Current Affairs - Banking & Finance

Recently, the Central Vigilance Commission (CVC) took steps to reconstitute the advisory board responsible for conducting preliminary examinations of bank frauds, before passing on recommendations to investigative agencies like the Central Bureau of Investigation (CBI).

Key Points:

• Reconstitution of ABBFF: The reconstituted Advisory Board on Banking and Financial Frauds (ABBFF) will now be led by Suresh N Patel, former Central Vigilance Commissioner.
• Alongside the Chairman, there are four Members, all serving a two-year tenure starting from August 21, as stated in the CVC's official order.
• Mandatory Referral to ABBFF: All matters of fraud involving Rs. 3 crore and above must be referred to the advisory board for advice by public sector banks, public sector insurance companies, and public sector financial institutions.
• This is to be done before initiating criminal investigation, and the advice provided by ABBFF should be considered by the competent authority.
• Additional Referral Authority: CVC or CBI can also seek advice from ABBFF for any case or technical matter related to fraud.
• Frauds Analysis and Policy Input: ABBFF is empowered to conduct periodic analysis of frauds within the financial system and provide inputs for policy formulation regarding frauds to RBI and CVC.
• Location and Timelines: Headquartered in New Delhi, ABBFF is expected to provide requested advice within a month of receiving the initial reference from the Ministry/Department/CVC or the investigation agency, including the Delhi Special Police Establishment.
• Sunset Clause Not Implemented: CVC did not implement the Indian Banks Association's (IBA) suggestion of a sunset clause, which would have limited action against bankers for credit decisions after a certain period.

On 18^th August, 2023, the Reserve Bank of India (RBI) introduced new requirements for Infrastructure Debt Fund-NBFCs (IDF-NBFCs), including a minimum net owned fund (NOF) of Rs 300 crore and a capital-to-risk weighted assets ratio (CRAR) of at least 15%, with a minimum Tier 1 capital of 10%.

Key Points

• New Requirements for IDF-NBFCs: RBI has issued revised guidelines for Infrastructure Debt Funds - Non-Banking Financial Companies (IDF-NBFCs).
• IDF-NBFCs are now required to maintain a minimum Net Owned Fund of Rs 300 crore and a CRAR of at least 15%, with a minimum Tier 1 capital of 10%.
• Definition of IDF-NBFC Revised: The revised definition of an IDF-NBFC specifies that it is a non-deposit-taking NBFC authorized to refinance infrastructure projects that have completed at least one year of satisfactory commercial operations.
• Additionally, IDF-NBFCs can directly finance toll-operate-transfer (TOT) projects.
• Fundraising and ALM: IDF-NBFCs are permitted to raise funds through rupee or dollar-denominated bonds with a minimum maturity of five years.
• They can also use shorter tenor bonds and commercial papers (CPs) up to 10% of their total outstanding borrowings for better asset-liability management (ALM).
• External commercial borrowings (ECBs) with a minimum tenure of five years, not sourced from foreign branches of Indian banks, can also be utilized.
• Exposure Limits and Risk Weights: IDF-NBFCs are subject to exposure limits, allowing up to 30% of their Tier 1 capital for a single borrower or party and up to 50% for a single group of borrowers or parties.
• Changes in Sponsorship Requirements: The requirement for sponsorship of IDF-NBFCs by banks or NBFC-Infrastructure Finance Companies (NBFC-IFCs) has been removed.
• The need for a tripartite agreement with concessionaires and project authorities for investments in Public-Private Partnership (PPP) infrastructure projects is now optional.
• Eligibility Criteria for NBFCs to Sponsor IDF-MFs: RBI has outlined eligibility criteria for NBFCs to sponsor Infrastructure Debt Funds-Mutual Funds (IDF-MFs).
• These criteria include factors such as net owned funds, net NPAs, years of existence, profitability, and other supervisory concerns.

On 18^th August, The Reserve Bank of India (RBI) introduced a significant policy shift by directing all regulated entities, including banks and NBFCs, to provide personal loan borrowers with the option to switch from floating interest rates to fixed rates during interest rate resets.

Key Points:

• Borrower-Centric Regulations: This initiative, outlined in a circular titled 'Reset of floating interest rate on equated monthly instalments (EMI) based personal loans,' aims to empower borrowers with greater control over their loan structures.
• Change of Tenure: Additionally, borrowers can opt for EMI enhancements or tenor elongation, further customizing their loan experience.
• Switch to Fixed Rates: At interest rate resets, borrowers now have the choice to switch to fixed interest rates in accordance with the lender's board-approved policy.
• Disclosure of Charges: Lenders are mandated to disclose all applicable charges for switching loans from floating to fixed rates, as well as any service charges or administrative costs.
• These details must be presented in the sanction letter and communicated when changes in charges occur.
• Enhanced Transparency: To enhance transparency, lenders are required to provide borrowers with quarterly statements through appropriate channels.
• These statements will include information on principal and interest payments, EMI amounts, remaining EMIs, and annualized interest rates.
• Implementation Deadline: The RBI has mandated that these instructions must be extended to both existing and new loans by December 31, 2023.
• Rationale behind RBI's Move: The RBI's decision to implement these regulations stems from supervisory reviews and feedback from the public, which highlighted instances of lenders significantly elongating tenors for floating rate loans without proper consent.

On 17^th August, 2023, the Reserve Bank of India (RBI) introduced the UDGAM (Unclaimed Deposits – Gateway to Access inforMation) portal, simplifying the process for citizens to locate their unclaimed deposits across multiple banks.

Key Points:

• Addressing the Issue of Unclaimed Deposits: Minister of State for Finance disclosed that as of February 2023, unclaimed deposits worth Rs. 35,012 crores from public sector banks (PSBs), inactive for a decade or more, have been transferred to RBI.
• UDGAM Portal Overview: The UDGAM portal, conceptualized by RBI, aims to create an accessible way for the public to identify and recover their unclaimed deposits from various banks.
• Response to the Rise in Unclaimed Deposits: This initiative is a response to the concerning increase in unclaimed deposits, accompanied by RBI's efforts to raise awareness through public campaigns.
• How the UDGAM Portal Functions: The portal empowers users to identify their own unclaimed deposit accounts or those of their parents that may have been neglected and forgotten. It allows users to reclaim the funds or reactivate dormant deposit accounts with their respective banks.
• Collaborative Development and Initial Bank Inclusions: The portal's development has been a collaborative effort involving Reserve Bank Information Technology Pvt Ltd (ReBIT), Indian Financial Technology & Allied Services (IFTAS), and participating banks. Currently, the UDGAM portal covers seven banks, including State Bank of India, Punjab National Bank, South Indian Bank, Central Bank of India, Dhanlaxmi Bank, DBS Bank India, and CitiBank N.A.
• Future Expansion and Accessibility: The UDGAM portal's accessibility is set to expand further, with additional banks to be included in the search facility by October 15, 2023.

On 2^nd August, 2023, the Ministry of Finance's Department of Expenditure introduced the "Vivad se Vishwas 2" scheme, a strategic move to accelerate the resolution of contractual conflicts involving government entities.

Key Points

• Scope and Coverage: The scheme's scope extends to disputes arising until September 30, 2022, emphasizing its applicability to a wide range of cases involving government entities.
• Graded Settlement Approach: The scheme embraces a graded approach to settlement, considering the degree of dispute pendency.
• Applicability: The scheme's ambit encompasses all domestic contractual disputes involving either the Government of India or organizations operating under its jurisdiction.
• Settlement Amounts: Under the scheme, contractors dealing with court awards issued on or before April 30, 2023, could receive settlement amounts up to 85% of the net award upheld by the court.
• Similarly, for arbitral awards passed on or before January 31, 2023, a settlement offer of up to 65% of the net awarded sum is extended.
• Streamlined Process: To facilitate a transparent and efficient process, the government e-marketplace (GeM) has launched a dedicated web page for the scheme's implementation.
• Eligible claims will undergo processing solely through the GeM platform, ensuring a streamlined resolution process.
• Enhancing Dispute Resolution: The scheme is designed to provide a significant boost to the timely settlement of contractual disputes between the government and government undertakings.

In a move perceived as a prelude to the next round of consolidation among regional rural banks (RRBs), the Centre has exempted RRBs from the purview of Competition Commission of India's (CCI) merger control regime.

This exemption allows RRBs to proceed with mergers without prior scrutiny and approval from CCI for a period of five years, paving the way for smooth consolidation within the sector.

Key Points:

• Tenure of exemption: The exemption will be available for five years.
• Facilitating RRB Mergers: This move enables RRBs to merge without prior scrutiny and approval from CCI, which examines whether mergers will affect competition or consumer interests.
• Status of RRBs: Currently, there are around 43 RRBs in India, regulated by the Reserve Bank of India (RBI).
• Finance Minister's Review Meetings: Union Finance Minister is set to hold review meetings across the country on the functioning of RRBs along with their sponsor banks.
• History of RRBs: India's RRB journey began in 1975, conceptualized as hybrid micro-banking institutions to serve the credit needs of small and marginal farmers, agricultural laborers, and the socio-economically weaker sections of the population.
• Stake in RRBs: The Centre holds a 50% stake in each RRB, sponsor banks hold 35%, and the remaining 15% is with the State government.

Recently, the International Financial Services Centres Authority (IFSCA) and Climate Policy Initiative - India (CPI) have signed a Memorandum of Understanding (MoU) to cooperate and increase the mobilization of global sustainable capital flows into India.

The key points are:

• Mobilization of Sustainable Capital Flows: The primary objective of the agreement is to increase the mobilization of global sustainable capital flows into India.
• Both IFSCA and CPI recognize the importance of sustainable finance in achieving the transition to green and resilient economies.
• Conducive Regulatory Environment: IFSCA has taken significant steps to create a regulatory environment that is conducive to sustainable finance.
• The organization has implemented international best practices in its regulatory framework to support the needs of India and other developing countries.
• Research Collaboration: The MoU includes provisions for research collaboration between IFSCA and CPI.
• The organizations will work together to conduct research in the field of sustainable finance, aiming to generate valuable insights and contribute to the development of sustainable finance practices in India.
• Support for Climate Investments: The collaboration between IFSCA and CPI recognizes the need for greater international capital flows to support climate investments in India.
• IFSCA, as the regulatory authority for IFSCs, can play a critical role in enabling climate investments from international sources through the capital markets route.
• Achievement of Sustainable Development Goals: The partnership aligns with the objectives of the Sustainable Development Goals (SDGs) by promoting sustainable finance and facilitating the mobilization of global capital towards sustainable projects.
• It supports India's efforts to achieve its SDG targets and contribute to global sustainable development.

On 5^th July, 2023, a working group appointed by the Reserve Bank of India (RBI) put forward several recommendations to expedite the internationalization of the Indian rupee. The recommendations aim to increase the use of the Indian currency in cross-border transactions.

The key recommendations are:

• Adoption of a Standardized Approach: Implementing a standardized approach for examining proposals on bilateral and multilateral trade arrangements for invoicing, settlement, and payment in the rupee and local currencies will streamline cross-border transactions and promote the use of the rupee in international trade.
• Opening of Rupee Accounts for Non-Residents: Encouraging the opening of rupee accounts for non-residents, both within India and outside the country, will facilitate easier access and usage of the rupee by foreign entities, promoting its internationalization.
• Integration of Payment Systems: Integrating Indian payment systems with those of other countries will enable seamless cross-border transactions, enhancing the efficiency and convenience of using the rupee for international payments.
• Development of a Global Rupee Market: Fostering the development of a global rupee market will ensure liquidity and accessibility of the currency across different time zones, facilitating round-the-clock trading and investment in rupee-denominated instruments.
• Recalibration of the Foreign Portfolio Investor (FPI) Regime: Reviewing and recalibrating the FPI regime will attract greater foreign investment in Indian markets and instruments denominated in rupees, deepening the rupee market and increasing its attractiveness to global investors.
• Review of Taxes on Masala Bonds: Evaluating and potentially revising taxes on masala bonds, which are rupee-denominated bonds issued outside India by Indian entities, will encourage their issuance and utilization, contributing to the internationalization of the rupee.
• Real-Time Gross Settlement (RTGS) for Cross-Border Trade: Exploring the international use of Real-Time Gross Settlement for cross-border trade transactions will ensure faster and more secure settlement of international payments in rupees.
• Inclusion of Indian Government Bonds in Global Indices: Working towards the inclusion of Indian Government Bonds in global bond indices will increase their visibility and attractiveness to international investors, enhancing the internationalization of the rupee.
• Efforts for Rupee Inclusion in IMF's SDR: Making efforts to include the rupee in the International Monetary Fund's Special Drawing Rights (SDR) basket will enhance the global recognition and acceptance of the rupee as an international reserve currency.

Recently, the Union government released the 3rd Installment of Tax Devolution to state governments amounting to Rs 1,18,280 crore in June 2023, as against the normal monthly devolution of Rs 59,140 crore.

• Uttar Pradesh received the highest (Rs 21,218 crore) followed by Bihar (Rs 11,897 crore), Madhya Pradesh, West Bengal and Rajasthan.

About Tax Devolution

• It refers to the distribution of tax revenues between the central government and the state governments. It is a constitutional mechanism established to allocate the proceeds of certain taxes among the Union and the states in a fair and equitable manner.
• Article 280(3) (a) of the Constitution of India mandates that the Finance Commission (FC) has the responsibility to make recommendations regarding the division of the net proceeds of taxes between the Union and the states.

Recommendations of 15th Finance Commission on Tax Devolution

Share of States in Central Taxes (Vertical Devolution)

• The share of states in the central taxes for the 2021-26 period is recommended to be 41%, same as that for 2020-21.
• This is less than the 42% share recommended by the 14th Finance Commission for 2015-20 period.
• The adjustment of 1% is to provide for the newly formed union territories of Jammu and Kashmir, and Ladakh from the resources of the centre.

Horizontal Devolution (Allocation between the States)

• For horizontal devolution, it has suggested 12.5% weightage to demographic performance, 45% to income, 15% each to population and area, 10% to forest and ecology and 2.5% to tax and fiscal efforts.PM inaugurates first-ever National Training Conclave

On 2^nd June, 2023, the Reserve Bank of India (RBI) released draft cybersecurity directions for payment system operators (PSOs) and digital payments under the title- Draft Master Directions on Cyber Resilience and Digital Payment Security Controls for Payment System Operators.

• These directions are being issued under the Payment and Settlement Systems Act, 2007.

Aim

• To improve safety and security of the payment systems operated by PSOs by providing a framework for overall information security preparedness with an emphasis on cyber resilience.

About the Directions

Applicability

• The Directions apply to all RBI-authorized non-bank payment system operators (PSOs).

Timelines for Implementation

Large non-bank PSOs: April 1, 2024

• Payment Aggregators (PAs), card payment networks, large pepaid payment instrument (PPI) issuers, non-bank ATM networks, White Label ATM Operators, Clearing Corporation of India Limited (CCIL), National Payments Corporation of India (NPCI), NPCI Bharat Bill Pay Limited, TReDS, and Bharat Bill Payment Operating Units fall under this category.

Medium non-bank PSOs: April 1, 2026

• Cross-border (in-bound) money transfer operators under Money Transfer Service Scheme (MTSS) and Medium PPI Issuers fall under this category.

Small non-bank PSOs: April 1, 2028

• Small PPI Issuers and Instant Money Transfer Operators fall under this category.

Board of Directors (Board) of the PSO

• The Board of Directors (Board) of the PSO shall be responsible for ensuring adequate oversight over information security risks, including cyber risk and cyber resilience.

Cyber Crisis Management Plan (CCMP)

• PSOs will be required to develop an approved Cyber Crisis Management Plan (CCMP) to detect, contain, respond to, and recover from cyber threats and attacks.