Newsletter on RBI October 2023

Amendments in the FEMA, 1999

RBI Updates October 2023

1. Reserve Bank of India constitutes an external Working Group on Expected Credit Loss (ECL) based Framework for Provisioning by Banks

On January 16, 2023, RBI had released the Discussion Paper on “Introduction of Expected Credit Loss (“ECL”) Framework for Provisioning by Banks”, soliciting inputs from all stakeholders. The ECL approach to provisioning is a paradigm shift from the current incurred loss-based provisioning regime and it has already been implemented under International Accounting Standards Board (IASB) and US Financial Accounting Standards Board (FASB).

Several comments have been received from various stakeholders on the issues flagged in the Discussion Paper which are being examined by RBI. However, in order to get independent inputs on some of the technical aspects having a bearing on the significant transition involved RBI vide Press Release No. 2023-2024/1043 dated October 04, 2023 notified that it has been decided to constitute an external Working Group.

The members of the Working Group shall consist of the experts from academia and industry as well as representatives from select banks as given below:

R. Narayanaswamy, former Professor, IIM Bangalore (Chairperson of the Working Group)
Sanjay Kallapur, ISB, Hyderabad
Shri Rajosik Banerjee, KPMG
Shri S Srinivasa Rao, SBI
Shri Rajendra Khandelwal, ICICI Bank
Shri Susanta Baishya, HDFC Bank
Shri Adish Yadav, Canara Bank
Shri Pravinkumar Taparia, Saraswat Co-operative Bank
Shri Sridharan N, Equitas Small Finance Bank

The Terms of Reference for the Working Group would be as follows:

Delineate the principles that will be required to be considered by banks while designing the credit risk models to be used for assessing and measuring expected credit losses.
Recommend factors that banks should consider for determination of credit risk based on the guidance provided in IFRS 9 and principles laid out by BCBS.
Suggest the methodology to be used for undertaking external independent validation of the models.
Recommend, based on comprehensive data analysis, prudential floors for provisioning.
Any other issue incidental to the above.

The final guidelines after duly factoring recommendations of the Working Group will be put in the public domain before issue.

The link for the aforesaid Press Release is as follows:
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR104355CFE6E3B65A420681CFE8DE897C0128.PDF (rbi.org.in)

2. Prompt Corrective Action (PCA) Framework for Non-Banking Financial Companies (NBFCs) – Extension to Government NBFCs

On October 10, 2023 RBI vide Notification No. RBI/2023-24/67 Ref. No. DoS.CO.PPG/SEC.05/11.01.005/2023-24 extended the Prompt Corrective Action (PCA) Framework for NBFCs introduced by RBI on December 14, 2021 to Government NBFCs (except those in Base Layer) with effect from October 01, 2024, based on the audited financials of the NBFC as on March 31, 2024, or thereafter.

The link for the aforesaid Notification is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT676313F815527C45559806D30BD0A5C5B8.PDF (rbi.org.in)

3. Amendment to the Master Direction (MD) on KYC

On October 17, 2023 RBI vide Notification No. RBI/2023-24/69 DOR.AML.REC.44/14.01.001/2023-24 amended the Master Direction (MD) on KYC dated February 25, 2016, in terms of which Regulated Entities (REs) defined in the MD have to undertake Customer Due Diligence (CDD), as per the process laid out therein, for their customers.

The amendments have been carried out to:

Update certain instructions in the MD considering amendments to the Prevention of Money Laundering Rules vide Government notifications dated September 4, 2023 and October 17, 2023;
Update Annex II of the MD considering the changes to Government of India Order related to Unlawful Activities (Prevention) Act (UAPA), 1967, vide corrigendum dated August 29, 2023;
Update Annex III of the MD by replacing the Government of India Order dated January 30, 2023, related to Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005 (WMD Act, 2005) with the Government of India Order dated September 1, 2023 (which has been issued by the Government in suppression of the earlier WMD Act Order dated January 30, 2023), on the matter;
Update certain instructions in accordance with the Financial Action Task Force Recommendations;
Add a new Section 55A, on Foreign Contribution Regulation Act, in the MD on KYC; and
Update certain other instructions post review.

The amended provisions of the MD given in detail in Annexure to the above mentioned notification shall come into force with immediate effect.

The link for the aforesaid Notification is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT676313F815527C45559806D30BD0A5C5B8.PDF (rbi.org.in)

4. Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023

On October 19, 2023 Rbi vide Notification No. RBI/DoR/2023-24/105 DoR.FIN.REC.No.45/03.10.119/2023-24 in supersession of the Non-Banking Financial Company–Non-Systemically Important Non-Deposit taking (Reserve Bank) Directions, 2016 and Non-Banking Financial Company–Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 introduced the Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (the Directions).

The Directions were introduced in the public interest and for the purpose of enabling the Reserve Bank to regulate the financial system to the advantage of the country and to prevent the affairs of any Non-Banking Financial Company (NBFC) from being conducted in a manner detrimental to the interest of investors and depositors or in any manner prejudicial to the interest of such NBFCs.

The Directions are specified in the above-mentioned notification.

The link for the aforesaid Notification is as follows:
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=12550&Mode=0

5. Strengthening of customer service rendered by Credit Information Companies and Credit Institutions

On October 26, 2023 RBI vide RBI/2023-24/73 DoR.FIN.REC.49/20.16.003/2023-24 pursuant to powers conferred by Credit Information Companies (Regulation) Act, 2005 (CICRA, 2005) directed the credit institutions (CIs) and credit information companies (CICs) to implement a comprehensive framework as detailed in the said notification for strengthening and improving the efficacy of the grievance redress mechanism and customer service provided by the Credit Institutions (CIs) and Credit Information Companies (CICs).

The introduction of the said framework was announced in Statement on Developmental and Regulatory Policies released with the Bi-monthly Monetary Policy Statement 2023-24 on April 6, 2023.

The said notification specifies the following directions to be implemented as directed by RBI for putting in place the above-mentioned framework:

1. Intimation of access to Credit Information Report and updation of credit information with Credit Information Companies;
2. Setting up of Nodal points/ officials by Cis;
3. Root Cause Analysis of the Complaints by Cis;
4. Reasons for rejection of requests for data correction by Cis;
5. Periodic review of match logic algorithm by CICs;
6. Ingestion of credit information data by CICs;
7. Disclosure of complaints on credit information reporting by CICs;
8. Easy access to Free Full Credit Report for the individuals by CICs.

The directions shall come into effect six months from the date of this notification.

CICs and CIs which contravene or default in adherence to the above directions shall be liable for penal action as per the provisions of CICRA, 2005.

The link for the aforesaid Notification is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT73D86ADB78399949C199250E3E16F037D5.PDF

6. Framework for compensation to customers for delayed updation/ rectification of credit information

On October 26, 2023 RBI vide Notification No. RBI/2023-24/72 DoR.FIN.REC.48/20.16.003/2023-24 pursuant to powers conferred by Credit Information Companies (Regulation) Act, 2005 (CICRA, 2005) directed the credit institutions (CIs) and credit information companies (CICs) to implement the compensation framework for delayed updation / rectification of credit information.

The introduction of the said framework was announced in Statement on Developmental and Regulatory Policies released with the Bi-monthly Monetary Policy Statement 2023-24 on April 6, 2023.

The said notification specifies the details of the framework which inter-alia are as below:

a complainant may request a CIC or CI to update the credit information by making an appropriate correction, addition or otherwise and such request shall be disposed within 30 days by the CIC or CI;
Section 21(3) of CICRA, 2005 read with Rule 20 (3) (c) of Credit Information Companies Rules, 2006 collectively provide an overall limit of 30 days viz. 21 days to CI and 9 days to CIC to resolve/ dispose of the complaint;
A CI shall pay compensation to the complainant, if it fails to send updated/rectified credit information to the CIC within 21 days of receipt of complaint from the complainant or CIC;
A CIC shall pay compensation to the complainant, if it fails to resolve the complaint within 30 days of receipt of complaint from the complainant or CI, despite the CI having furnished the send updated/rectified credit information to the CIC within 21 days of receipt of complaint from the complainant or CIC;
The CI/CIC shall inform the complainant of the action taken including the rejection of the complaint along with reasons for the said rejection;
The grievance / complaint involving inaccurate credit information from more than one CI shall be registered by the complainant with the concerned CIC and the CIC shall coordinate with all the CIs concerned and furnish the complainant with a comprehensive resolution of the grievance;
Compensation to be provided by the CICs/ CIs to the complainant shall be apportioned among the CIs/ CICs concerned proportionately.
The compensation amount shall be credited to the bank account of the complainant within five (5) working days of the resolution of the complaint which is the date when the rectified Credit Information Report (CIR) has been sent by the CIC or CI to the postal address or email ID provided by the complainant.
The complainant can approach RBI Ombudsman, under the Reserve Bank – Integrated Ombudsman Scheme, 2021, in case of wrongful denial of compensation by CIs or CICs.
In case of wrongful denial of compensation by CIs which are yet to be covered under the Reserve Bank – Integrated Ombudsman Scheme, 2021, the complainant can approach Consumer Education and Protection Cell (CEPC) functioning from Regional Offices (ROs) of Reserve Bank of India.

The said notification further provides for the following:

Instances where the said compensation framework will not be applicable;
Illustrative examples for apportionment of compensation between the CIs & CICs;

The compensation framework shall come into effect six months from the date of this notification.

CICs and CIs which contravene or default in adherence to the above directions shall be liable for penal action as per the provisions of CICRA, 2005.

The link for the aforesaid Notification is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI72FCCD26102301BDA57DCC7B47C9BB0B0994716BED22.PDF

7. Review of Financial Information Provider (FIP) under Account Aggregator Framework

The paragraph 3(1)(xi) of Master Direction – Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016 (MD) defines the term ‘Financial Information Provider’ (FIP).

As per National Pension System (NPS) architecture, Central Recordkeeping Agency (CRA), registered under section 27 of the Pension Fund Regulatory and Development Authority (PFRDA) Act, 2013, acts as an interface between the different intermediaries in the NPS system. CRAs hold information pertaining to the subscribers including the balances under NPS.

Accordingly, On October 26, 2023 on review of the FIP under Account Aggregator Framework provided under the MD, RBI vide Notification No. RBI/2023-24/76 DoR.FIN.REC.52/03.10.123/2023-24, decided to replace ‘Pension Fund’ with ‘Central Recordkeeping Agency’ as the financial information provider in the AA ecosystem. The MD is being modified accordingly.

The link for the aforesaid Notification is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/CIRCULARNO52E20668E92E444741B5783425C949FEA6.PDF

8. Joining the Account Aggregator Ecosystem as Financial Information User

RBI has observed that entities eligible to join as Account Aggregator (AA) ecosystem provided under the Master Direction – Non-Banking Financial Company – Account Aggregator (Reserve Bank) Directions, 2016 (MD) ecosystem as Financial Information Provider (FIP), have onboarded as Financial Information User (FI-U) only.

Consequently, such entities are not providing the financial information held by them while accessing financial information from other FIPs.

To ensure efficient and optimum utilisation of the AA ecosystem RBI on October 26, 2023 vide Notification No. RBI/2023-24/77 DoR.FIN.REC.53/03.10.123/2023-24 decided that regulated entities joining the AA ecosystem as FI-U shall necessarily join as FIP also, if they hold the specified financial information and fall under the definition of FIP. The MD is being modified accordingly.

The link for the aforesaid Notification is as follows:
https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NOTI773109DABBDE4E4E27B93AB7325962E43A.PDF