Amendments in the FEMA, 1999

RBI Updates November 2023

1. Regulation of Payment Aggregator – Cross Border (PA - Cross Border)

On October 31, 2023, RBI issued a Direction for Regulation of Payment Aggregators – Cross Border (PA – Cross Border).

In light of recent developments in cross-border payments, RBI has decided to directly regulate all entities involved in facilitating cross-border transactions for the import and export of goods and services. These entities will be designated as Payment Aggregators-Cross Border (PA-CB).

Entities, including Authorised Dealer (AD) banks, Payment Aggregators (Pas), and PAs-CB, involved in processing/settlement of cross-border payment transactions for import and export of goods and services, shall comply with these instructions (as updated from time to time).

The link for the aforesaid directives is as follows:

2. Master Direction on Information Technology Governance, Risk, Controls and Assurance Practices

The Reserve Bank of India (RBI) on November 7, 2023, issued a Master Direction on Information Technology Governance, Risk, Controls, and Assurance Practices, which prescribes IT and cybersecurity guidelines for banks and other regulated entities.

In October 2022, a draft Master Direction on Information Technology Governance, Risk, Controls, and Assurance Practices was released by RBI for public feedback.

These Directions incorporate, consolidate, and update the guidelines, instructions, and circulars on IT Governance, Risk, Controls, Assurance Practices, and Business Continuity/ Disaster Recovery Management. These Directions shall come into effect from April 1, 2024.

These Master Directions shall apply to Scheduled Commercial Banks (excluding Regional Rural Banks); Small Finance Banks; Payments Banks; Non-Banking Financial Companies in Top, Upper, and Middle Layers; All India Financial Institutions (NHB, NABARD, SIDBI, EXIM Bank and NaBFID); and Credit Information Companies.

These Directions shall not apply to (i) Local Area Banks and (ii) NBFC-Core Investment Companies.

In the case of foreign banks operating in India through branch mode, reference to the board or board of directors in these Directions should be read as a reference to the controlling office/ head office which has oversight over the branch operations in India. Further, such foreign banks shall be subject to a ‘comply or explain’ approach in terms of the applicability of these Directions. The ‘comply or explain’ approach shall allow such foreign banks to deviate from any specific part of these Directions subject to examination and acceptance by RBI of a reasonably justifiable explanation for the same, as part of the supervisory process.

The Regulated Entities to put in place a robust IT Service Management Framework for supporting their information systems and infrastructure to ensure the operational resilience of their entire IT environment (including DR sites).

The Master Direction covers details on the following:
(1)IT Governance Framework
(2)IT Infrastructure & Services Management
(3)IT and Information Security Risk Management
(4)Business Continuity and Disaster Recovery Management
(5)Information System Audit

The link for the aforesaid Directives is as follows:

3. Fully Accessible Route for Investment by Non-residents in Government Securities – Inclusion of Sovereign Green Bonds

On November 08, 2023, RBI issued a Directives on ‘Fully Accessible Route’ (FAR) for Investment by Non-residents in Government Securities – Inclusion of Sovereign Green Bonds. RBI initially specified eligible Government Securities for investment under the FAR (‘specified securities’) on March 30, 2020, and later on July 7, 2022.

In a recent decision, all Sovereign Green Bonds issued in the fiscal year 2022-23 have been designated as ‘specified securities’ under the Fully Accessible Route. These Directions shall be applicable with immediate effect.

The link for the aforesaid Directives is as follows:

4. Regulatory measures towards consumer credit and bank credit to NBFCs

On November 16, 2023 RBI instructed for Banks and NBFCs for its Consumer credit exposure and credit card receivables.

The high growth seen in consumer credit and increasing dependency of NBFCs on bank borrowings were also highlighted by the Governor in the interactions with MD/CEOs of major banks and large NBFCs in July and August 2023, respectively. In this context, it has been decided to effect the following measures by which the Reserve Bank of India (RBI) has tightened norms for consumer credit as it asked Banks and NBFCs to assign a higher risk weight for unsecured personal loans. The long-term effect will be to contain potential damage, particularly in preventing over-leveraging. RBI is concerned about consumers taking multiple loans, and with this decision of RBI is preventing measures against possible NPAs. NBFCs are expected to scale down business and adjust to the new regulatory framework.

The RBI decision is driven by concerns about the rapid growth in retail loan and bank lending to NBFCs which together contributed around 50% of incremental credit in the last 12 months. The RBI is cautious about the potential risk and wants to preempt any negative consequences.

However, these new regulations will not apply to housing loans, education loans, vehicle loans, and gold loans.

Except for Strengthening credit standards (point a), the provided instructions are effective immediately. REs should strive to comply with the provisions as soon as possible but must implement them no later than February 29, 2024.

A.Consumer credit exposure:

  • Consumer credit exposure of commercial banks: Existing instructions for commercial banks assign a 100% risk weight to consumer credit. It has now been decided to raise the risk weights for consumer credit exposure, including personal loans (excluding housing loans, education loans, vehicle loans, and gold-secured loans), by 25 percentage points to 125%.
  • Consumer credit exposure of NBFCs: Under current norms, NBFCs’ loan exposures typically carry a 100% risk weight. It has now been decided that consumer credit exposure of NBFCs categorized as retail loans (excluding certain types like housing loans, educational loans, vehicle loans, loans against gold jewelry, and microfinance/SHG loans) will now attract a higher risk weight of 125%.
  • Credit card receivables: Currently, credit card receivables of scheduled commercial banks (SCBs) carry a risk weight of 125%, and for NBFCs, it’s 100%. It has now been decided to raise the risk weights to 150% for SCBs and 125% for NBFCs, both reflecting an increase of 25 percentage points.

B. Bank credit to NBFCs: As per existing norms, SCBs assign risk weights to their exposures to NBFCs based on external credit ratings. It has now been decided to increase the risk weights of such exposures by an additional 25 percentage points when the external rating of the NBFC is below 100%. This adjustment is applicable to all cases, excluding loans to Housing Finance Companies (HFCs) and loans to NBFCs eligible for classification as a priority sector as per existing instructions.

C. Strengthening credit standards:

  •  Real Estate Investment Trusts (REs) must review and establish Board-approved sectoral exposure limits for consumer credit, including sub-segments, as deemed necessary for prudent risk management. Specifically, limits should be set for all unsecured consumer credit exposures, and adherence to these limits should be closely monitored by the Risk Management Committee.
  •  Top-up loans provided by REs against depreciable movable assets, like vehicles, will be treated as unsecured loans for credit appraisal, prudential limits, and exposure assessment purposes.

While it will allow more cover for credit risk in the unsecured loan segment, it will make lending in the unsecured segment more expensive for banks and NBFCs which will in turn make unsecured loans more expensive for the borrowers.
The link for the aforesaid instruction is as follows:

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