Universal Access to Savings
|RBI should require a strong Proof of Identity (POI) for each and every customer and a documentary proof of one national address but waive the requirement of documentary proof for the current address, for the purpose of opening a full-service bank account. It should instead enjoin upon banks to carry out careful tracking of usage and transactions patterns to ascertain the risk levels of the customer and take necessary action based upon risk-based surveillance processes developed internally by each bank. RBI must take the lead in developing this as a convergent approach to KYC across all regulators for their respective products.||RBI eases KYC rules by waiving the requirement for documentary proof of local address for opening a savings bank account. Customers need submit only one documentary proof of address – this can either be the current address or the permanent address.|
|Eliminate the distance criteria between the BC and the nearest branch of the sponsor bank. Allow Banks to decide operational criteria.||RBI has removed distance criteria that banks had to comply with in terms of locations for their BC outlets (maximum of 30 km for rural, semi-urban, urban, and 5km for metropolitan). It will now become possible for a potential new banking entrant to set up a business comprising purely of a national level BC network supported by a few branches of its own. For such entities the challenge will therefore no longer be about how to establish a national level branch network like that of the existing national full-service banks, but to ensure that they solve specific operational issues such as cash management.|
|Under the Banking Regulation Act, a set of banks may be licensed which may be referred to as Payments Banks with the following characteristics:
a) Given that their primary role is to provide payment services and deposit products to small businesses and low-income households, they will be restricted to holding a maximum balance of Rs. 50,000 per customer.
b) They will be required to meet the CRR requirements applicable to all the Scheduled Commercial Banks.
c) They will be required to deposit the balance proceeds in approved SLR securities with a duration of no more than three months and will not be permitted to assume any kind of credit risks.
d) In view of the fact that they will therefore have a near-zero risk of default, the minimum entry capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore required for full-service SCBs.
e) They will be required to comply with all other RBI guidelines relevant for SCBs and will be granted all the other rights and privileges that come with that licence.
f) Existing SCBs should be permitted to create a Payments Bank as a subsidiary.
Update: RBI grants “in-principle” approval to 11 Applicants for Payments Banks
The Reserve Bank of India has decided to grant “in-principle” approval to 11 applicants to set up payments banks in India. The successful applicants include the largest telcos, corporate houses, Business Correspondents, a Depository and a mobile wallet provider.
The proposed Payments Banks are required to keep minimum capital of Rs.100 crore, and maintain maximum balances of upto Rs.100,000 per account per year. 75% of Demand deposit balances collected are to be invested in permissible Government securities that qualify for SLR and the Payments Bank will not be permitted to have credit business. Temporary liquidity needs can be met through the interbank uncollateralised call money market and the collateralised repo and CBLO markets. Besides maintaining minimum capital adequacy ratio of 15%, Payments Banks will also have to maintain a leverage ratio of not less than 3% as a backstop measure. NBFCs, corporate BCs, mobile phone companies, supermarkets and other players including banks can set up Payments Banks as subsidiaries subject to shareholding limits.
The guidelines also specifically clarify that RBI does not mandate a diversified ownership structure, which would have been required if these banks were undertaking credit activities. Payments Banks can therefore be set up as fully-owned subsidiaries so that promoters can leverage adjacencies arising from the use of existing infrastructure of the parent companies by the subsidiary Payments Bank.
|Under the Banking Regulation Act, a set of banks may be licensed which may be referred to as Wholesale Banks with the following characteristics:
a) Given that their primary role is lending and not the provision of retail deposit services, they will only be permitted to accept deposits larger than Rs. 5 crore.
b) Since they could expect to borrow large amounts from other banks, net liabilities from the banking system will be permitted to be deducted from their NDTL computation for the purposes of ascertaining their SLR obligations on par with the treatment currently given for CRR.
c) Since other banks are expected to lend large amounts to Wholesale Banks, those other banks will be permitted to deduct their net assets to the banking system from the computation of their ANBC (the amounts on which PSL requirements are to be applied).
d) In view of the fact that they will not take retail deposits, the minimum entry capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore required for full-service SCBs.
e) If the institution has fewer than twenty branches through which it operates, it will not be required to meet the 25 per cent branching requirement. Institutions with twenty or fewer branches could be referred to as Wholesale Investment Banks while those with a larger branch network could be referred to as Wholesale Consumer Banks.
f) Wholesale Consumer Banks should be permitted to act as BCs for other full service Banks.
g) They will be required to comply with all other RBI guidelines relevant for SCBs and will be granted all the other rights and privileges that come with that licence.
As part of the First Bi-monthly Monetary Policy Statement, 2016-17, Dr. Raghuram G. Rajan, RBI Governor, had stated that the Reserve Bank will explore the possibilities of licensing other differentiated banks such as custodian banks and banks concentrating on whole-sale and long-term financing.
A paper in this regard will be put out for comments by September 2016.
Affordable Formal Credit
|Banks must be required to disclose their concentration levels to each segment in their financial statements.||Accepting the CCFS recommendation to encourage banks to activity manage their exposures to various sectors including to priority sectors, RBI advises banks to disclose in their ‘Notes of Accounts’ to the financial statements, sector-wise advances and NPAs from 2014-15 onwards. Additionally, banks may also disclose the same for sub-sectors where the outstanding advances exceeds 10% of the total outstanding advances to that sector.
RBI has also updated its prudential guidelines for banks to now require greater disclosure of general and specific provisions along industry/geographic areas. Banks need to disclose movement of provisions for NPAs (Separate disclosure shall be made for specific provisions and general provisions held by the bank with a description of each type of provisions held) . In addition, write-offs and recoveries that have been booked directly to the income statement should be disclosed separately. Disclosure is also required along major industry or counterparty type: the amount of NPAs and if available, past due loans, provided separately; Specific and general provisions; and specific provisions and write-offs during the current period. In addition, banks are encouraged also to provide an analysis of the ageing of past-due loans. Also, banks need to disclose the amount of NPAs and, if available, past due loans provided separately broken down by significant geographic areas including, if practical, the amounts of specific and general provisions related to each geographical area. The portion of general provisions that is not allocated to a geographical area should be disclosed separately.
|A set of banks may be licensed which may be referred to as Wholesale Banks, with primary role of lending and not provision of retail deposit services.||RBI keeps in abeyance for a year, the issue of new CoRs for NBFCs.
In the First B-Monthly Monetary Policy Statement, 2014-15, the Governor indicates that an overhaul of the regulatory framework for NBFCs is underway. “An overhaul of the extant regulatory framework for non-banking financial companies (NBFCs) is underway to align it with several important developments which have taken place in the financial sector. It is, therefore, proposed to keep in abeyance, subject to certain exceptions, issue of Certificate of Registration (CoR) for conducting NBFC business, except in the public interest, till an appropriate regulatory framework is put in place for the NBFC sector.” It is expected that the CCFS recommendations for NBFCs be considered in the formulation of a revised framework.
|Restore the permission of ND-NBFCs to act as BCs of a bank. Concerns around commingling can be effectively handled through technology-based solutions such that all settlements happen on an intra-day basis.||RBI has permitted ND-NBFCs to act as BCs to commercial banks provided that the banks have contracts in place to ensure that fears such as commingling of funds, conflicts of interest, forced bundling of products, and so on are adequately taken care of. With specialised credit origination capabilities, and with prudential requirements to be met, NFBCs with established systems and trained personnel are better placed than others to perform the role of institutional BCs. This relaxation is expected to have far-reaching outcomes for last-mile access.|
|Universal reporting to credit bureaus should be mandated for all loans, both individual and SME, but in particular SHG loans, Kisan Credit Card, and General Credit Card.||RBI has directed all Credit institutions to become members of all Credit Information Companies (currently four in number – CIBIL, Equifax, Experian, High Mark) and submit data including historical data to them within three months of the RBI Directive. All Credit Information Companies and Credit Institutions are expected to keep the credit information collected / maintained by them updated regularly on a monthly basis or at shorter intervals as mutually agreed upon.|
|Case for convergence of regulations (between banks and NBFCs) regarding SARFAESI Act eligibility for NBFCs subject to strong customer protection guidelines.||The Union Budget 2015 establishes intent in this direction – ‘To bring parity in regulation of Non-Banking Financial Companies (NBFCs) with other financial institutions in matters relating to recovery, it is proposed that NBFCs registered with RBI and having asset size of Rs.500 crore and above will be considered for notifications as ‘Financial Institution’ in terms of the SARFAESI Act, 2002’.|
|PSL targets should be applicable on the last reporting Friday during the last month of each quarter in exactly the same manner as it is currently applicable in the month of March, so as to ensure more timely and continuous credit flow into priority sectors. In order to ensure administrative ease, requirements such as investment into RIDF can continue to be levied on an annual basis and computed on the basis of the average of the quarterly requirements.||RBI has in its Circular dated April 23, 2015, stated that “To ensure continuous flow of credit to priority sector, there will be more frequent monitoring of priority sector lending compliance of banks on ‘quarterly’ basis instead of annual basis as of now. The data on priority sector advances have to be furnished by banks at quarterly and annual intervals as per revised reporting formats…. For the year 2015-16, the shortfall in achieving priority sector target/sub-targets will be assessed based on the position as on March 31, 2016. From financial year 2016-17 onwards, the achievement will be arrived at the end of financial year based on the average of priority sector target /sub-target achievement as at the end of each quarter.”|
|Convergence of NBFC and bank regulations with regard to quantum of provisioning for standard assets.||RBI now requires every NBFC-SI to make provisions for standard assets at 0.25 per cent by the end of March 2015; 0.30 per cent by the end of March 2016; 0.35 per cent by the end of March 2017 and 0.40 per cent by the end of March 2018 and thereafter, of the outstanding, which shall not be reckoned for arriving at net NPAs. While this does harmonise provisioning norms for banks and NBFCs, agri advances for instance continue to enjoy lesser provisioning norms by banks (0.25%). Also non systemically important NBFCs continue to meet the 0.25% requirement as provisioning norms for standard assets.|
|Convergence of NBFC and bank regulations with regard to the ‘duration to qualify for an NPA’.||RBI stated that in the interest of harmonisation, the asset classification norms for NBFCs-ND-SI and NBFCs-D are being brought in line with that of banks as proposed in the circular (but this has been implemented only in the case of ‘doubtful assets’ and ‘sub-standard’ assets so far). Consequently, for NFBC-ND-SIs, RBI has redefined ‘doubtful assets’ (and ‘sub-standard assets’) to mean an asset that remains a sub-standard asset (and as non-performing asset) for a period ‘exceeding 18 months’ for the financial year ended March 31, 2015; ‘exceeding 16 months’ for the financial year ended March 31, 2016; ‘exceeding 14 months’ for the financial year ending March 31, 2017 and ‘exceeding 12 months’ for the financial year ending March 31, 2018 and thereafter.|
|All policy biases against consumption finance need to be removed. An example of this is restricting the proportion of consumption finance that is permitted for NBFC-MFIs.||RBI has modified NBFC-MFI Directions to be more accommodative of this recommendation. “ Loans given for income generation should constitute at least 50 per cent of the total loans of the NBFC-MFI and the remaining 50 per cent can be for other purposes”.|
|To address wholesale funding constraints faced by NBFCs in a systematic manner, the committee recommended that the benefit of ‘shelf prospectus’ should be available for one year to all issuers including NBFCs.||Section 31 of the Companies Act, 2013 was notified on September 12, 2013, according to which any class or classes of companies, as SEBI may provide by regulations in this behalf, may file a shelf prospectus with the Registrar of Companies. The Shelf Prospectus shall be filed at the stage of the first offer of securities. It shall indicate a period of validity, which shall not exceed one year commencing from the date of opening of the first offer of securities under that prospectus. In respect of a second or subsequent offer of such securities issued during the period of validity of that prospectus, no further prospectus is required to be filed.
Following this, SEBI issued regulations permitting NBFCs and HFCs to file shelf prospectus for public issuance of debt securities, provided they comply with certain criteria including net worth of at-least Rs.500 crore, consistent track record of distributable profit for the last three years; rating of not less than AA- or equivalent for the securities issued under the shelf prospectus, among others.
|The decision on the manner in which risk sharing and credit approval arrangements need to be structured between banks and their agents can be left to the judgment of banks. Outsourcing guidelines should be amended to permit this.||RBI Circular has indicated that ‘in view of concerns raised that these instructions are not being adhered to, we reiterate that outsourcing of any activity by the bank does not diminish its obligations, and those of its Board and senior management, who have the ultimate responsibility for the outsourced activity. Banks have been advised to take steps to ensure that the service provider employs the same high standard of care in performing the services as would be employed by the banks, if the activities were conducted within the banks and not outsourced. Further, banks should not engage in outsourcing that would result in their internal control, business conduct or reputation being compromised or weakened.’|
|It is recommended that there be more flexibility within the norms on External Commercial Borrowing (ECB). Specifically, ECB in Rupees needs to be permitted for all institutions. For ECB not in Rupees, eligibility to be linked to size and capacity to absorb foreign exchange risk rather than specific NBFC categories.||In order to facilitate Rupee denominated borrowing from overseas, the RBI has decided to put in place a framework for issuance of Rupee denominated bonds overseas within the overarching ECB policy. The RBI has fixed the current limit of USD 51 billion for foreign investment in corporate debt in Rupee terms at Rs. 2443.23 billion. Issuance of Rupee denominated bonds overseas will be within this aggregate limit of foreign investment in corporate debt. As the overall limit is now prescribed in Rupee terms, the maximum amount which can be borrowed by an entity in a financial year under the automatic route by issuance of these bonds will be Rs. 50 billion. Proposals to borrow beyond Rs. 50 billion in a financial year will require prior approval of the Reserve Bank.|
|RBI must represent to the MoF to restore the tax-free status of securitisation SPVs as pass-through vehicles for tax treatment, so as to create pathways for Wholesale Banks to provide liquidity to other Banks and Financial Institutions directly originating assets in priority sectors, thereby ensuring the role it would play in ensuring efficient risk transmission.||Any distribution tax that was to be applicable to an investor of a securitisation trust, based on income distributed by the latter will not be applicable on or after the 1st June, 2016.|
|Credit facilities documented as bonds or Pass-Through Certificates (PTC), whether originated directly or purchased in the secondary markets should be permitted to be held in the “banking book”of a bank based on declared intent and not merely based on source or legal documentation. Investment by banks in bonds of institutions must qualify for PSL where wholesale lending to the same institutions already qualifies under PSL; Investment by banks in the form of non-fund based limits (such as guarantees) should qualify for PSL to the extent of the credit equivalent amount of the off-balance sheet facility where loans to these categories qualify for PSL. ANBC should also be adjusted to include such PSL-linked, non-fund based limits.||With the objective of developing a strong and vibrant market for Priority Sector Lending Certificates (PSLCs), the RBI has permitted a bank to issue PSLCs upto 50 percent of previous year’s PSL achievement without having the underlying in its books. However, as on the reporting date, the bank must have met the priority sector target by way of the sum of outstanding priority sector lending portfolio and net of PSLCs issued and purchased. To the extent of shortfall in the achievement of target, banks may be required to invest in RIDF/other funds as hitherto.
PSLC is a short-term accounting instrument meant to cover a shortfall in PSL targets. Within various subsets of Priority Sector Lending, PSLC will enable banks to achieve the stipulated Priority Sector Lending target and sub targets in the event of a shortfall. This mechanism can prove to be profitable for both the lending bank as well as the borrowing bank. The lending bank (in this case the banks with surplus PSL) can be incentivized through selling their excess achievement over targets thereby enhancing lending to the categories under priority sector. On the other hand, the buyer buys the obligation with a guarantee of no transfer of risk or loan assets.
|The CCFS recommended various norms that may be harmonised in a differentiated bank regime that also provides room for NBFCs. In this regard, one of the recommendation was regarding the strong case for convergence/ harmonisation of norms on SARFAESI eligibility for banks and NBFCs subject to strong customer protection laws.||The Central Government has specified 196 non-banking financial companies having asset of five hundred crore rupees and above as per their last audited balance sheet, as “financial institutions” under the SARFAESI Act. All provisions of the SARFAESI Act, shall apply to such financial institutions with the exception of certain provisions (like enforcement of security interest, assistance of secured creditor in taking possession of secured asset, manner and effect of take-over of management, no compensation to directors for loss of office, right to appeal, appeal to Appellate Tribunal and right of borrower to receive compensation and costs in certain cases), which will apply only to security interest which is obtained for securing repayment of secured debt with principal amount of rupees one crore and above.|
|Reorient the focus of NABARD, CGTMSE, SIDBI, and NHB to be market makers and providers of risk-based credit enhancements rather than providers of direct finance, automatic refinance, or automatic credit guarantees for National Banks.||The MUDRA Bank, the entity created for the development of the microenterprise sector, is providing market making functions by providing credit enhancements and guarantees to banks and NBFCs to bring down their cost of funding. Besides providing refinance, MUDRA participates in securitization of the loan assets of these high quality originators, by providing second loss default guarantee, for credit enhancement and also participating in investment of Pass Through Certificate (PTCs) either as Senior or Junior investor.|
|Under the Banking Regulation Act, a set of banks may be licensed which may be referred to as Wholesale Banks with the following characteristics:
a. Given that their primary role is lending and not the provision of retail deposit services, they will only be permitted to accept deposits larger than Rs. 5 crore.
b. Since they could expect to borrow large amounts from other banks, net liabilities from the banking system will be permitted to be deducted from their NDTL computation for the purposes of ascertaining their SLR obligations on par with the treatment currently given for CRR.
c. Since other banks are expected to lend large amounts to Wholesale Banks, those other banks will be permitted to deduct their net assets to the banking system from the computation of their ANBC (the amounts on which PSL requirements are to be applied).
d. In view of the fact that they will not take retail deposits, the minimum entry capital requirement for them will be Rs. 50 crore compared to the Rs. 500 crore required for full-service SCBs.
e. If the institution has fewer than twenty branches through which it operates, it will not be required to meet the 25 per cent branching requirement. Institutions with twenty or fewer branches could be referred to as Wholesale Investment Banks while those with a larger branch network could be referred to as Wholesale Consumer Banks.
f. Wholesale Consumer Banks should be permitted to act as BCs for other full service Banks.
|RBI releases Discussion Paper on ‘Wholesale & Long-Term Finance Banks’
RBI in the discussion paper has stated that the Wholesale and Long-Term Finance (WLTF) banks will focus primarily on lending to infrastructure sector and small, medium and corporate businesses. They will also mobilise liquidity for banks and financial institutions directly originating priority sector assets, through securitisation of such assets and actively dealing in them as market makers. They may also act as market-makers in securities, such as, corporate bonds, credit derivatives, warehouse receipts, and take-out financing, etc. These banks will provide refinance to lending institutions and shall be present in capital markets in the form of aggregators. They may have negligible retail sector exposure on asset side. The primary sources of funds for these banks could be a combination of wholesale and long term deposits (above a large threshold), debt/equity capital raised from primary market issues or private placement, and term borrowings from banks and other financial institutions.
The RBI paper has proposed a higher level of initial minimum paid-up equity capital, say Rs 1,000 crore or more, for these banks.
|The RBI should issue regulations on Suitability, applicable specifically for individuals and small businesses, to all regulated entities within its purview, i.e., banks, NBFCs and payment institutions so that the violation of such regulations would result in penal action for the institution as contemplated under the aforesaid statutes through a variety of measures, including fines, cease-and-desist orders, and modification and cancellation of licences. These regulations should be applicable specifically for individuals and small businesses defined under the term ― retail customer by FSLRC(…) All financial firms regulated by the RBI would be required to have an internal process to assess Suitability of products prior to advising clients with regard to them. The RBI would provide the following guidance with regard to the internal compliance requirements for firms regarding Suitability:
a) The Board should approve and oversee the procedures put in place for Suitability on an annual basis and attempt to detect and correct any deviations from procedure.
|The RBI has published on its website the final Charter of Customer Rights for banking customers. This Charter has five Rights:
The Right is Suitability has been described as: The products offered should be appropriate to the needs of the customer and based on an assessment of the customer’s financial circumstances and understanding.
The RBI has in its press release, pointed out that all scheduled commercial banks, regional rural banks and urban cooperative banks are expected to prepare their own board-approved policy incorporating the five Rights of the Charter, and that such a policy must also contain monitoring and oversight mechanisms to be followed for ensuring that rights are not violated.
|The Committee recommends that a unified Financial Redress Agency (FRA) be created by the Ministry of Finance as a unified agency for customer grievance redress across all financial products and services which will in turn coordinate with the respective regulator. The FRA should have a presence in every district in the country and customers should be able to register complaints over the phone, using text messages, internet, and with the financial services provider directly, who should then be required to forward the complaint to the redressal agency. The customers should have their complaints resolved within 30 days of registration of the complaint with the FRA.||The Union Budget 2015 establishes intent in this direction. The Financial Minister stated that ‘a properly functioning capital market also requires proper consumer protection. I, therefore, also propose to create a Task Force to establish a sector-neutral Financial Redressal Agency that will address grievances against all financial service providers’.|
|Given the size of the unregulated financial services industry in the country and the limited capacity of regulators, it is inevitable that certain fraudulent financial firms will dupe customers of their savings or mis-sell products. In most such instances, the regulator becomes cognizant of the crime much after the damage has been done. In order to prevent such instances of fraud, a citizen-led approach to surveillance and monitoring would be useful to consider. Hence the RBI should create a system by which any customer can effortlessly check whether a financial firm is registered with or regulated by RBI. Customers should be able to access this service by phone, through text-messages or on the internet.||The Reserve Bank of India (RBI) launched Sachet (www.sachet.rbi.org.in), a website from where anyone can get information about companies that are allowed to accept deposits. A customer will also be able to lodge complaints and share information about illegal acceptance of deposits by unscrupulous entities. The website has been launched to enable early identification of illegal collection of deposits, which will, in turn, allow enforcement agencies to take swift action. One can check whether a particular company that is accepting deposits is registered with any regulator and whether it is permitted to accept deposits. The website also provides details of regulations prescribed by all financial regulators.|
Comprehensive Financial Services
|In keeping with the goal of creating integrated providers for financial services delivery, RBI should publish a guideline towards the appointment of entities regulated by it, including National Banks, Regional Banks, or NBFCs, as agents. This guideline should set out the following eligibility criteria for agents: …… The Agent should adopt the Suitability principles of the RBI as well as those of the Principal‘s regulator. The Agent should also have a mechanism to address queries and grievance of the customer about the services rendered by it and publicise it widely through electronic and print media. All customer grievances should be addressed within a defined time frame.||RBI has dispensed with minimum eligibility criteria (such as minimum NOF of Rs.100 cr, minimum capital adequacy levels, prescribed net NPA levels, and atleast 3 year history of profitability) as well as the requirement for prior RBI approval for distributing mutual funds by NBFCs. Additionally the NBFC should have put in place a comprehensive Board approved policy regarding undertaking mutual funds distribution. The services relating to the same should be offered to its customers in accordance with this policy. The policy will also encompass issues of customer appropriateness and suitability as well as grievance redressal mechanism.|