Regulatory updates

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: 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.
• Fees chargeable: Peer to peer lending should not be promoted as an investment product with features like tenure linked assured minimum returns, liquidity options, etc.
• 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