licensing of Small Finance Bank”
In November 2014, the Reserve Bank of India (RBI) first issued guidelines on Licensing of “Small Finance Banks” in the private sector and subsequently, ten small finance banks (SFBs) were licensed and set-up. After gaining experience in dealing with these banks, review of their performance, and to encourage competition, the RBI has now issued draft guidelines for “on-tap” licensing of SFBs. The draft guidelines have been formulated for continuous authorisation and covers eligible promoters, scope of activities, capital requirements, prudential norms, licensing process, etc. The RBI had invited comments and suggestions on the draft guidelines by 12 October 2019.
Some Basic features proposed in these guidelines were
Eligible promoters (and entities)
- Resident individuals/ professionals (Indian citizens), singly or jointly, each having at least ten years of experience in banking and finance at a senior level. Companies and societies that are owned and controlled by residents (as defined in FEMA regulations) with successful track record of running their businesses for at least five years.
- Existing NBFCs, MFIs and Local Area Banks (LABs) in the private sector that are controlled by residents (as defined in FEMA regulations) and having a successful track record of running their businesses for at least five years – can opt for conversion into SFB after complying with the necessary legal and regulatory requirements.
- UCBs (Urban Co-op banks) desirous of converting to SFB may convert to SFB after ensuring compliance with the guidelines. By opening of this option, RBI is trying to bring the good quality UCBs in its full control for better regulation. Presently, UCBs are under dual control.
- Existing payments bank can also opt for conversion into SFB, subject to compliance with the guidelines.
- Joint ventures by different promoter groups for setting up an SFB are not eligible.
- Public sector entities and large industrial houses/ business groups , including NBFCs promoted by them, autonomous boards/ bodies set up under enactment of a state legislature, state financial corporations, subsidiaries of development financial institutions are not eligible.
(What is important here to know is who is Not eligible)
SFBs may be set up as a standalone entity or under a holding company, acting as a promoting entity of SFB. In case of a company, the promoter have to set up a Holding company (non-operative finance holding company (NOFHC)) to govern the SFB. The holding company will be registered as an NBFC-CIC with the RBI.
Fit and Proper criteria
The RBI will examine applicants based on their past record of sound credentials and integrity; financial soundness and successful track record of running their business, etc., for at least a period of five years. Local focus and ability to serve smaller customers will be a key criterion in licensing such banks.
- Minimum paid-up voting equity capital – Rs. 2000 mn except for UCBs/ NBFCs/ MFIs/ LABs converting to SFBs.
- For UCBs converting to SFBs – minimum net worth will be Rs. 1000 mn from the date of commencement and which should be increased to RS. 2000 mn within five years of commencing operations as an SFB.
- For NBFCs/ MFIs/ LABs converting to SFBs – minimum net worth will be Rs. 2000 mn.
- Non-promoters (individual and entities) will not be permitted to have a shareholding in excess of 10% of the paid-up voting equity capital of SFB.
External Benchmark Based Interest Rate
The RBI on September 4, 2019 made it mandatory for banks to link all new floating rate personal or retail loans and floating rate loans to MSMEs to an external benchmark with effect from October 1, 2019. The banks are free to choose one of the several benchmarks indicated in the circular. They are also free to choose their spread over the benchmark rate, subject to the condition that the credit risk premium may undergo change only when borrower’s credit assessment undergoes a substantial change, as agreed upon in the loan contract. The interest rate under external benchmark shall be reset at least once in three months.
All new floating rate personal or retail loans (housing, auto, etc.) and floating rate loans to Micro and Small Enterprises extended by banks from October 01, 2019 shall be benchmarked to one of the following:
- Reserve Bank of India policy repo rate
- Government of India 3-Months Treasury Bill yield published by the Financial Benchmarks India Private Ltd (FBIL)
- Government of India 6-Months Treasury Bill yield published by the FBIL
- Any other benchmark market interest rate published by the FBIL.
How it will help?
It will create standardisation, transparency and most importantly since the rate of loan will be linked to an external benchmark it will be market aligned. The main objective is to improve the transmission of monetary policy. You must have heard this discussion that RBI is constantly reducing its policy rate but banks are not passing the rate cut benefits to the customers. Now once you link your loan rate to an external benchmark (driven by market forces) banks will have a limited scope for NOT reducing loan rates after a rate cut by RBI.
Internal Working Group to Review Agricultural Credit
The RBI internal working group (IWG) headed by MK Jain, Deputy Governor to review agriculture credit has made the following recommendations:
- The Indian Banks’ Association (IBA) should introduce a web portal on the lines of PSB Loans in 59 Minutes to allow quicker credit access for the agriculture sector. The Centre launched the portal in November 2018 to provide loans of up to ₹1 crore to MSMEs in less than an hour.
- State governments having a highly restrictive legal framework should be encouraged to reform it on basis of Model Land Leasing Act proposed by NITI Aayog or the Land Licensed Cultivators’ Act, 2011 of Andhra Pradesh to improve formal lending to tenant farmers.
- The government should set up a federal institution, on the lines of goods and services tax (GST) Council to suggest and implement reforms in the field of agriculture.
- Banks should be allowed to give consumption loans to farmers upto a sanctioned limit of ₹0.1 million under Priority Sector Lending (PSL) on certain conditions. However, such loans will not classify for PSL-Agri.
- GoI and state governments should evaluate the effectiveness of current subsidy policies with regard to agri inputs and credit so as to improve viability of agriculture in a sustainable manner. In view of the above stated, loan waivers should be avoided.
- At present there is no database of the Indian agriculture sector. Thus, GoI with the help of state governments should develop a centralised database for agriculture capturing details related to crops cultivated, cropping pattern, output, sown/irrigated area, health of soil, natural calamity.
- GoI in partnership with state governments should set up a credit guarantee fund for the agriculture sector on the lines of credit guarantee schemes implemented in the MSME sector to cover the default risk of the borrowers.
Read the opinion of the Hindu on this report.
RBI Harmonised Turn Around Time (TAT) and customer compensation for failed transactions
The Reserve Bank of India vide notification dated 20th September, 2019 has finalised the framework on Harmonisation of Turn Around Time (TAT) for resolution of customer complaints related to failed transactions across all authorised payment system and compensation for such transactions.
This direction comes in pursuance of the observance of a large number of customer complaints that have surfaced on account of unsuccessful or ‘failed’ transactions. The reason for failure could be on account of various factors not directly attributable to the customer such as disruption of communication links, non-availability of cash in ATMs, time-out of sessions, non-credit to beneficiary’s account due to various causes, etc.
It has been observed that the rectification / compensation paid to the customer for these ‘failed’ transactions is not uniform. Hence, it has been decided to rectify and compensate the customers due to the inconvenience caused.
- The prescribed TAT is the outer limit for resolution of failed transactions
- The banks and other operators / system participants shall endeavour towards quicker resolution of such failed transactions.
- In case of any financial compensation, the same shall be effected to the customer’s account suo moto, without waiting for a complaint or claim from the customer.
New guidelines have been set up by the RBI for the eight categories of transactions through ATMs, cards, immediate payment system, unified payment interface, prepaid cards etc. The timeline for auto-reversal for failed transaction shall be the day of transaction+ 5 more days.
In case if the failed amount is not reverted back to the account, then the bank is required to credit Rs.100 per day as compensation for the delay. Customers, who do not get the benefit of redress of the failure as defined in the TAT, can register a complaint to the Banking Ombudsman of Reserve Bank of India.
Reference- legality simplified
Motivational Dose – Where career in RBI can take you ?
Shri Gurumoorthy Mahalingam took charge as Whole Time Member, Securities and Exchange Board of India in Mumbai on Octover 12, 2016 for a tenure of five years or till attainment of 65 years of age whichever is earlier. Shri Mahalingam handles the Integrated Surveillance Department, Investment Management Department, Enforcement Department, Foreign Portfolio Investors and Custodians, Collective Investment Schemes, Department of Economic and Policy Analysis, among others. Prior to this assignment, Shri Mahalingam held the position of Executive Director, Reserve Bank of India. As Executive Director, he was in-charge of the market operations of RBI, both Foreign Exchange and Rupee liquidity. His work responsibilities also included RBI’s engagements with international institutions / forums like BIS, IMF, G-20, SAARC Finance and BRICS. He was also looking after the Department of Statistics and Information Management in RBI.He has also served as Regional Director of Reserve Bank of India. He has also been associated with NISM (National Institute of Securities Markets), an educational initiative of Sebi, as part of its visiting faculty.Shri Mahalingam is an MSc in Statistics and Operations Research from IIT, Kanpur and an MBA in International Banking and Finance from Birmingham Business School, United Kingdom.