Regulatory updates

The Reserve Bank of India (RBI), vide a notification dated 22 October 2021 (SBR notification) had introduced the Scale Based Regulatory (SBR) framework for NBFCs. The approach renders the regulation and supervision of the NBFCs to be a function of their size, activity, and perceived riskiness. The SBR framework classified the NBFCs into the following four layers:

1. NBFC-Base Layer (NBFC-BL)
2. NBFC-Middle Layer (NBFC-ML)
3. NBFC-Upper Layer (NBFC-UL)
4. NBFC-Top Layer (NBFC-TL).

Vide the SBR framework (circular issued in October 2021), RBI had stipulated that NBFCs in the upper layer would be required to follow differential standard asset provisioning. The RBI vide a circular dated 6 June 2022 has issued detailed guidelines on differential provisioning to be held by NBFCs classified as NBFC-UL towards different classes of standard assets. NBFCs classified as NBFC-UL would be required to maintain provisions in respect of ‘standard’ assets at the following rates for the funded amount outstanding:

Further, current credit exposures¹⁷arising on account of the permitted derivative transactions would also attract provisioning requirement as applicable to the loan assets in the ‘standard’ category, of the concerned counterparties. All conditions applicable for treatment of the provisions for standard assets would also apply to the aforesaid provisions for permitted derivative transactions.

These revised provisions will be applied while computing the prudential floor with effect from 1 October 2022.

To access the text of the notification, please click here

13. Definition of the terms Micro Enterprises, Small Enterprises, and Medium Enterprises shall be as per the circular FIDD.MSME &NFS.BC.No.3/06.02.31/2020-21 dated July 2, 2020, on ‘Credit flow to Micro, Small and Medium Enterprises Sector’ as updated from time to time.
14. Housing loans extended at teaser rates shall mean housing loans having comparatively lower rates of interest in the first fewyears after which the rates of interest are reset at higher rates.
15. Commercial Real Estate (CRE) would consist of loans to builders/ developers/ others for creation/acquisition of commercial realestate (such as office building, retail space, multi-purpose commercial premises, multi-tenanted commercial premises, industrial or warehouse space, hotels, land acquisition, development and construction etc.) where the prospects for repayment, or recovery in case of default, would depend primarily on the cash flows generated by the asset by way of lease/rental payments, sale etc. Further, loans for third dwelling unit onwards to an individual will be treated as CRE exposure.
16. Commercial Real Estate –Residential Housing (CRE–RH) is a sub-category of CRE that consist of loans to builders/ developers for residential housing projects (except for captive consumption). Such projects should ordinarily not include non-residential commercial real estate. However integrated housing project comprising of some commercial spaces (e.g., shopping complex, school etc.) can also be specified under CRE-RH, provided that the commercial area in the residential housing project does not exceed 10 per cent of the total Floor Space Index (FSI) of the project. In case the FSI of the commercial area in the predominantly residential housing complex exceed the ceiling of 10 per cent, the entire loan should be classified as CRE and not CRE-RH.
17. Current credit exposure is defined as the sum of the gross positive mark-to-market value of all derivative contracts with respect to a single counterparty, without adjusting against any negative marked-to-market values of contracts with the same counterparty.

In September 2021, RBI had issued the Master Direction –Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 (MD-TLE), thereby laying down a comprehensive, self-contained set of regulatory guidelines governing transfer of stressed loan exposures¹⁸.

Clause 77 of the MD-TLE, inter aliastates that investments in Security Receipts (SRs)/Pass Through Certificates (PTCs)/other securities issued by Asset Reconstruction Companies (ARCs) shall be valued periodically by reckoning the Net Asset Value (NAV) declared by the ARC based on the recovery ratings received for such instruments.

Provided that when transferors invest in the SRs/PTCs issued by ARCs in respect of the stressed loans transferred by them to the ARC, the transferors shall carry the investment in their books on an ongoing basis, until its transfer or realisation, at the lower of the redemption value of SRs arrived based on the NAV as above, and the Net Book Value (NBV) of the transferred stressed loan at the time of transfer.

The RBI, vide a circular dated 30 June 2022 (the 2022 circular) has provided a glide path for entities to ensure smooth implementation of clause 77 of the MD-TLE. In respect of valuation of investments in SRs outstanding on the date of issuance of MD-TLE (September 24, 2021), the difference between the carrying value of such SRs and the valuation arrived at as on the next financial reporting date after the date of issuance of MD-TLE, in terms of clause 77 of the MD-TLE, may be provided over a five-year period starting with the financial year ending 31 March 2022 -i.e. from FY2021-22 till FY2025-26.

Subsequent valuations of investments in such SRs on an ongoing basis shall, however, be strictly in terms of the provisions of MD-TLE.

All lending institutions are required to put in place a board approved plan to ensure that the provisioning made in each of the financial years as per the guidelines above is not less than one fifth of the required provisioning on this count.

All other provisions of the MD-TLE shall continue to be applicable, as hitherto.

This circular is applicable to all India financial institutions, NBFCs, urban, state and district central cooperative banks, local area banks and regional rural banks.

To access the text of the circular, please click here

To access the text of MD-TLE, please click here

18. Stressed loans are loans classified as NPAs or as Special Mention Accounts (SMAs).

Digital lending witnessed a sharp increase during the COVID-19 pandemic. Banks and Non-Banking Financial Companies (NBFCs) have been lending either directly through their own digital platforms or through a digital lending platform under an outsourcing arrangement. Such outsourcing arrangements are usually entered into with Lending Service Providers (LSP)/Digital Lending Applications (DLAs).

Until recently, there were no set of regulations that governed the ‘digital lending’ business, which resulted in various concerns such as unbridled engagement of third parties (LSPs), misselling, over indebtedness of customers, breach of data privacy, unfair business conduct, exorbitant interest rates and unethical recovery practices. Accordingly, on 2 September 2022, RBI notified the guidelines on digital lending (the guidelines).

The guidelines would be applicable to all Regulated Entities (REs) (i.e., commercial banks, primary (urban) cooperative banks, state co-operative banks, district central cooperative banks and NBFCs (including housing finance companies)) providing loans through the digital lending platforms. The REs would also need to ensure that the LSPs engaged by them, and the digital lending apps of the REs and of the LSPs engaged by the REs comply with the said guidelines.

Effective date The guidelines are applicable on an immediate basis (i.e., from 2 September 2022) to:

• The existing customers availing fresh loans and
• To new customers getting onboarded

REs have been given time till 30 November 2022 to put in place adequate systems and processes to ensure that existing digital loans comply with the guidelines.

The guidelines reiterate that outsourcing arrangements entered into by REs with the LSPs/DLAs do not diminish an REs’ obligations, and it should continue to conform to the extant guidelines on outsourcing prescribed by RBI. Additionally, it would be the REs’ responsibility to ensure that the guidelines are conformed with by the LSPs and the DLAs.

The guidelines focus on three main areas:

• Customer protection and conduct requirement
• Technology and data requirement
• Regulatory framework

The key takeaways under each of these areas is discussed below:

Key takeaways under the three main areas

1. Customer protection and conduct requirements: Some of the important areas covered in the guidelines pertaining to customer protection and conduct requirements include:

1. Loan disbursal, servicing and repayment directly through RE account: REs must ensure that all disbursements are made to a bank account of the borrower without any pass-through account/pool account of any third party (including LSPs/DLAs)²⁵, similarly all repayments should be made by a borrower directly into the REs’ bank account (and not a third party/pool account)
2. Enhanced disclosures to the borrowers: REs should make sure that various information such as key facts statement, digitally signed documents, product-related information, etc. is available to the borrowers
3. Fees/charges: Fees, charges, etc. should be paid directly by the RE to the LSP, and these should not be charged to the borrower. Additionally, the penal interest should be charged on the outstanding amount of the loan, and the annual penal interest rate should be disclosed in the key fact statement
4. Grievance redressal mechanism: The responsibility of grievance redressal would remain with the RE. Additionally, various grievance redressal provisions have been introduced which include having in place a suitable nodal grievance redressal officer with the LSPs to deal with digital lending related complaints/issues raised by the borrowers, complaint mechanism under Reserve BankIntegrated Ombudsman Scheme (RB-IOS) etc.
5. Cooling-off/look-up period: The guidelines have introduced a cooling-off/look-up period, wherein borrowers are given an option to exit digital loans by paying the principal and proportionate Annual Percentage Rate (APR)²⁶ without any penalty. This period needs to be determined by the board of directors of the RE, however the minimum cooling-off period has been prescribed by the guidelines.
6. Enhanced due diligence of LSPs and assessment of borrower’s creditworthiness: REs should conduct enhanced due diligence before entering into a partnership with an LSP, taking into account its technical abilities, data privacy policies, storage systems, etc.

REs must also capture the economic profile of the borrowers to assess the borrower’s creditworthiness in an auditable way and also ensure that there is no automatic increase in the credit limit, unless explicit consent of the borrower is taken on record for such an increase.

1. Technology and data requirement: The key provisions pertaining to technology and data requirement, as introduced by the guidelines include the following:

1. Collection, usage and sharing of data with third parties: With regard to personal information of the borrowers, the REs should ensure that only need-based data is collected from borrowers, access to a borrowers’ mobile phone apps should be limited, borrower should be able to manage his/her data collected by the DLA, purpose of obtaining borrower’s consent should be disclosed, and explicit consent of the borrower should be obtained before sharing of personal information, etc.
2. Storage of data: REs should establish and disclose clear policy guidelines regarding storage of customer data- such as type of data, length of time it can be stored, etc. REs should also ensure that basic minimal data of the customer is stored by it, no biometric data is stored, and all data is stored in servers located within India.
3. Privacy policy and technology standards: The REs should ensure that the DLAs and LSPs engaged by them have a comprehensive privacy policy, which is in compliance of the applicable laws, associated regulations and RBI guidelines. Additionally, REs should ensure that the REs and LSPs engaged by them comply with various technology standards, including requirements on cybersecurity.

1. Regulatory framework: From a regulatory perspective, RBI has prescribed the following requirements for digital lending:

1. Reporting to Credit Information Companies (CICs): REs should ensure that any lending done through their DLAs and/or DLAs of LSPs engaged by them, is reported to Credit Information Companies (CICs) irrespective of its nature/tenure. This will contribute towards reduced dependence on alternative data for financial consumers, as more and more of them would develop formal credit history for themselves
2. Provisions relating to loss sharing arrangement in case of default: Various LSPs provide certain credit enhancement features such as first loss guarantee up to a pre-decided percentage of loans generated by it. The guidelines issued require the REs entering into financial contracts including a clause on First Loss Default Guarantee (FLDG) to comply with the Securitisation Guidelines, especially the provision relating to synthetic securitisation²⁷. Also, RBI, vide a press release issued in August 2022 has stated that the recommendation pertaining to FLDG is under examination and further guidance is expected in near future.

25. Certain exceptions to this include disbursals covered exclusively under statutory or regulatory mandate (of RBI or of any other regulator), flow of money between REs for co-lending transactions and disbursals for specific end use, provided the loans is disbursed directly into the bank.
26. APR is an effective annualised rate that is charged to a borrower of a digital loan. It represents the all-inclusive cost- including cost of funds, credit cost, operating cost processing fee, verification charges, maintenance charges, etc.
27. Synthetic securitisation is an arrangement where the credit risk of an underlying pool of loan exposures is hedged by the originator through credit derivatives or credit guarantee arrangements

To access the text of the guidelines, please click here

Central Bank Digital Currency (CBDC) refers to a digital form of currency notes issued by a central bank. Many central banks across the globe are exploring the issuance of CBDC. Recently, RBI through its press release dated 7 October 2022 issued a concept note on CBDC (the concept note). It explains the key motivations and objectives, benefits, types and other related considerations of issuing a CBDC in India, referred to as e₹(digital Rupee). The e₹ would provide an additional option to the currently available forms of money.

The concept note comprises of the following eight chapters:

1. Introduction
2. CBDC-Conceptual Framework
3. Motivations for issuance of CBDC
4. Design considerations for CBDC
5. Technology considerations for CBDC
6. Other considerations
7. Policy implications of introduction of CBDC, and
8. Way forward.

Some of the key aspects specified in the Concept Note include:

• CBDC – Meaning: RBI defines CBDC as a legal tender issued by a central bank in a digital form. It is akin to sovereign paper currency but takes a different form, exchangeable at par with the existing paper currency and would be accepted as a medium of payment, legal tender and a safe store of value.
• Objective: The main objectives of introducing CBDCs are:
  1. Reduction in cost of physical cash management¹¹.
  2. To further the cause of digitisation to achieve a less cash dependent economy.
  3. Supporting competition, efficiency and innovation in payments.
  4. Exploring the use of CBDCs for improvement in crossborder transactions.
  5. Supporting financial inclusion¹², and
  6. Enhancing and restoring trust in central bank currency vis-à-vis proliferation of crypto assets.
• Types of CBDC: Based on the usage and functions performed by the CBDCs and considering the different levels of accessibility, CBDC can be classified into following two types:
  1. CBDC Wholesale (CBDC-W): CBDC-W would be broadly used for improving the efficiency of interbank payments and securities settlement. These would be designed for restricted access by the financial institutions, and
  2. CBDC Retail (CBDC-R): CBDC-R would be potentially available for use to all private sector, nonfinancial consumers and businesses (retail consumers for day-to-day transactions).
• Administration of CBDCs: RBI would create and issue CBDC tokens to authorised entities (Token Service Providers – TSPs) who would further distribute it to the end users for retail transactions. Many customer facing activities such as customer onboarding, KYC, etc. could be performed by intermediaries/ TSPs, instead of the RBI. In this regard, the concept paper has proposed three models for issuing CBDCs. These are Direct, Indirect and Hybrid models. The following table illustrates the overall administration of CBDCs and the roles of various parties involved:

(Source: RBI concept note on CBDCs)

• Design considerations: With regard to the design of the CBDCs, the concept paper discussed the following:
  1. The RBI is exploring the option of implementation of account based¹³ CBDC in CBDC – W and token based¹⁴ CBDC in CBDC – R.
  2. CBDC would be an alternative to cash, and it should imbibe all elements of cash. Thus, CBDCs should be nonremunerative (therefore, it should not be interest bearing)
  3. Some level of anonymity should be incorporated in the design of the CBDCs, however, it would be restricted to prevent illegal and shadow economy transactions.
• Technology considerations: There are two types of technology platforms – Conventional system and the Distributed Ledger Technology (DLT). In the conventional system, data is stored over multiple physical nodes, being ultimately controlled by one authoritative central entity i.e., the top node of the hierarchy. However, in a DLT system (Blockchain technology), data is managed jointly by multiple entities in a decentralised manner and each update has to be harmonised amongst the nodes of all entities without the requirement of any top node. RBI, through the concept note has highlighted the fact that DLT system, at this point in time, owing to the low volume of transactions and other scalability issues would not be suitable for implementing the CBDC framework across the country.
• Next steps: RBI has been exploring the pros and cons of introduction of CBDCs for some time. As mentioned above, since there are multiple compelling objectives for introducing CBDCs, RBI is currently engaged in working towards a phased implementation strategy, going step by step through the various stages of pilots followed by the final launch. Thus, further developments are expected around this space in near future.

To access the text of the concept note, please click here

11. Cost of physical cash management includes printing, storage transportation and replacement of bank notes, etc.
12. By making financial services more accessible to the unbanked and underbanked population.
13. Account based system would require maintaining a record of balances and transactions of all account holders to indicate the ownership of the monetary balances. In this case, exchange of CBDCs would be transfer of balance from one account to another.
14. Token based CDBCs would involve a type of a digital token issued by the central bank with a unique token number (representing a claim on the bank), like a bank note. It would be a bearer instrument, i.e., whoever holds the token would be considered to be the owner.

Unhedged Foreign Currency Exposure (UFCE) of an entity is a significant area of concern not just for the individual entity, but for the entire financial system as well. This is largely due to the fact that entities which do not hedge their foreign currency exposures can incur high losses during the period of heightened volatility in foreign exchange rates. These losses may reduce their capacity to service the loans taken from the banking system and increase their probability of default thereby affecting the health of the banking system. Consequently, RBI has, from time to time issued various guidelines and instructions to the banks on UFCE of the entities which have borrowed from the banks¹⁵.

Consequent to banks seeking various clarifications on certain aspects related to UFCE, RBI undertook a review of the extant guidelines on UFCE, thereby clarifying and amending few aspects of the guidelines, and has also consolidated the existing instructions on the subject into the RBI (Unhedged Foreign Currency Exposure) Directions, 2022 (the Directions).

The Directions were issued on 11 October 2022 and would be applicable to all commercial banks¹⁶ (excluding payments banks and regional rural banks). Some of the key changes that have been introduced are stated below:

• Definition of Entity: Presently, banks are required to assess UFCE of all the entities. The term ‘entities’ has been defined as ‘those entities which have borrowed from banks including borrowing in INR and other currencies, irrespective of the size of exposure/entity’. This definition has now been amended. The revised definition of ‘entity’ states that ‘an entity means a counterparty to which bank has exposure in any currency’.
• Exemption from UFCE guidelines: At present, UFCE guidelines exclude a bank’s exposure to an entity arising from derivative transactions. This exemption has now been extended to include factoring transactions as well.
• Alternative method for exposure to smaller entities: Currently, banks have an option to follow an alternative method for exposure to ‘smaller entities’ which have:

1. UFCE, and
2. Are not in a position to provide information on their UFCE to the bank.

The Directions have now revised the applicability criteria of the alternative method. It would be applicable for exposure to ‘smaller entities’ which have Foreign Currency Exposure (FCE) (instead of UFCE), and are not in a position to provide information on their UFCE.

Additionally, the definition of smaller entities has been amended to include those entities on which total exposure of the banking system is INR50 crore or less (earlier INR25 crore or less).

• Incremental capital requirement: Banks are required to apply incremental capital requirement for certain exposures as given below:

It has been clarified that the incremental capital requirement for exposures in the last bucket is 25 percentage points increase in the risk weight. For example, if an entity which otherwise attracts a risk weight of 50 per cent falls in the last bucket, the applicable risk weight would be 75 per cent (50 per cent +25 per cent).

Effective date: The Directions would come into effect from 1 January 2023.

To access the text of the Directions, please click here

15. As per these instructions, guidelines and directives, banks were required to maintain incremental provisioning and capital requirements for their exposures to entities with UFCE.
16. The Directions would also be applicable to overseas branches and subsidiaries of banks incorporated in India.
17. Earnings Before Interest and Depreciation – EBID is computed as Profit after tax + Interest on debt + Depreciation + Lease rentals (if any).

As per the guidelines enunciated in the RBI (Financial Statements – Presentation and Disclosures) Directions, 2021 (RBI disclosure guidelines), all commercial banks, other than the Regional Rural Banks (RRBs) are required to provide certain disclosures with respect to divergence in asset classification and provisioning¹⁸. The disclosures relate to the following areas:

The above mentioned disclosures are required to be provided in the notes to accounts in the annual financial statements, published immediately following the communication of such divergence by RBI to the bank.

With an aim to further strengthen compliance with the prudential norms on income recognition, asset classification and provisioning, RBI, vide a notification dated 11 October 2022 has expanded the purview of these disclosure requirements for Primary (Urban) Co-operative Banks (UCBs). Additionally, the existing thresholds specified for the commercial banks have also been revised. The key guidelines issued in this regard include:

• Applicability: Banks should provide the disclosures (as stipulated in the previous page) in the financial statements for the year ending 31 March 2023, if either or both of the following conditions are satisfied:

1. The additional provisioning with regard to the NPAs, as assessed by the RBI exceeds 10 per cent of the reported profit before provisions and contingencies for the period
2. The additional Gross NPAs, as identified by RBI exceeds 10 per cent of the reported incremental Gross ¹⁹ for the period.

Note: In case of UCBs, the threshold for the reported incremental Gross NPAs would be 15 per cent, which would be reduced subsequently, after review by the RBI.

• Revised thresholds for the year ending 31 March 2024: The thresholds pertaining to profit before provisions and contingencies and Gross NPAs (as mentioned in ‘Applicability’ section above) would be revised in the annual financial statements for the year ending 31 March 2024, and onwards, as mentioned below:

To access the text of the notification, please click here

To access the text of the updated RBI (Financial Statements – Presentation and Disclosures) Directions, 2021, please click here

18. Paragraph C.4(e) of Annexure III to the RBI (Financial Statements-Presentation and Disclosures) Directions, 2021 specifies disclosure requirements with respect to divergence in asset classification and provisioning
19. Reported incremental Gross NPAs refers to additions made during the year to the Gross NPAs, as disclosed in the notes to financial statements of the year.
20. Threshold may be subsequently reduced, after review by the RBI

The Reserve Bank of India (RBI), vide a notification dated 13 December 2022 issued certain amendments to the RBI (Financial Statements – Presentation and Disclosures) Directions, 2021 (the Directions). The amendments are applicable to all commercial banks.

Part A of Annexure II to the Directions specify the notes and instructions for compilation of balance sheet and profit and loss account for commercial banks. The amendment emphasises on the disclosure of material items by the commercial banks in their financial statements. Some of the key changes introduced are summarised in the table below:

Further, Payments Banks should also disclose particulars of all such items in the notes to accounts, wherever any item under the Schedule 14(I)-Other Income-“Commission, Exchange and Brokerage” exceeds one per cent of the total income.

Effective date: The amendments are effective for disclosures in the notes to the annual financial statements for the year ending 31 March 2023 and onwards.

To access the text of the notification, please click here

To access the text of the amended Regulations, please click here

On 2 September 2022, RBI had issued the Guidelines on Digital Lending (digital lending guidelines). The guidelines apply to digital lending extended by all commercial banks, primary (urban) co-operative banks, state co-operative banks, district central co-operative banks and NBFCs (including HFCs). With a view to provide further clarification on certain aspects of the digital lending guidelines and to enable a smooth implementation of the same, on 15 February 2023, RBI issued Frequently Asked Questions (FAQs) on the digital lending guidelines. Some of the key clarifications provided by RBI include:

• What is digital lending The digital lending guidelines define digital lending as a remote and automated lending process, largely by use of seamless digital technologies for customer acquisition, credit assessment, loan approval, disbursement, recovery, and associated customer service. The FAQs clarified the following:

• Even if some physical interface with the customer is present, the lending would still fall under the definition of digital lending. However, the Regulated Entities (REs) must ensure that the intent behind the guidelines is adhered to.
• EMI programmes on credit cards would be governed by the Master Direction on Credit Card and Debit Card – Issuance and Conduct, 2022 (Master Directions), and not by the digital lending guidelines. However, other loan products offered on credit cards which are not covered under the Master Directions, and loans offered on debit card, including EMI programmes would be governed by the digital lending guidelines.
• Digital loans offered over any digital platform which meet the definition of digital lending apps or platforms (including mobile apps, websites, etc.) would be subject to the digital lending guidelines.

• Appointment of grievance redressal officers The digital lending guidelines require all Lending Service Providers (LSPs) of the REs to appoint a nodal Grievance Redressal Officer (GRO) to deal with digital lending related complaints/issues raised by the borrowers against their Digital Lending Applications (DLAs). The FAQs clarified that only those LSPs which have an interface with the borrowers would need to appoint a nodal GRO. The FAQs have further reiterated that the REs shall remain responsible for ensuring resolution of complaints arising out of actions of all LSPs engaged by them.

• Disclosure of Annual Percentage Rate (APR) The digital lending guidelines require the REs to disclose the APR¹⁷ The APR is an effective annualised rate which is charged to a borrower of a digital loan. It represents the all-inclusive cost-including cost of funds, credit cost, operating cost processing fee, verification charges, maintenance charges, etc. to all its borrowers as part of the Key Fact Statement (KFS). The FAQ has provided various clarifications on certain aspects of APR:

1. For a floating rate loan, the APR may be disclosed at the time of origination based on the prevailing rate as per the format of KFS. However, as and when the floating rate changes, only the revised APR may be disclosed to the customer via SMS/ e-mail each time the revised APR becomes applicable.
2. Insurance charges only for such insurance which is linked/integrated in loan products would be considered for calculating the APR as these charges are intrinsic to the nature of such digital loans.
3. Penal charges such as cheque bounce/mandate failure charges, which are necessarily levied on a per instance basis may not be annualised. However, these charges must be disclosed separately in the KFS under ‘Details about Contingent Charges’. In this regard, the FAQs have clarified the following:

• No pass-through accounts The digital lending guidelines required REs to ensure that all disbursements are made to a bank account of the borrower without any pass-through account/pool account of any third party (including LSPs/DLAs). Similarly, all repayments, etc. should be executed by a borrower directly in an RE’s bank account. In this regard, the FAQs have clarified the following:

1. The flow of funds between the bank accounts of a borrower and lender in a lending transaction cannot be controlled directly or indirectly by a third-party including LSP. While a Payment Aggregator (PA) providing such services would remain out of the ambit of digital lending guidelines, any PA also performing the role of an LSP must comply with the digital lending guidelines.
2. In case of delinquent loans, REs can deploy physical interface to recover loans in cash, where absolutely necessary. In order to afford operational flexibility to REs, such transactions are exempted from the requirement of direct repayment of loan in the RE’s bank account. However, any recovery by cash should be duly reflected in the borrower’s account and REs shall ensure that any fees, charges, etc., payable to LSPs are paid directly by them (REs) and are not charged by LSP to the borrower directly or indirectly from the recovery proceeds.
3. Loan products where loan is repaid by the corporate employer by deducting the amount from the borrower’s salary would be allowed. REs should ensure that LSPs do not have any control over the flow of funds directly or indirectly in such transactions. It has also to be ensured that repayment is directly from the bank account of the employer to the RE.

• Penal interest or charges The digital lending guidelines require the penal interest/charges levied on the borrower to be based on the outstanding amount of the loan. The FAQ has clarified that the amount under default shall act as the ceiling on which the penal charges can be levied.

• Cooling-off or look-up period The cooling-off or look-up period is a period during which borrowers are given an option to exit digital loans by paying the principal and proportionate Annual Percentage Rate (APR), without any penalty. The FAQ has clarified that reasonable one-time processing fees paid by the borrower can be retained by the borrower if the customer exits the loan during the cooling-off period. This, should be disclosed to the customer upfront in KFS. However, the processing fee has to be mandatorily included for the computation of APR.

To access the text of the FAQs, please click here

To access the text of the digital lending guidelines, please click here

Green finance¹Green finance refers to the lending to and/or investing in the activities/projects meeting the prescribed requirements, that contribute to climate risk mitigation, climate adaptation and resilience, and other climate-related or environmental objectives-including biodiversity management and nature-based solutions. has been progressively gaining traction in India and could play a pivotal role in mobilising resources and their allocation in green activities and projects. The Reserve Bank of India (RBI) observed that some Regulated Entities (REs) have already offered green deposits for financing green activities and projects. In this regard, on 11 April 2023, RBI issued a Framework for acceptance of green deposits (the Framework) for the REs. An illustration of how the system for green deposits works is given in figure 1 below:

Figure 1: An illustration of the system for green deposits

(Source: Foundation for Audit Quality’s analysis, 2023)

Some of the key aspects enunciated in the Framework include:

• Applicability and Effective Date: The Framework would be applicable to the following Regulated Entities (REs):
  1. Scheduled Commercial Banks (SCBs) including Small Finance Banks (excluding Regional Rural Banks, Local Area Banks and Payments Banks), and
  2. All Deposit taking Non-Banking Financial Companies (NBFCs) registered with the RBI, including Housing Finance Companies (HFCs).

The framework would come into effect from 1 June 2023.

• Frameworks/policies to be developed by REs: REs would be required to develop and publish the following policies on their websites, after they are duly approved by the board of directors of the REs:
  1. Policy on green deposits: The policy on green deposits would lay down all aspects pertaining to the issuance and allocation of green deposits. This includes the following:
     1. Green deposits would be issued in INR as acumulative/non-cumulative deposit
     2. On maturity, the green deposits would be renewed or withdrawn, at the option of the depositor
     3. The policy would also define the tenor, size, interest rate and other terms and conditions (as applicable to the RE).
  1. Financing framework: REs would be required to put in place a board approved Financing Framework (FF) for effective allocation of green deposits. The FF would cover the following:
     1. The eligible green activities/projects that could be financed out of proceeds raised through green deposits.
     2. Process for identifying, evaluating and selecting the projects fit for lending/investing within the eligible categories. Also monitoring and validating the sustainability information provided by the borrower.
     3. Allocation of proceeds of green deposits to the various projects and reporting of such allocation.
     4. Third party verification or assessment of allocation of proceeds and assessment of impact associated with funds lent for or invested in green finance activities/projects.
     5. Particulars of temporary allocation of green deposit proceeds²Temporary allocation of proceeds of green deposits would be only in liquid investments, which have a maximum original tenure up to one year., pending their allocation to eligible activities/projects

The FF would also undergo a review by an external agency – this review report would also be made available on the RE’s website.

• Use of proceeds: The Framework states that the REs must allocate the proceeds raised through green deposits towards the activities/projects which encourage energy efficiency in resource utilisation, reduce carbon emissions and greenhouse gases, promote climate resilience, adaptation and value, improve natural ecosystems and biodiversity. Some of the key sectors specified in this regard include:

• Renewable energy
• Energy efficiency
• Clean transportation
• Climate change adaptation
• Sustainable water and waste management
• Pollution prevention and control
• Green buildings
• Sustainable management of living natural resources and land use
• Terrestrial and aquatic biodiversity conservation.

• Third-party verification/assurance and impact assessment: The Framework has provided that the allocation of funds raised through green deposits during a Financial Year (FY) would be subject to an independent third-party verification/assurance, on an annual basis. Further, the third-party verification/assurance report should, at the minimum, cover the following aspects:

• Use of the proceeds to be in accordance with the eligible green activities/projects. The REs should monitor the end-use of funds allocated against the deposits raised, and
• Policies and internal controls, including project evaluation and selection, management of proceeds and validation of sustainability information provided by the borrower to the REs and adequate reporting and disclosures.

Also, it has been specified that the REs, with the assistance of external firms, must annually assess the impact associated with the funds lent for, or invested in green finance activities/projects through an impact assessment report³An illustrative list of impact indicators has been provided in Annex 1 of the Framework.. In this regard, the Framework states that the impact assessment exercise should be undertaken on a voluntary basis for F.Y. 2023-24. However, this would become mandatory from F.Y. 2024-25 onwards.

• Reporting and Disclosures: The Framework states that a review report should be placed by the RE before its board of directors within three months of the end of the FY, which must cover the following details:

• Amount raised under green deposits during the previous FY
• List of green activities/projects to which proceeds have been allocated, along with a brief description of the projects
• Amounts allocated to the eligible green activities/projects, and
• A copy of the third-party verification/assurance report and the impact assessment report.

Additionally, disclosures are required to be provided in the annual financial statements of the RE regarding the use of green deposit funds in the format prescribed by the Framework.

To access the text of the Framework, please click here

Before 2021, the London Inter-Bank Offered Rate (LIBOR) was seen as one of the most significant numbers, been used as an interest rate benchmark across various contracts in multiple currencies. However, with questions on its integrity and reliability being raised globally, in 2017, the Financial Conduct Authority (FCA) had announced that post 2021, corporates and banking institutions should adopt Alternative Reference Rates (ARRs) in place of LIBOR.

Consequently, by 31 December 2021, LIBOR linked to most of the currencies worldwide had ceased permanently, with certain select currencies like USD LIBOR, targeting to finally phase it out by 30 June 2023.

The phasing out of LIBOR inter alia has key impact on business, by amendments to existing agreements for insertion of fallback clauses, transition to ARR, etc.. Impacts were also on accounting, for which the MCA⁸Amendments issued by the MCA is in accordance with the amendments issued by the International Accounting Standard Board to the IFRS. has issued certain exemptions, practical expedients and disclosure requirements in two phases- Phase 1 deals with pre-IBOR reform and Phase 2 deals with post-IBOR reforms. With 30 June 2023 being round the corner, regulators are issuing constant reminders to banks/financial institutions and other businesses to complete the transition.

As on date, India has achieved a smooth transition with regard to LIBOR settings that have ceased to be published/become non-representative after 31 December 2021. New transactions are now being predominantly undertaken using ARRs, such as Secured Overnight Financing Rate (SOFR) and Modified MIFOR⁹MIFOR is a domestic interest rate benchmark that is reliant on USD LIBOR. It is published by the Financial Benchmarks India Private Limited (FBIL). (Mumbai Interbank Offered Rate).

With effect from 30 June 2023, the publication of remaining five USD LIBOR settings would cease permanently, and accordingly, the MIFOR would also cease to be published. In this regard, RBI vide a press release dated 12 May 2023 has stated that:

• Banks/financial institutions/their customers should not enter into any new transaction that relies on or is priced using the USD LIBOR or the MIFOR
• Banks/financial institutions should take all the necessary steps to ensure insertion of fallback clauses in all remaining legacy financial contracts that reference USD LIBOR or MIFOR
• While certain synthetic LIBOR settings would continue to be published post 30 June 2023, these settings are not meant to be used in new financial contracts
• Banks/financial institutions should develop systems and processes to manage the complete transition away from LIBOR w.e.f. 1 July 2023.

To access the text of the press release, please click here

The Reserve Bank of India (RBI) has from time to time, issued several instructions to the Regulated Entities (REs) regarding compromise settlements in respect of stressed accounts. This includes the Prudential Framework for Resolution of Stressed Assets dated 7 June 2019 (the prudential framework), which recognises compromise settlements as a valid resolution plan.

In order to provide further guidance regarding the resolution of stressed assets as well as to rationalise and harmonise the instructions across all REs, on 8 June 2023, RBI issued a framework for compromise settlements¹⁹ Compromise settlement refers to any negotiated arrangement with the borrower to fully settle the claims of the RE against the borrower in cash. It may entail some sacrifice of the amount due from the borrower on the part of REs with corresponding waiver of claims of the RE against the borrower to that extent. and technical write-offs²⁰ Technical write-off refers to cases where the non-performing assets remain outstanding at borrowers’ loan account level but are written-off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same. (the framework).

Subsequently, on 20 June 2023, RBI issued certain clarifications on the framework in the form of Frequently Asked Questions (FAQs). Following are some of the key aspects of the framework and FAQs:

• Applicability and Effective Date: The provisions of the framework would be applicable to the following REs:

• Commercial banks (including small finance banks, local area banks and regional rural banks)
• Primary (urban) co-operative banks/state co-operative banks/central co-operative banks
• All-India financial institutions
• Non-Banking Financial Companies (NBFCs) (including housing finance companies)

The framework has come into force with immediate effect (i.e., from 8 June 2023).

• Board-approved policy: The framework states that REs should put in place board-approved policies for undertaking compromise settlements with the borrowers as well as for technical write-offs. Such policies must comprehensively lay down the process to be followed for all compromise settlements and technical write-offs (including delegation of power for approval of such compromise settlements and technical write offs), with specific guidance on the necessary conditions precedent such as minimum ageing, deterioration in collateral value, etc. For compromise settlements, the policy should inter alia also contain the permissible sacrifice for various categories of investments while arriving at the settlement amount after determining the value of the security or collateral. The compromise settlements and technical write-offs included in the policy would be without prejudice to any mutually agreed contractual provisions between the RE and the borrower relating to future contingent realisations or recovery by the RE, subject to such claims not being recognised in any manner on the balance sheet of the REs till actual realisations of the receivables²¹It is to be noted, that any claims recognised on the balance sheet of the RE would render the arrangement to be a restructuring..
• Delegation of power for approval of compromise settlements and technical write offs: The REs should ensure that compromise settlements and technical write offs are approved as follows:

• Cooling period: As a disincentive to both the lenders and the borrowers from seeking a compromise settlement for resolution of stressed assets on a regular basis, the framework has introduced the concept of cooling period for normal cases of compromise settlement during which the lender undertaking settlement shall not take any fresh exposure on the borrower entity. This is given in the table below:

• Reporting mechanism: The framework specifies that there must be a reporting mechanism to the next higher authority, at least on a quarterly basis, with respect to compromise settlements and technical write offs approved by a particular authority. Accordingly, such settlements and technical write-offs which have been approved by the MD and CEO/board level committee would be reported to the board. Further, the board would mandate a suitable reporting format, covering the following aspects at the minimum:

• Trend in the number of accounts and amounts subjected to compromise settlement and/or technical write-off (quarter on quarter and year on year)
• A separate breakup of the accounts in (a) classified as fraud, red-flagged, wilful default and quick mortality accounts
• Amount-wise, sanctioning authority-wise, and business segment/asset-class-wise grouping of such accounts, and
• Extent of recovery in technically written-off accounts.

• Prudential treatment: The prudential treatment for exposures subject to compromise settlement and technical write offs is as under:

• Treatment of debtors classified as fraud and wilful defaulter: REs may undertake compromise settlements or technical write-offs w.r.t. the debtors categorised as wilful defaulters or fraud, without prejudice to the criminal proceedings underway against such debtors. RBI vide the FAQs has clarified that penal measures²⁵ Penal measures include:
  ⁃ No additional facilities should be granted by any bank/financial institution to borrowers listed as wilful defaulters, and that such companies (including their entrepreneurs/promoters) get debarred from institutional finance for floating new ventures for a period of five years from the date of removal of their name from the list of wilful defaulters.
  ⁃ Borrowers classified as fraud are debarred from availing bank finance for a period of five years from the date of full payment of the defrauded amount. currently applicable to borrowers classified as fraud or wilful defaulter remain unchanged and shall continue to be applicable in cases where the banks enter into compromise settlement with such borrowers.

To access the text of the notification, please click here

To access the text of the FAQs, please click here

On 2 September 2022, the Reserve Bank of India (RBI) issued guidelines on digital lending, which are applicable to all Regulated Entities (REs). The REs must ensure that the Lending Service Providers (LSPs) engaged by them, and the digital lending apps of the REs and of the LSPs comply with these guidelines. However, these guidelines did not stipulate the regulation for First Loss Default Guarantee (FLDG).

In this regard, on 8 June 2023, RBI issued guidelines on DLG (DLG guidelines), commonly known as FLDG, in digital lending. Some of the key aspects of the DLG guidelines are discussed below:

• DLG arrangement: There must be a contractual arrangement between the RE and a DLG Provider under which the DLG Provider should guarantee to compensate the RE for the loss due to default up to a certain percentage of the loan portfolio of the RE, specified upfront (as per the DLG guidelines, the amount of DLG cover on any outstanding portfolio should not exceed five per cent of the amount of that loan portfolio). Any other implicit guarantee of similar nature linked to the performance of the loan portfolio of the RE and specified upfront, should also be covered under the definition of DLG. The DLG arrangement would remain in force for a minimum period of the longest tenor of the loan in the underlying loan portfolio.
• Eligibility for a DLG Provider: DLG arrangements are to be entered into with LSPs which are corporates/other REs. An outsourcing arrangement should have been entered into with these parties.
• Declaration from DLG provider: Prior to initiating or renewing a DLG arrangement, the RE should at the minimum obtain a declaration from the DLG provider, certified by the LSP’s statutory auditor on (a) aggregate DLG amount outstanding, (b) the number of REs (c) The respective number of portfolios against which DLG has been provided and (d) past default rates on similar portfolios.
• Approval by board of directors: REs should put in place policies approved by the board of directors before entering into any DLG arrangement. At the minimum, the policy should include:

• The eligibility criteria for DLG provider
• Nature and extent of DLG cover
• Process of monitoring and reviewing the DLG arrangement, and
• The details of the fees, if any, payable to the DLG provider.

• Forms of DLG: RE should accept DLG only in one or more of the following forms:

• Cash deposited with the RE
• Fixed Deposits maintained with a scheduled commercial bank with a lien marked in favour of the RE
• Bank Guarantee in favour of the RE

• Recognition of Non-Performing Asset (NPA): The RE would be responsible for recognition of individual loan assets in the portfolio as NPA and consequent provisioning as per the extant asset classification and provisioning norms irrespective of any DLG cover available at the portfolio level. Additionally, the amount of DLG invoked should not be set off against the underlying individual loans. The DLG guidelines have also clarified that DLG should be invoked within 120 days, unless the amount is made good by the borrower before that.
• Disclosure Requirements: The REs should have a mechanism to ensure that LSPs with whom they have a DLG arrangement should publish on their website – the total number of portfolios and the respective amount of each portfolio on which DLG has been offered.

Effective date: The aforementioned DLG guidelines have come into force w.e.f. 8 June 2023.

To access the text of the DLG guidelines, please click here

Presently, banks adhere to the Master Direction – Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions), 2021 (2021 regulations) for the classification and valuation of their investment portfolio. However, with significant developments in the global standards on classification, measurement and valuation of investments (i.e., the International Financial Reporting Standards (IFRS)), the linkages with the capital adequacy framework as well as progress in the domestic financial markets, RBI felt a need to review and update the 2021 regulations.

On 12 September 2023, RBI issued the revised regulatory guidelines on investment classification and valuation, the Master Directions – Classification, Valuation and Operations of Investment Portfolio of Commercial Banks (Directions), 2023 (2023 regulations).

The 2023 regulations would be applicable to all commercial banks (excluding regional rural banks) from 1 April 2024. The figure below highlights the key aspects of the 2023 regulations:

(Source: Foundation for Audit Quality’s analysis, 2023 read with the 2023 regulations issued by the RBI in September 2023)

The above aspects are discussed in detail below:

• Classification of investments As per the 2023 regulations, the investment portfolio of banks must be categorised into three categories – Held to Maturity (HTM)⁶ Securities that fulfil the following conditions would be classified under HTM: - The security is acquired with the objective of holding it till maturity, i.e., the financial assets are held with the objective to collect the contractual cash flows, and - The contractual terms give rise to cash flows that are Solely Payments of Principal and Interest (SPPI criterion) on principal outstanding on the specified dates. , Available for Sale (AFS)⁷ Securities that fulfil the following conditions would be classified under AFS: - The security is acquired with the objective that is achieved by both – collecting contractual cash flows and selling securities, and - The contractual terms of the security meet the SPPI criterion and Fair Value through Profit and Loss (FVTPL) ⁸ FVTPL is a residual category, thus securities that do not qualify for inclusion in HTM or AFS would be classified under FVTPL . Further, Held for Trading (HFT) (which was earlier, as per the 2021 regulations, an investment category by itself) would be a separate investment sub-category within the FVTPL category . The 2023 regulations have dispensed off the maximum period within which investments in the HFT category need to be sold. Also, the classification for investments in subsidiaries, associates and joint ventures has also been revised.

• Recognition and measurement

1. Initial recognition: All investments must be measured at fair value⁹ Unless facts and circumstances suggest that the fair value is materially different from the acquisition cost, it should be presumed that the acquisition cost is the fair value on initial recognition. As per the extant provisions, investments are initially recognised at acquisition cost
2. Subsequent measurement: The 2023 regulations provide that:

• The securities held under HTM should be carried at cost and not be Marked to Market (MTM) after initial recognition
• The securities held under AFS should be fair valued at least on a quarterly basis , if not more frequently. The change in fair value would be recognised in a separate reserve called the ‘AFS Reserve’.
• Securities that are classified under the HFT sub-category should be fair valued on a daily basis, whereas other securities in FVTPL need to be fair valued at least on a quarterly basis , if not more frequently
• Investments in subsidiaries, associates and joint ventures would be a separate category of investments and should be held at acquisition cost.

• Valuation In order to increase the consistency and comparability in fair value measurements and related disclosures, the 2023 regulations have prescribed that the investment portfolio should be bifurcated into three fair value hierarchies – Level 1¹⁰Inputs which are unadjusted quoted prices in active markets, Level 2¹¹ Observable inputs other than quoted prices and Level 3¹²Unobservable inputs . Disclosures pertaining to fair valuation have also been specified.

• Disclosures The 2023 regulations have prescribed robust disclosures which would be required to be made in the financial statements for the year ending 31 March 2025. Some of these include:

• Carrying amounts and fair value of each of the categories (i.e., HTM, AFS, FVTPL) and each class (i.e., government securities, other approved securities, etc.): Disclosure need to be made in the notes to accounts of financial statements for the year ending 31 March 2025.
• Gain/loss on investments: Disclosure to be made in the notes to accounts of financial statements for the year ending 31 March 2025
• Disclosures as per fair value hierarchy: Disclosure would be required in the notes to accounts of financial statements for the year ending 31 March 2026.

• Other key requirements Some other key requirements specified in the 2023 regulations include:

• Transition requirements: After transitioning to the revised regulatory framework, it has been provided that the banks should not reclassify investments between categories (i.e., HTM, AFS and FVTPL ) without the approval of the Board of Directors and RBI. Permission for reclassification would be provided only in exceptional circumstances. At the time of transition, banks would be allowed a one-time option to re-classify their investments and adjust the gains/losses arising on such reclassification
• Investment Reserve Account: The need to maintain an Investment Reserve Account (IRA)¹³ As per the 2021 regulations, the excess provision on account of depreciation of investments in the AFS or HFT categories is appropriated to IRA. This was included as a part of the Tier II capital of the bank has been dispensed with. The balance in IRA, if any, as on 31 March 2024, should be transferred to the revenue/general reserve, provided the bank meets the minimum regulatory requirements of Investment Fluctuation Reserve (IFR)¹⁴ The IFR is created by banks to address the systemic impact of sharp increase in yields in government securities . If the bank does not meet the minimum IFR requirements, the balances in IRA should get transferred to IFR. The ceiling on investments in HTM as a percentage to total investments, and also the ceiling on Statutory Liquidity Ratio (SLR) securities that can be held in HTM have been dispensed with. However, any sale from HTM needs to be made in accordance with the bank’s board approved policy, and the details need to be disclosed in the notes to accounts.
• Requirements w.r.t. derivatives: Specific accounting and disclosure requirements have also been stipulated for derivatives.

To access the text of the RBI announcement, please click here

The Reserve Bank of India (RBI) has mandated the Regulated Entities (REs), which are categorised as secured creditors as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, to display information in respect of the borrowers whose secured assets have been taken into possession by them.

REs would be required to upload this information on their website in the prescribed format and the first such list should be displayed on the website within six months from the date of the RBI notification, i.e., 25 September 2023, and the same needs to be updated on a monthly basis.

To access the text of the RBI notification, please click here

The banking sector in India has undergone various regulatory changes, thereby resulting in growing complexity and uncertainty in relation to these regulatory compliances. In this regard, RBI felt a need to establish an effective senior management team in the banks to navigate the ongoing and emerging regulatory challenges. Consequently, on 25 October 2023, RBI issued a notification to mandate the following:

• Appointment of whole-time directors: RBI has now prescribed the requirement to ensure the presence of at least two Whole-Time Directors (WTDs), including the Managing Director (MD) and Chief Executive Officer (CEO) on the board of banks. The number of WTDs need to be decided by the board of the banks by taking into account factors such as – size of operations, business complexity, etc.
• Changes in the Articles of Association (AoA): The notification states that those banks which do not already have the enabling provisions regarding appointment of WTDs in their AoA, may first seek necessary approvals under Section 35B(1)(a)¹³Provisions relating to appointment of managing directors, etc., to be subject to previous approval of the RBI. of the Banking Regulation Act, 1949, in order to comply with these requirements.
• Submission of proposals for appointment: Such banks which currently do not meet the minimum requirement of two WTDs are advised to submit their proposals for the appointment under Section 35B(1)(b) of the Banking Regulation Act, 1949, within a period of four months from the date of issuance of the notification.

To access the text of the notification, please Click here

In December 2021, the Reserve Bank of India (RBI) had introduced the Prompt Corrective Action (PCA) framework for Non-Banking Financial Companies (NBFCs). The objective of the PCA framework is to enable supervisory intervention at an appropriate time and require the entity under supervision to initiate and implement remedial measures in a timely manner, so as to restore financial health of the NBFC. It also intends to act as a tool for effective market discipline.

RBI, vide a notification dated 10 October 2023 has now extended the PCA framework to government NBFCs* (except those in base layer), w.e.f. 1 October 2024.

To access the text of the notification, please click here

* Based on the audited financials of the NBFC as on 31 March 2024, or thereafter

The Reserve Bank of India (RBI) observed a high growth in consumer credit and increasing dependency of Non-Banking Financial Companies (NBFCs) on bank borrowings. In this context, recently, RBI, vide a notification dated 16 November 2023 introduced certain important measures to increase the risk weights of banks’ exposure to retail loans and loans given to NBFCs. Similar amendments have been made for NBFCs, where the risk weights of their exposure to retail loans has been increased. The details of the increase have been given below:

• Strengthening credit standards: RBI has stated that:

• Regulated Entities (REs)⁸ REs include commercial banks (including small finance banks, local area banks and regional rural banks), NBFCs (including HFCs) should review their existing sectoral exposure limits for consumer credit and put in place, if not there already, board approved limits in respect of various sub-segments under consumer credit as part of prudent risk management. In particular, limits must be prescribed for all unsecured consumer credit exposures. These limits need to be monitored on an ongoing basis by the Risk Management Committee
• All top-up loans extended by REs against movable assets which are inherently depreciating in nature, such as vehicles, should be treated as unsecured loans for credit appraisal, prudential limits and exposure purposes.

Effective Date: All the aforementioned provisions, except point (c)(i) came into force with immediate effect, i.e., 16 November 2023. With respect to point (c)(i), all REs should ensure compliance with the provisions at the earliest, but not later than 29 February 2024.

To access the text of the notification, please click here

Regulated Entities (REs)² Regulated entities, for the purpose of this circular, include all commercial banks (including small finance banks, local area banks and regional rural banks), all primary (urban) co-operative banks/state co-operative banks/ central co-operative banks, all-India financial institutions and all non-banking financial companies (including housing finance companies) make investments in units of Alternative Investment Funds (AIFs), as part of their regular investment operations. However, RBI observed certain transactions that raised regulatory concerns. These transactions entail substitution of direct loan exposure of REs to borrowers, with indirect exposure through investments in units of AIFs³ To give an example, an RE has extended a loan to a debtor (A Ltd.). The same RE invests in AIFs which further invests or subscribes to the instruments of A Ltd.. Thus A Ltd. obtained funds from AIFs and could use it to pay back the REs, which would result in evergreening of loans extended by the REs. .

In order to address these concerns, RBI, vide a notification dated 19 December 2023 has prescribed certain important guidelines. These mainly pertain to:

• Downstream investments: REs should not make investments in any scheme of AIFs which has downstream investments either directly or indirectly in a debtor company⁵ The debtor company of the RE, for this purpose, would mean any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months. of the RE
• Liquidation of investments and provisioning requirements: If an AIF scheme, in which the RE is already an investor, makes a downstream investment in any such debtor company, then the RE must liquidate its investment in the scheme within 30 days from the date of such downstream investment by the AIF. In case REs are not able to liquidate their investments within the aforementioned time limit, then they would be required to make 100 per cent provision on such investments
• Investment by REs in the subordinated units of an AIF scheme with ‘priority distribution model’: RBI has specified that the investment done by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ should be subject to full deduction from RE’s capital funds.

Effective date: The above guidelines are applicable with immediate effect, i.e., 19 December 2023.

To access the text of the notification, please click here

On 11 April 2023, RBI had issued the Framework for acceptance of Green Deposits (the framework). The framework is effective from 1 June 2023 and aims to direct the flow of funds to sustainable projects and initiatives, protect the interest of the depositors as well as address greenwashing concerns.

Recently, RBI issued certain FAQs for ease of implementation of the said framework. Some of the important issues addressed by the FAQs include:

• Scope of the framework: The framework is applicable only in respect of the green deposits raised by Regulated Entities (REs) on or after 1 June 2023⁵ It has been clarified that it is not mandatory for REs to raise green deposits, however, in case REs intend to raise green deposits from their customers, they should follow the framework prescribed.. Further, it is not permissible for the REs to finance green activities/projects first and raise green deposits thereafter.
• Investment of unallocated proceeds of green deposits: As per the framework, unallocated proceeds of green deposits can be invested in liquid instruments with maturity up to one year. In this regard, RBI has clarified that:

• Liquid instruments refer to the ‘Level 1 High Quality Liquid Assets’ as per the RBI guidelines,
• REs can temporarily park proceeds of green deposits, pending allocation towards green activities/projects, in liquid instruments with maximum maturity up to one year (to be specified under the financing framework), and
• The framework does not specify any penalty for non-allocation of proceeds towards green activities/projects. However, it would be subject to supervisory review.

• Interest on green deposits: REs are not permitted to offer differential interest rate on green deposits. Further, there is no restriction on premature withdrawal of green deposits. Further, such premature withdrawal would not have any bearing on activities/projects undertaken using the proceeds of the green deposits.
• Eligibility criteria for external review and impact assessment: The FAQs state that REs can engage with any appropriate and reputed domestic/international agency for external review, third-party verification/assurance and impact assessment.
• Foreign banks: It has been specified that foreign banks can have a common global policy for green deposits raised in India after 1 June 2023.
• Denomination of green deposits: The FAQs clarify that green deposits can be denominated in Indian Rupees only.

To access the text of the FAQs, please click here

The RBI vide its notification dated 26 April 2021¹⁰ Notification no. RBI/2021-22/24 DOR.GOV.REC.8/29.67.001/2021-22 dated 26 April 2021- Corporate Governance in Banks - Appointment of Directors and Constitution of Committees of the Board, provides instructions with regard to the chair and meetings of the board, composition of certain committees of the board, age, tenure and remuneration of directors, and appointment of the whole-time directors (WTDs provided instructions on corporate governance for banks (corporate governance notification).

Paragraph 9 of the corporate governance notification deals with remuneration of Non-Executive Directors (NEDs) of banks. It states that in addition to sitting fees and expenses for attending meetings of the board and its committees, NEDs may be paid a compensation in the form of a fixed remuneration which should not exceed INR20 lakh per annum¹¹ This limit would not be applicable to the chairman of the board of directors.

However, considering their significant role in the efficient functioning of banks, RBI, vide a notification dated 9 February 2024 (the notification) revised the aforementioned ceiling to INR30 lakh per annum.

Further, it has been clarified that:

• The Board of a bank may fix a lower amount within the revised ceiling limit, depending upon the size of the bank, experience of the NED and other relevant factors
• Banks should disclose the remuneration paid to directors on an annual basis at a minimum, in their annual financial statements.

Applicability and Effective Date: The above requirement would be applicable to all private sector banks, including Small Finance Banks (SFBs) and Payment Banks (PBs), as also the wholly owned subsidiaries of foreign banks. The notification came into force with effect from 9 February 2024.

To access the text of the notification, please click here

On 19 December 2023, RBI had issued a circular, wherein certain instructions were issued to address the regulatory concerns relating to investment by Regulated Entities (REs) in the AIFs.

In order to ensure uniformity in the implementation of the aforesaid instructions among the REs, RBI, vide a notification dated 27 March 2024 has stated that:

• Downstream investments should exclude investments in equity shares of the debtor company⁴ The debtor company of the RE means any company to which the RE currently has or previously had a loan or investment exposure anytime during the preceding 12 months of the RE, but must include all other investments (including investment in hybrid instruments)
• Provisioning⁵ In case REs are not able to liquidate their investments within the prescribed time limit, they should make 100 per cent provision on such investments should be required only to the extent of investment by the RE in the AIF scheme which is further invested by the AIF in the debtor company, and not on the entire investment of the RE in the AIF scheme
• Paragraph 3⁶ Paragraph 3 of the RBI circular dated 19 December 2023 discusses investment by REs in the subordinated units of any AIF scheme with a ‘priority distribution model’ of the circular dated 19 December 2023 would only be applicable in cases where the AIF does not have any downstream investment in a debtor company of the RE
• Proposed deduction from capital should take place equally from both Tier-1 and Tier-2 capital and reference to investment in subordinated units of the AIF scheme includes all forms of subordinated exposures, including investment in the nature of sponsor units
• Investments by REs in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of the RBI circular dated 19 December 2023

To access the text of the notification, please click here

During an onsite inspection of Regulated Entities⁸ Regulated entities include the following:
• All Commercial Banks (including Small Finance Banks, Local Area Banks and Regional Rural Banks) excluding Payments Banks
• All Primary (Urban) Co-operative Banks/ State Co-operative Banks/ District Central Co-operative Banks
• All Non-Banking Financial Companies (including Microfinance Institutions and Housing Finance Companies) (REs) for the period ended 31 March 2023, RBI came across cases of unfair lending practices. The key observations are listed below:

• Point of charging interest – REs were charging interest from the date of sanction of loan or date of execution of loan agreement instead from the date of actual disbursement of the funds to the customer. Further, in other cases, interest was charged from the date of the cheque whereas the cheque was handed over to the customer at a later date.
• Duration of interest charged – Customers were charged interest for the entire month, in cases where disbursal or repayment of loans took place during the course of the month.
• Advance instalments – In some cases it was noted that one or more instalments were collected in advance but interest was charged on full loan amount.

In this regard, on 29 April 2024, RBI issued a directive that required all REs to review and make the required changes to their internal systems and practices around loan disbursal, application of interest and other charges in order to have fair and transparent dealings with customers.

To access the text of the directive issued, please click here

A key fact statement is a document given by the lender to the borrower, providing details of a loan agreement including rate of interest and Annual Percentage Rate (APR). It enables borrowers to compare loan details offered from all lenders and finalise the best offer.

Currently, the requirement to provide a KFS and disclose APR is covered under various extant guidelines⁹ Paragraph 2 of Circular on ‘Display of information by banks’ dated 22 January 2015; paragraph 6 of Master Direction on ‘Regulatory Framework for Microfinance Loans’ dated 14 March 2022; and paragraph 5 of ‘Guidelines on Digital Lending’ dated 2 September 2022. , however, there is no consistency in the format of a KFS or reporting requirements.

In order to reduce information asymmetry on financial products being offered by different REs and enhance transparency, on 15 April 2024, RBI issued a notification, providing harmonized instructions pertaining to the issuance of KFS for all retail and MSME term loans extended by all REs:

• All prospective borrowers should be provided a KFS in the standard format provided in Annexure A of the notification. The KFS should be explained to the borrower and an acknowledgement should be obtained that he/she has understood the same.
• The KFS should be valid¹⁰ Validity period refers to the period available to the borrower, after being provided the KFS by the RE, to agree to the terms of the loan. for at least three working days for loans having tenor of seven days or more and one working day for loans having tenor of less than seven days¹¹ In view of the stipulation relating to the validity period of the KFS, the provision at paragraph 8 of the ‘Guidelines on Digital Lending’ relating to mandatory minimum number of days for post-sanction cooling-off period, shall stand partially modified as under:
  “A borrower shall be given an explicit option to exit digital loan by paying the principal and the proportionate APR without any penalty during this period. The cooling off period shall be determined by the Board of the RE, subject to the period so determined not being less than one day. For borrowers continuing with the loan even after look-up period, pre-payment shall continue to be allowed as per extant RBI guidelines.” .
• The RE would be bound by the terms of the loan indicated in the KFS, if agreed to by the borrower during the validity period.
• The KFS should include a computation sheet of Annual Percentage Rate (APR) and amortization schedule of the loan over the loan tenor¹² Illustrative examples of calculation of APR and disclosure of repayment schedule for a hypothetical loan are given in Annex B and C of the notification respectively. .
• Any fees, charges, etc. which are not mentioned in the KFS, cannot be charged by the REs to the borrower at any stage during the term of the loan, without explicit consent of the borrower.
• Charges that are recovered from the borrowers by the REs on behalf of third-party service providers on actual basis, such as insurance charges, legal charges etc., should also form part of the APR and be disclosed separately.

It is to be noted that credit card receivables are exempted from the provisions contained under this notification.

Applicability and commencement: REs should put in place the necessary systems and processes to implement the above guidelines at the earliest. In any case, all new retail and MSME term loans sanctioned on or after 1 October 2024, including fresh loans to existing customers, should comply with the above guidelines in letter and spirit without any exception. During the interregnum, the relevant provisions on ‘KFS/Factsheet’⁹ under the extant guidelines shall continue to remain applicable,

To access the text of the directive issued, please click here

With an aim to address the diversity in the regulatory framework that governs investment funds across various jurisdictions, on 7 June 2024, the Reserve Bank of India (RBI) amended the Foreign Exchange Management (Overseas Investment) Directions, 2022 (the directions). The amendments to the directions (amendments) provide clarity with regard to the following key points pertaining to Overseas Portfolio Investments (OPIs).

To access the text of the notification, please click click here

To access the text of the notification, please click click here

Currently co-operative banks are required to create Bad and Doubtful Debt Reserves (BDDR) either by (a) recognising an expense in the Profit and Loss account or (b) through appropriations from net profits. However, the creation of BDDR through appropriations from net profits³ This is in accordance with guidelines prescribed in the respective State Co-operative Societies Acts is not in consonance with Accounting Standard (AS) 5⁴ This is because AS 5 requires all expenses which are recognised in a period to be included in the determination of net profit or loss for the period. , Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies. Further , RBI observed that the treatment of BDDR for regulatory capital and reckoning of net NPAs varies across co-operative banks and in few cases with regulatory norms.

With a view to bring about uniformity in the treatment of BDDR, RBI vide a notification dated 2 August 2024 has issued the following revised instructions⁵ These instructions are applicable to all Primary (Urban) Co-operative Banks, State Co-operative Banks and Central Co-operative Bank :

• With effect from FY 2024-25, all provisions as per the Income Recognition, Asset Classification and Provisioning norms (IRACP) norms, as applicable to co-operative banks, should be charged to the profit and loss account in the period in which they are recognized. However, the existing guidelines on capital adequacy would continue to define the eligibility of such provisions for regulatory capital purposes.
• After charging all provisions as per the IRACP norms and other existing guidelines, net profits may be appropriated to BDDR (where required).
• The RBI has also prescribed a transitional approach for existing amounts in the BDDR created out of appropriations, so that an AS compliant approach may be followed.

RBI has also mentioned that co-operative banks should comply with the provisions of the respective State Co-operative Societies Acts / Multi-State Co-operative Societies Act, 2002 as applicable.

Effective date: The revised instructions are applicable immediately.

To access the text of the notification dated 2 August 2024, click here

The Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021 (Master Directions) prescribe the manner of computing risk weighted assets⁶ Risk weighted assets are used to compute the capital ratio of HFCs. To arrive at the risk weighted asset, each asset/on-balance sheet or off-balance sheet item needs to be multiplied by the relevant risk weights. (which are a weighted aggregate of on-balance sheet and off-balance sheet items). Based on a review, RBI decided to update the manner of computing risk weighted assets of certain exposures for HFCs, accordingly, RBI issued a circular dated 12 August 2024 (RBI circular) prescribing the following:

• Risk weight for Commercial Real Estate – Residential Building: Prior to the RBI circular, the risk weight of fund-based and non-fund-based exposures to commercial real estate - residential building carried a risk weight of 75 per cent. However, RBI, vide its circular has revised the risk weights of these assets, based on whether they are classified as standard or non-standard assets:

• Standard assets would carry a 75 per cent risk weight
• Assets not classified as standard would carry 100 per cent risk weight (i.e. as per the category ‘Other Assets (Others)⁷ As indicated at sr. no. 6(d) of para 6.2 of the HFC Master Directions ).

• Undisbursed amount of housing loans/other loans: Para 6.3.1 of the Master Directions lays down a two-step process of computing risk weighted amounts for an off-balance sheet item that gives rise to credit exposure. The RBI circular clarified that for undisbursed amount of housing/other loans, the risk weighted assets computed as per step 1 and step 2 of the Master Directions would be capped at the risk weighted asset computed on a notional basis for equivalent amount of disbursed loan.

This circular is effective the date of its issue (i.e. 12 August 2024).

To access the text of the circular, please click here

The regulation of HFCs was transferred from the National Housing Bank (NHB) to the Reserve Bank of India (RBI) with effect from 9 August 2019. Since then, various regulations have been issued to treat HFCs as a category of NBFCs. In continuation of this policy, a review of the existing regulations of HFCs and NBFCs was undertaken and the following amendments have been prescribed for both NBFCs and HFCs vide a notification dated 12 August 2024 (the notification).

Amendments applicable only to HFCs

• Regulations pertaining to deposit acceptance : Currently, HFCs that accept and hold public deposits (HFCs-D) are subject to relaxed prudential parameters on deposit acceptance as compared to deposit taking NBFCs (NBFCs-D). In order to specify uniform prudential parameters for both NBFCs-D and HFCs-D, the following amendments have been prescribed for HFCs-D:

• All HFCs-D should maintain on an ongoing basis, liquid assets to the extent of 15 per cent of the public deposits held by them. (Earlier this was 13 per cent. A glide path has been prescribed for increase in the same)
• Regulations on safe custody of liquid assets as applicable to NBFCs⁸ As prescribed by Master Direction – Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 (NBFC Master Directions) would now mutatis mutandis apply to all HFCs-D (the existing regulations on safe custody would get repealed)⁹ As prescribed by para 40 of the Master Direction Non-Banking Financial Company – Housing Finance Company (Reserve Bank) Directions, 2021
• HFCs-D should ensure full asset cover for public deposits accepted by them (no change in this case). The NHB should be informed in case the asset cover falls short of the liability (this is a new requirement)
• HFCs-D should obtain minimum investment grade credit rating at least once every year prior to accepting fresh deposits/renewing existing deposits (no change)
• The ceiling on quantum of deposits that can be accepted by HFCs-D has reduced from 3 times to 1.5 times of net owned fund
• Public deposits accepted or renewed henceforth should be repaid within 60 months (earlier deposits could be repaid within 120 months).
• Regulations on opening of branches and appointment of agents as applicable to NBFCs-D would now apply to HFCs-D (this is a new requirement)
• HFCs-D should set board approved limits for exposure to capital markets (this is a new requirement)

• Hedging of risks: Certain HFCs have been permitted to hedge the risks arising out of their operations by participating in exchange traded currency derivatives, interest rate futures and credit default swaps in accordance with guidelines prescribed by RBI (earlier no regulatory guidelines were prescribed for the same).
• Co-branded credit cards: HFCs are now permitted to issue co-branded credit cards subject to instructions issued by RBI. (Earlier this was not permitted)
• Finalisation of accounts: HFCs are required to finalise their balance sheet within three months from the date to which it pertains. In case of any extension of period, prescribed approvals are required to be obtained from NHB and the Registrar of Companies. (This is a new requirement)
• Periodicity of Information System Audit (IS audit): Audit committees of HFCs should ensure that periodicity of IS audit is as per Master Direction on Information Technology Governance, Risk, Controls and Assurance Practices dated 7 November 2023 (IT Master Directions). (Earlier, information system audit of critical and significant internal systems and processes was required to be conducted at least once in two years.)
• Investment through Alternative Investment Funds (AIF) for computing Net Owned Fund (NOF): Both direct and indirect investments (for example, through AIF) made by HFCs in entities of the same group would be reduced from owned funds to arrive at NOF. In this case indirect investments through AIF would be considered only if:

• HFCs have provided 50 per cent or more funds in the AIF (company) or
• HFCs are beneficial owners of the AIF (trust) and 50 per cent of funds of trust have come from HFC (earlier, no regulatory guidelines were prescribed).

• Account aggregators: HFCs acting either as ‘Financial Information Provider’ or ‘Financial Information User’ would be expected to adopt the technical specifications prescribed by RBI (this is a new requirement).

Amendments applicable only to NBFCs

• Time period for intimation of maturity of deposits: NBFCs-D are now required to intimate details of maturity of the deposit to the depositor at least 14 days before the date of maturity of the deposit (earlier this was two months).
• Repayment of public deposits: NBFCs-D (not being a problem NBFC*) would be permitted to prematurely pay the full or part of the public deposits to the depositor, where the depositor needs the same to meet certain expenses of an emergent nature. This is subject to the conditions prescribed by RBI.
• Register of deposits: NBFCs-D are permitted to maintain details of deposits on a centralised computer database provided they share these details with respective branches on a quarterly basis. It has now been clarified that this data should be shared with branches before the 10th day of the next quarter
• Periodicity of Information System Audit (IS audit): Audit committees of all NBFCs should ensure that periodicity of IS audit is as per IT Master Directions. (earlier, information system audit of critical and significant internal systems and processes was required to be conducted at least once in two years.)
• Other amendments: There have been certain amendments in the nomination rules and in the safe custody of liquid asset rules.

Effective date: These amendments would be effective from 1 January 2025.

To access the text of the notifications, please click here

*Problem NBFC means an NBFC which -

• has refused or fails to meet within five working days any lawful demand for repayment of the matured public deposits; or
• intimates the Company Law Board (CLB) under section 58AA of the Companies Act, 1956, about its default to a small depositor in repayment of any public deposit or part thereof or any interest thereupon; or
• approaches RBI for withdrawal of the liquid asset securities to meet its deposit obligations; or
• approaches RBI for any relief or relaxation or exemption from the provisions of these Directions or from that of Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 for avoiding default in meeting public deposit or other obligations; or
• has been identified by RBI to be a problem NBFC either suo moto or based on the complaints from the depositors about non-repayment of public deposits or on complaints from the company’s lenders about non-payment of dues;

NBFC-peer to peer lending platforms (P2P) are a type of NBFC which carry on the business of providing services of loan facilitation between lenders and borrowers via an online medium. P2P platforms are governed by RBI vide the Master Direction - Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 (the Directions).

The RBI observed that certain P2P platforms had adopted practices which were violative of the Directions¹⁰ Such practices include, among others, violation of the prescribed funds transfer mechanism, promoting peer to peer lending as an investment product with features like tenure linked assured minimum returns, providing liquidity options and at times acting like deposit takers and lenders instead of being a platform. . Accordingly, RBI vide a circular dated 16 August 2024 has modified/clarified certain existing regulations governing P2P platforms and added certain new regulations in the Directions. Some of the key changes are given below:

• Credit risk: P2P platforms are prohibited from assuming any credit risk (directly or indirectly) arising out of transactions on its platform. The RBI has also prohibited P2P platforms from cross-selling insurance products that function as credit enhancement or credit guarantee.
• Matching and mapping lenders with borrowers: P2P platforms are now required to both match and map lenders with borrowers in an equitable and non-discriminatory manner (as prescribed in the P2P platform’s board approved policy)¹¹ Without this loans cannot be disbursed . However, matching/mapping of participants within a closed user group¹² Examples of ‘closed user group’ include borrowers/lenders sourced through an affiliate/service provider to The NBFC-P2P. is not permitted.
• Fund transfer: As per the existing guidelines, loan disbursal and collection will be through two separate escrow accounts-

• Lender’s escrow account: Funds from lenders should be deposited in the lenders' escrow account and can only be disbursed to specific borrower account. Such funds should not be utilised for replacement of funds by any other lender.
• Borrower’s escrow account: Borrowers can make repayments only into borrowers' escrow account, and the funds from there should be transferred to the lenders' account.

Additionally, funds transferred into the lender’s escrow account and borrower’s escrow account should not remain in these accounts for more than 'T+1' day, where 'T' is the date, the funds are received

• Disclosures: P2P platforms are required to make certain disclosures on their website regarding portfolio performance. Such disclosure should also include details of all losses incurred by lenders on principal or interest or both.
• Borrowers’ consent: The P2P platform is required to disclose details about the borrower to the lender. However, the personal identity of the borrower should be disclosed only after obtaining the borrower's consent.
• Peer to peer lending: Peer to peer lending should not be promoted as an investment product with features like tenure linked assured minimum returns, liquidity options, etc.
• Peer to peer lending: P2P platforms should have an objective pricing policy. The fees should clearly be disclosed at the time of lending as either a fixed amount or a fixed percentage of the principal. Fees should not depend on borrower repayment.
• Branding and caveats: The P2P platform should display their registered/brand name in all customer touchpoints, promotional materials, and communications with stakeholders. Further, the P2P platform’s website, mobile/web applications including any promotional material should have appropriate caveats.

Effective date: All the amendments would come into effect immediately. However, the requirement to ensure funds in the lender’s and borrower’s escrow account does not stay in that account for more than T+1 days is applicable from 90 days of the date of this circular.

To access the text of the circular, please click here

On 1 October 2024, the RBI issued new compounding rules- the Foreign Exchange (Compounding Proceedings) Rules, 2024 (new compounding rules) which supersede the erstwhile Foreign Exchange (Compounding Proceedings) Rules, 2000 (old compounding rules). The key changes introduced by the new compounding rules are as follows:

1. Digitization: Digital payment options have been introduced for payment of application fee and penalty amounts.
2. Enhanced monetary limits: Generally a contravention is allocated to a compounding officer basis the monetary limit of the contravention. These monetary limits have now been expanded so that more powers are delegated to regional offices and special cells of RBI. This change is intended to reduce the burden on the senior officers, as most of the less serious contraventions will be handled by subordinate officers and it is also likely to expedite the overall compounding process.
3. Non-compoundable cases: A dedicated new rule 9 is introduced in the new compounding rules, as against proviso to Rule 8(2) of the old compounding rules, to specifically list out the cases which cannot be compounded. These cases include:

• matters where the amount is not quantifiable,
• matters attracting special provisions relating to assets held outside India in contravention of FEMA or Section 3(a) of FEMA i.e. where proceeding relates to a serious contravention suspected of money-laundering, terror financing or affecting the sovereignty and integrity of the nation
• where the adjudicating authority has already passed an order imposing penalty.

The new compounding rules are applicable with effect from 12 September 2024.

To access the text of the new compounding rules, please click here

In November 2010, the RBI, vide a notification required ARCs to be a member of at least one Credit Information Company (CIC) and recommended that it provides the CIC the required data. However, with an aim to maintain a record of borrowers' credit history after the transfer of loans from banks and NBFCs to ARCs, on 10 October 2024, the RBI issued revised guidelines for ARCs to align their membership with CICs similar to the guidelines for banks and NBFCs. . Key points include:

• Mandatory CIC membership: ARCs must become members of all CICs and submit data according to the credit reporting format prescribed by RBI.
• Data submission: ARCs must ensure data is updated regularly on a fortnightly basis or at intervals agreed upon between the ARC and CIC
• Data rectification: Any rejected data must be corrected and resubmitted within seven days of receiving the rejection notice from the CIC.
• Best practices: ARCs should adopt best practices for CIC-related matters, including regular data updates, providing customer information, and appointing nodal officers.

Effective date: ARCs must establish systems and processes to comply with these guidelines by 1 January 2025.

To access the circular, please click here