The Reserve Bank of India (RBI), the country’s central bank and banking regulator, today announced major policy decisions taken at its bi-monthly monetary policy review meeting held during 3rd to 5th October. While the RBI’s Monetary Policy Committee (MPC) kept key rates unchanged in its rate setting review, the policy measures announced cover significant areas of regulation, payments systems and consumer protection.
India’s central bank outlined several regulatory initiatives to strengthen oversight across banks, non-banking financial companies (NBFCs) and other entities regulated by it.
Revised Norms for Project Finance
The RBI plans to issue revised guidelines on the prudential framework for income recognition, asset classification and provisioning pertaining to advances for projects under implementation. This is aimed at strengthening the regulatory framework for project finance across all regulated entities like banks, NBFCs and mortgage lenders.
Project finance loans usually involve financing for infrastructure and industrial projects which entail complex structuring and have long gestation periods spanning years before projects start generating cash flows. The extant prudential norms for such project loans also vary across different regulated entities leading to uneven practices.
The revised uniform framework aims to address these issues by harmonizing the norms for aspects like loan classification and provisioning, treatment of delayed projects and calculation of provisioning requirements based on the date of commencement of commercial operations. The norms are expected to align risk management and loan loss provisioning with the economic life cycle of project loans.
Credit Risk Transfer by NBFCs
The RBI has decided to permit NBFCs in the middle and base layers to offset their credit exposures through eligible credit risk transfer instruments, similar to norms currently applicable only to upper layer NBFCs. This move aims to harmonize credit concentration norms related to credit risk transfer across NBFCs of all layers.
Credit concentration risk refers to risk arising from excessive exposure to single/group borrowers as a percentage of the NBFC’s capital funds. The extant norms limit NBFCs’ exposure to a single party/group to 15% of owned funds for upper layer, 10% for middle layer and 5% for base layer NBFCs.
The credit risk transfer mechanisms allow NBFCs to reduce their credit exposures by purchasing guarantees, credit derivatives etc. that absorb losses in case the borrower defaults. Earlier, only upper layer NBFCs were permitted to avail this facility. The latest move will provide flexibility to middle and base layer NBFCs as well with appropriate safeguards.
Incentives for UCBs Meeting PSL Targets
With a view to incentivize urban cooperative banks (UCBs) that achieve priority sector lending (PSL) targets, the RBI has decided to increase the limit on gold loans under the bullet repayment scheme from Rs 2 lakh to Rs 4 lakh.
This enhanced limit will apply to UCBs that have met the overall PSL target of 75% as well as sub-targets for different categories as on March 31, 2023 and continue to meet them thereafter. The categories include loans to small and marginal farmers, micro-enterprises and weaker sections.
The RBI had earlier provided an extended timeline to UCBs for meeting PSL targets in view of limitations arising from their regional focus. UCBs play an important role in priority sector lending owing to their widespread presence including in rural areas. The higher gold loan limit is expected to improve priority sector coverage of UCBs.
Framework for Recognising SROs
The RBI plans to issue an omnibus framework for recognizing self-regulatory organizations (SROs) across its regulated entities like banks, NBFCs, mortgage lenders etc. At present, SROs function mainly in the securities market and commodity derivatives market domains.
Self-regulation by industry members through SROs can complement regulatory oversight by enhancing compliance standards among members. SROs can also provide a useful consultative platform for policy making by leveraging industry insights.
The proposed framework aims to tap these benefits by laying down objectives, eligibility criteria, governance standards and oversight mechanisms for SROs covering all RBI regulated entities. The draft guidelines will be released shortly for stakeholder feedback to help shape the final norms for recognize suitable SROs.
Payments Systems
The RBI introduced three important measures aimed at further deepening digital payments across the country.
Extension of PIDF Scheme
The Payments Infrastructure Development Fund (PIDF) scheme was originally introduced by RBI in January 2021 for a period of three years, later extended by six months. The scheme provides financial incentives to banks for deployment of payment acceptance infrastructure such as POS machines, QR code readers etc. in tier 3-6 centres and north eastern states.
Under the PIDF scheme, banks are reimbursed by the RBI for 30-50% of costs associated with new deployments depending on location. This helps expand the footprint of digital payments ecosystem across underserved areas.
The scheme has facilitated deployment of over 2.66 crore new POS machines so far across target locations. To further accelerate digitization, the RBI has now decided to extend the PIDF scheme by two more years till December 2025. This will incentivize banks to deploy another 3-4 crore devices over the next two years.
New Channels for Card Tokenization
The RBI introduced card-on-file tokenization (CoFT) in September 2021 as an enhanced security mechanism for processing card payments. Under this, merchants store tokens instead of actual card details and tokenize card data during transactions.
Currently, cardholders have to rely on individual merchant apps/websites to get their cards tokenized. To improve consumer convenience, the RBI now plans to enable token creation facilities directly through card issuers. This will allow cardholders to get their cards tokenized by issuers once, which can then be used across multiple merchant platforms.
Inclusion of PM Vishwakarma Beneficiaries under PIDF
The PIDF scheme will now be expanded to include street vendors, carpenters, cobblers, nurses etc. enrolled under the PM Vishwakarma scheme launched earlier this year. The scheme aims to provide affordable institutional credit to the beneficiaries for their business activities.
Earlier, beneficiaries of the PM SVANidhi scheme catering to street vendors were covered under PIDF. Adding PM Vishwakarma beneficiaries across all centres will provide targeted impetus to RBI’s financial inclusion efforts to promote digital transactions at the grassroots. Small value cashless payments are expected to gain traction among such beneficiaries through POS machines deployed under PIDF funding.
Consumer Protection
The RBI outlined measures to further strengthen consumer protection in regulated entities such as banks, NBFCs and other financial service providers through improved grievance redressal.
Master Direction on Internal Ombudsman Mechanism
The RBI had introduced the Internal Ombudsman (IO) system in 2015 in select scheduled commercial banks for reviewing complaints rejected by the Internal Grievance Redressal (IGR) mechanisms. This provided an apex level arbitration mechanism within banks.
Over the years, IO system has been extended across all banks and also mandated for certain NBFCs, fintech companies, credit information companies etc. At present, the IO guidelines for different entities contain certain variations in operational aspects even as the basic framework remains uniform.
To harmonize and strengthen the system, the RBI now plans to issue a consolidated Master Direction on IO mechanism applicable across all regulated entities. The master direction will align processes on aspects like timeline for complaint escalation to IOs, minimum qualifications for IOs, reporting formats etc. This is expected to enhance the efficacy of grievance redressal mechanisms based on learnings from the last six years.