Category Archives: banking laws

bad bank structure

https://pib.gov.in/PressReleasePage.aspx?PRID=1755466

Central Government guarantee of Rs.30,600 crore to back Security Receipts issued by National Asset Reconstruction Company Limited (NARCL) for acquiring stressed loan assets was approved by Union Cabinet yesterday.

NARCL proposes to acquire stressed assets of about Rs. 2 Lakh crore in phases within extant regulations of RBI. It intends to acquire these through 15% Cash and 85% in Security Receipts (SRs). The following Frequently asked questions explain various aspects regarding Central Government guarantee to back Security Receipts issued by National Asset Reconstruction Company Limited for acquiring of stressed loan assets.

  1. What isNational Asset Reconstruction Company Limited (NARCL)? Who has set it up?

NARCL has been incorporated under the Companies Act and has applied to Reserve Bank of India for license as an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain51% ownership inNARCL.

  1. What is India Debt Resolution Company Ltd. (IDRCL)? Who has set it up?

IDRCL is a service company/operational entity which will manage the asset and engage market professionals and turnaround experts. Public Sector Banks (PSBs) and Public FIs will hold a maximum of 49% stake and the rest will be with private sector lenders.

  1. Why is NARCL-IDRCL type structure needed when there are 28 existing ARCs?

Existing ARCs have been helpful in resolution of stressed assets especially for smaller value loans. Various available resolution mechanisms, including IBC have proved to be useful. However,considering the large stock of legacy NPAs, additional options/alternatives are needed and the NARCL-IRDCL structure announced in the Union Budget is this initiative.

  1. Why is a Government Guarantee needed?

Resolution mechanisms of this nature which deal with a backlog of NPAs typically require a backstop from Government. This imparts credibility and provides for contingency buffers. Hence, GoI Guarantee of up to Rs 30,600 crore will back Security Receipts (SRs) issued by NARCL. The guarantee will be valid for 5 years. The condition precedent for invocation of guarantee would be resolution or liquidation. The guarantee shall cover the shortfall between the face value of the SR and the actual realisation. GoI’s guarantee will also enhance liquidity of SRs as such SRs are tradable.

  1. How will NARCL and IDRCL work?

The NARCL will acquire assets by making an offer to the lead bank. Once NARCL’s offer is accepted, then, IDRCL will be engaged for management and value addition.

  1. What benefit do banks get from this new structure?

It will incentivize quicker action on resolving stressed assets thereby helping in better value realization. This approach will also permit freeing up of personnel in banks to focus on increasing business and credit growth. As the holders of these stressed assets and SRs, banks will receive the gains. Further, it will bring about improvement in bank’s valuation and enhance their ability to raise market capital.

  1. Why is it being set up now?

Insolvency and Bankruptcy Code (IBC), strengthening of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI Act) and Debt Recovery Tribunals, as well as setting up of dedicated Stressed Asset Management Verticals (SAMVs) in banks for large-value NPA accounts have brought sharper focus on recovery. In spite of these efforts, substantial amount of NPAs continue on balance sheets of banks primarily because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented across various lenders. High levels of provisioning by banks against legacy NPAs has presented a unique opportunity for faster resolution.

  1. Is the guarantee likely to be invoked?

Government guarantee will be invoked to cover the shortfall between the amount realised from the underlying assets and the face value of SRs issued for that asset, subject to overall ceiling of ₹30,600 crore, valid for 5 years. Since there shall be a pool of assets, it is reasonable to expect that realisation in many of them will be more than the acquisition cost.

  1. How will Government ensure faster and timely resolution?

The GoI guarantee will be valid for five years and condition precedent for invocation of guarantee will be resolution or liquidation.Further, to disincentivize delay in resolution, NARCL has to pay a Guarantee fee which increase with passage of time.

  1. What will be the capital structure of NARCL and how much will Government contribute?

Capitalization of NARCL would be through equity from banks and Non-Banking Financial Companies (NBFCs). it will also raise debt as required.The GoI guarantee will reduce upfront capitalization requirements.

  1. What will be NARCL’s strategy for resolution of stressed assets?

NARCL is intended to resolve stressed loan assets above ₹500 crore each amounting to about ₹ 2 lakh crore. In phase I, fully provisioned assets of about Rs. 90,000 crores are expected to be transferred to NARCL, while the remaining assets with lower provisionswould be transferred in phase II.

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aadhar authentication e-KYC licence

RBI is vide its circular dated 13th September, 2021 opening up the window for NBFCs, payment system providers and payment system participants to obtain aadhar authentication e-KYC licence (KYC User Agency) or sub KUA. What is this now? I wonder what happened to the Central KYC registry. There are no parameters specified, which means any such NBFCs etc. can apply?

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12161&Mode=0

Application for Aadhaar e-KYC Authentication Licence

In terms of Section 11A of the PML Act, 2002, entities other than banking companies may, by notification of the Central Government, be permitted to carry out authentication of client’s Aadhaar number using e-KYC facility provided by the Unique Identification Authority of India (UIDAI). Such notification shall be issued only after consultation with UIDAI and the appropriate regulator.

A detailed procedure for processing of applications under the aforementioned Section for use of Aadhar authentication services by entities other than banking companies has been provided by the Department of Revenue, Ministry of Finance vide their circular dated May 9, 2019.

2. Accordingly, Non-Banking Finance Companies (NBFCs), Payment System Providers and Payment System Participants desirous of obtaining Aadhaar Authentication License – KYC User Agency (KUA) License or sub-KUA License (to perform authentication through a KUA), issued by the UIDAI, may submit their application to this Department for onward submission to UIDAI. The applications can also be forwarded over email. The format of the application is provided in the Annex to this circular.

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penalty on Dhanalakshmi Bank

RBI has levied a penalty of Rs.2.75 million on The Dhanalakshmi Bank Limited for contravention of section 26A(2) of the Banking Regulation Act, 1949 – which mandates banks to transfer to the Depositor Education and Awareness Fund any amount which has not been operated upon for 10 years or more or any deposit which is unclaimed for more than 10 years.

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=52096

The Reserve Bank of India (RBI) has imposed, by an order dated August 23, 2021, a monetary penalty of ₹27.50 lakh (Rupees Twenty Seven Lakh and Fifty Thousand only) on Dhanlaxmi Bank Ltd., Thrissur, Kerala (the bank) for contravention of sub-section (2) of section 26A of the Banking Regulation Act, 1949 (the Act) read with paragraph 3 of The Depositor Education and Awareness Fund Scheme, 2014 (the scheme) enclosed with RBI Circular on ‘The Depositor Education and Awareness Fund Scheme, 2014 – Section 26A of Banking Regulation Act, 1949- Operational Guidelines’ dated May 27, 2014. The penalty has been imposed in exercise of powers vested in RBI under the provisions of section 47 A (1) (c) read with section 46 (4) (i) of the Act.

This action is based on the deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.

Background

The Statutory Inspection for Supervisory Evaluation (ISE) of the bank was conducted by RBI with reference to its financial position as on March 31, 2020, and the examination of the Risk Assessment Report and Inspection Report pertaining to the same, revealed, inter-alia, contravention of above-mentioned provisions of the Act read with the scheme. In furtherance to the same, a notice was issued to the bank advising it to show cause as to why penalty should not be imposed on it for contravention of the provisions of the Act read with the scheme, as stated therein.

After considering the bank’s reply to the notice and oral submissions made during the personal hearing, RBI came to the conclusion that the charge of contravention of aforesaid provisions of the Act read with the scheme was substantiated and warranted imposition of monetary penalty on the bank.

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outsourcing of payment & settlement related activities

RBI circular dated 3rd August, 2021 wherein they have laid down conditions for outsourcing of payment & settlement related activities by payment system operators. Here’s the gist.

1. Introduction

1.1. This framework is applicable to non-bank PSOs insofar as it relates to their payment and / or settlement-related activities.

1.2. It seeks to put in place minimum standards to manage risks in outsourcing of payment and / or settlement-related activities (including other incidental activities like on-boarding customers2, IT based services, etc.).

1.3. The framework is not applicable to activities other than those related to payment and / or settlement services, such as internal administration, housekeeping or similar functions.

1.4. For the purpose of this framework, ‘outsourcing’ is defined as use of a third party (i.e. service provider) to perform activities on a continuing basis that would normally be undertaken by the PSO itself, now or in the future. ‘Continuing basis’ would include agreements for a limited period.

1.5. The term ‘service provider’ includes, but is not limited to, vendors, payment gateways, agents, consultants and / or their representatives that are engaged in the activity of payment and / or settlement systems. It also includes sub-contractors (i.e., secondary service providers) to whom the primary service providers may further outsource whole or part of some activity related to payment and settlement system activities outsourced by the PSO.

1.6. This framework is applicable to a service provider, whether located in India or elsewhere.

1.7. The service provider, unless it is a group company of the PSO, shall not be owned or controlled by any director or officer of the PSO or their relatives; the terms – control, director, officer and relative – have the same meaning as assigned to them under the Companies Act, 2013.

1.8. Outsourcing process is associated with several risks; following is an illustrative list of such risks:

  1. Compliance Risk – Where privacy, customer / consumer and prudential laws are not adequately complied with by the service provider;
  2. Concentration and Systemic Risk – Where the overall industry has considerable exposure to one service provider and hence, individual PSO may lack control over the service provider;
  3. Contractual Risk – Where the PSO may not have the ability to enforce the contract;
  4. Country Risk – When political, social or legal climate creates added risk;
  5. Cyber Security risk – Where breach in IT systems may lead to potential loss of data, information, reputation, money, etc.;
  6. Exit Strategy Risk – When over-reliant on one firm, the PSO loses related skills internally, and it becomes difficult to bring the activity back in-house; and where the PSO has entered into contracts that makes speedy exit prohibitively expensive;
  7. Legal Risk – Where the PSO is subjected to fines, penalties, or punitive damages resulting from supervisory actions, as well as to private settlements due to acts of omission and commission by the service provider;
  8. Operational Risk – Arising due to technology failure, fraud, error, inadequate financial capacity to fulfil obligations and / or to provide remedies;
  9. Reputation Risk – Where the service provided is poor and customer interaction is inconsistent with the overall standard expected from the PSO; and
  10. Strategic Risk – Where the service provider conducts business on its own behalf, inconsistent with the overall strategic goals of the PSO.

1.9. It is essential that the PSO, which is outsourcing its activities, ensures the following:

  1. Exercises due diligence, puts in place sound and responsive risk management practices for effective oversight, and manages the risks arising from such outsourcing of activities.
  2. Outsourcing arrangements do not impede its effective supervision by RBI.

1.10. Outsourcing of activities by the PSOs shall not require prior approval from RBI.

2. Activities that shall not be outsourced

2.1. The PSOs shall not outsource core management functions3, including risk management and internal audit; compliance and decision-making functions such as determining compliance with KYC norms. However, while internal audit function itself is a management process, the auditors for this purpose can be appointed by the PSO from its own employees or from the outside on contract.

3. Criticality of outsourcing

3.1. The PSO shall carefully evaluate the need for outsourcing its critical processes and activities, as also selection of service provider(s) based on comprehensive risk assessment. The critical processes are those, which if disrupted, shall have the potential to significantly impact the business operations, reputation, profitability and / or customer service.

4. PSO’s role and regulatory and supervisory requirements

4.1. Outsourcing of any activity by the PSO shall not reduce its obligations, and those of its board and senior management, who are ultimately responsible for the outsourced activity. The PSO shall, therefore, be liable for the actions of its service providers and shall retain ultimate control over the outsourced activity.

4.2. The PSO, while exercising due diligence in respect of outsourcing, shall consider all relevant laws, regulations, guidelines and conditions of authorisation / approval, licensing or registration.

4.3. Outsourcing arrangements shall not affect the rights of a customer of a payment system against the PSO, as well as those of a payment system participant against the PSO, including her / his ability to avail grievance redressal as applicable under the relevant laws. Responsibility of addressing the grievances of its customers shall rest with the PSO, including in respect of the services provided by the outsourced agency (i.e., service provider).

4.4. A PSO, which has outsourced its customer grievance redressal function, must also provide its customers the option of direct access to its nodal officials for raising and / or escalating complaints. Such access should be enabled through adequate phone numbers, e-mail ids, postal address, etc., details of which shall be displayed prominently on its website, mobile applications, advertisements, etc., and adequate awareness shall also be created about the availability of this recourse.

4.5. If the customer is required to have an interface with the service provider to avail products of the PSO, then the PSO shall state the same through the product literature / brochure, etc., and also indicate therein the role of such service provider.

4.6. A PSO must ensure that outsourcing does not impede or interfere with the ability of the PSO to effectively oversee and manage its activities; nor does it prevent RBI from carrying out its supervisory functions and objectives.

5. Outsourcing policy

5.1. To outsource any of its payment and settlement-related activities, the PSO shall have a board-approved comprehensive outsourcing policy, which incorporates, inter-alia, criteria for selection of such activities and service providers; parameters for grading the criticality of outsourcing; delegation of authority depending on risks and criticality; and, systems to monitor and review the operation of these activities.

6. Role of the board and responsibilities of the senior management

6.1. Role of the board

The board of the PSO, or a committee of the board to which powers have been delegated, shall be responsible, inter-alia, for the following:

  1. approving a framework to evaluate the risks and criticality of all existing and prospective outsourcing;
  2. approving policies that apply to outsourcing arrangements;
  3. mapping appropriate approval authorities for outsourcing depending on risks and criticality;
  4. setting up suitable administrative mechanism of senior management for the purpose of this framework;
  5. undertaking periodic review of outsourcing policy, strategies and arrangements for their continued relevance, safety and soundness;
  6. deciding on business activities to be outsourced and approving such arrangements; and
  7. complying with regulatory instructions.

6.2. Responsibilities of the senior management

The senior management shall be responsible for:

  1. evaluating the risks and criticality of all existing and prospective outsourcing, based on the framework approved by the board;
  2. developing and implementing sound and prudent outsourcing policies and procedures commensurate with the nature, scope and complexity of the outsourcing activity;
  3. reviewing periodically the effectiveness of policies and procedures, and for identifying new outsourcing risks as they arise;
  4. communicating, in a timely manner, to the board any information related to outsourcing risks;
  5. ensuring that contingency plans, based on realistic and probable disruptive scenarios, are in place and tested periodically; and
  6. ensuring an independent review and audit for compliance with the set policies.

6.3. A central record of all outsourcing arrangements shall be maintained and it shall be readily accessible for review by the board and senior management of the PSO. The record shall be updated promptly, and half yearly reviews shall be placed before the board or its senior management.

7. Evaluating capability of the service provider

7.1. While considering / renewing an outsourcing arrangement, the PSO shall include issues related to undue concentration of such arrangements with a service provider.

8. Outsourcing agreement

8.1. The terms and conditions governing the contract between the PSO and the service provider shall be carefully defined in written agreements and vetted by PSO’s legal counsel for their legal effect and enforceability. Every such agreement shall address the risks and the strategies for mitigating them. The agreement shall be sufficiently flexible to allow the PSO to retain adequate control over the outsourced activity and the right to intervene with appropriate measures to meet legal and regulatory obligations. The agreement shall also bring out the nature of legal relationship between the parties, i.e. whether agent, principal or otherwise. Some of the key provisions of the agreement should incorporate the following:

  1. defining activity to be outsourced, including appropriate service and performance standards;
  2. having access by the PSO to all books, records and information relevant to the outsourced activity, available with the service provider;
  3. providing for continuous monitoring and assessment by the PSO of the service provider, so that any necessary corrective measure can be taken immediately;
  4. including termination clause and minimum period to execute such provision, if deemed necessary;
  5. ensuring controls are in place for maintaining confidentiality of customer data and incorporating service provider’s liability in case of breach of security and leakage of such information related to customers;
  6. incorporating contingency plan(s) to ensure business continuity;
  7. requiring prior approval / consent of the PSO for use of sub-contractors by the service provider for all or part of an outsourced activity;
  8. retaining PSO’s right to conduct audit of the service provider, whether by its internal or external auditors, or by agents appointed to act on its behalf, and to obtain copies of any audit or review reports and findings made about the service provider in conjunction with the services performed for the PSO;
  9. adding clauses to allow RBI or person(s) authorised by it to access the PSO’s documents, record of transactions and other necessary information given to, stored or processed by the service provider, within a reasonable time;
  10. keeping clauses to recognise the right of RBI to cause an inspection to be made of a service provider of a PSO and the books of accounts, by one or more of its officers or employees or other persons;
  11. requiring clauses relating to a clear obligation on any service provider to comply with directions given by RBI insofar as they involve activities of the PSO;
  12. maintaining confidentiality of customer’s information even after the agreement expires or gets terminated; and
  13. preserving documents and data by the service provider in accordance with legal / regulatory obligations of the PSO, and the PSO’s interests in this regard shall be protected even after termination of the services.

9. Confidentiality and security

9.1. Public confidence and customer trust in the PSO is a prerequisite for its stability and reputation. PSO shall ensure the security and confidentiality of customer information in the custody or possession of the service provider.

9.2. Access to customer information by staff of the service provider shall be on ‘need to know’ basis, i.e., limited to areas where the information is required to perform the outsourced function.

9.3. The service provider shall be able to isolate and clearly identify the PSO’s customer information, documents, records and assets to protect their confidentiality. Where the service provider acts as an outsourcing agent for multiple PSOs, there should be strong safeguards (including encryption of customer data) to avoid co-mingling of information, documents, records and assets of different PSOs.

9.4. The PSO shall regularly review and monitor the security practices and control processes of the service provider and require the service provider to disclose security breaches.

9.5. The PSO shall immediately notify RBI about any breach of security and leakage of confidential information related to customers. In such eventualities, the PSO would be liable to its customers for any damage.

9.6. The PSO shall ensure that the extant instructions related to storage of payment system data shall be strictly adhered to by service provider, domestic or off-shore.

10. Responsibilities of Direct Sales Agents (DSAs) / Direct Marketing Agents (DMAs)

10.1. The PSOs shall ensure that the DSAs / DMAs are properly trained to handle their responsibilities with care and sensitivity, particularly for aspects such as soliciting customers, hours of calling, privacy of customer information, conveying the correct terms and conditions of the products on offer, etc.

10.2. The PSOs shall put in place a board-approved code of conduct for DSAs / DMAs and obtain their undertaking to abide by the same.

11. Business continuity and management of disaster recovery plan

11.1. Service provider shall develop and establish a robust framework for documenting, maintaining and testing business continuity and recovery procedures arising out of any outsourced activity. The PSO shall ensure that the service provider periodically tests the business continuity and recovery plans, and shall also consider conducting occasional joint exercises for testing of business continuity and recovery procedures with its service provider.

11.2. To mitigate risk of unexpected termination of the outsourcing agreement or liquidation of the service provider, the PSO shall retain adequate control over its outsourcing and shall have the right to intervene with appropriate measures to continue its business operations and its services to the customers in such cases without incurring prohibitive expenses or any break in its operations and services to the customers.

11.3. As part of contingency plan, the PSO shall consider the availability of alternative service provider(s), as well as the possibility of bringing the outsourced activity back in-house in an emergency and assess the cost, time and resources that would be involved.

11.4. The PSO’s information, documents and records, and other assets shall be isolable by the service provider. This is to ensure that in appropriate situations, all documents, record of transactions and information given to the service provider, and assets of the PSO, can be removed from the possession of the service provider in order to continue its business operations, or deleted, destroyed or rendered unusable.

12. Monitoring and control of outsourced activities

12.1. The PSO shall put in place a management structure to monitor and control its outsourcing activities. It shall ensure that outsourcing agreement with the service provider contains provisions to address monitoring and control by it of the outsourced activities.

12.2. Regular audit by either the internal or external auditors of the PSO shall be conducted to assess the adequacy of the risk management practices adopted in overseeing and managing the outsourcing arrangements and the PSO’s compliance with its risk management framework.

12.3. The PSO shall, at least on an annual basis, review the financial and operational conditions of the service provider to assess its ability to fulfil its outsourcing obligations. Such due diligence reviews shall highlight any deterioration or breach in performance standards, confidentiality and security, and in business continuity preparedness.

12.4. In the event of termination of the outsourcing agreement for any reason in cases where the service provider deals with the customers, the same shall be given due publicity by the PSO informing the customers so as to ensure that they stop dealing with the concerned service provider.

12.5. Certain cases like outsourcing of cash management, may involve reconciliation of transactions between the PSO, the service provider and its sub-contractors, if any. In such cases, PSO shall ensure that this reconciliation process is carried out in a timely manner.

12.6. A robust system of internal audit of all outsourced activities shall be put in place and monitored by the board of the PSO.

13. Outsourcing within a group / conglomerate

13.1. The PSO could have back office and service arrangements / agreements with group entities; for instance, sharing of premises, legal and other professional services, hardware and software applications, centralised back office functions, outsourcing certain payment and settlement services to other group entities, etc. Such arrangements with group entities shall be based on the PSO’s board-approved policy and service level arrangements / agreements with its group entities. The agreements shall cover demarcation of shared resources like premises, personnel, etc. Wherever there are multiple group entities involved or any cross-selling is observed, the customers shall be informed about the actual company / entity offering the product / service.

13.2. The PSO shall ensure that such arrangements:

  1. are appropriately documented in written agreements with details like scope of services, charges for services and maintaining confidentiality of customer’s data;
  2. do not cause any confusion among customers as to whose products / services they are availing, by clear physical demarcation of the site of activities of different group entities;
  3. do not compromise ability of the PSO to identify and manage risks on a standalone basis; and
  4. do not prevent RBI from being able to obtain information required for supervision of the PSO or pertaining to the group as a whole.

13.3. The PSO shall ensure that its ability to carry out operations in a sound fashion is not affected if premises or other services (such as IT systems and support staff) provided by the group entities become unavailable.

13.4. If sharing of premises is done with the group entities for cross-selling, the PSO shall take measures to ensure that the entity’s identification is distinctly visible and clear to the customers. Any communication by group entities (marketing brochure, verbal communication by staff / agent, etc.) in the PSO’s premises shall mention nature of arrangement of the entities with the PSO, so that customers are clear about the seller of the product.

13.5. The PSO’s advertisement or any agreement shall not give any overt or tacit impression that it is in any way responsible for the obligations of its group entities.

13.6. The risk management practices to be adopted by the PSO while outsourcing to a related party (i.e. party within the group / conglomerate) shall be identical to those specified above in this framework for a non-related party.

14. Additional requirements for off-shore outsourcing

14.1. The engagement of a service provider in a foreign country exposes the PSO to country risk. To manage such country risk, the PSO shall closely monitor government policies and, political, social, economic and legal conditions in countries where the service provider is based, both during the risk assessment process and on a continuous basis, and establish sound procedures for dealing with country risk problems. This includes having appropriate contingency and exit strategies. In principle, arrangements shall only be entered into with parties operating in jurisdictions generally upholding confidentiality clauses and agreements. The governing law of the arrangement shall also be clearly specified.

14.2. The activities outsourced outside India shall be conducted in a manner so as not to hinder efforts to supervise or reconstruct the India activities of the PSO in a timely manner.

14.3. As regards off-shore outsourcing of its services relating to Indian operations, the PSO shall ensure the following:

  1. The off-shore regulator regulating the off-shore service provider shall neither obstruct the arrangement nor object to RBI’s visit(s) for audit / scrutiny / examination / inspection / assessment or visit(s) by PSO’s internal and external auditors;
  2. The regulatory authority of the off-shore location does not have access to the data relating to Indian operations of the PSO simply on the ground that the processing is being undertaken there (not applicable if off-shore processing is done in the home country of the PSO); and
  3. The jurisdiction of the courts in the off-shore location where data is processed, does not extend to the operations of the PSO in India on the strength of the fact that the data is being processed there even though the actual transactions are undertaken in India.

15. Members / Participants of payment systems operated by the PSOs

15.1. In some payment systems operated by the PSOs, there could be other members / participants also. Some of these entities such as token requestors in tokenisation services rendered by card networks, third party application providers in Unified Payments Interface (UPI), etc., may not be directly regulated or supervised by RBI. Many of these entities may provide payment services directly to customers as well. It is prudent for such entities to put in place a system to manage risks arising out of activities outsourced by them.

15.2. As a best practice, the PSOs may engage with all participants in a payment transaction chain to encourage them to implement this framework in letter and spirit.

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access for non-banks to CPS

RBI guidelines dated 28th July, 2021 whereby they are extending the Centralised Processing System facility to few non bank entities like PPI Issuers, Card Networks, and White Label ATM operators. Read on.

1 Background

1.1 Centralised Payment Systems (CPS) in India are Real Time Gross Settlement (RTGS) and National Electronic Funds Transfer (NEFT) systems, both owned and operated by Reserve Bank. As part of its drive to encourage moving towards digital payments, Reserve Bank has been continuously taking measures to improve the payment ecosystem in general, and CPS in particular. The NEFT and RTGS systems were made available 24x7x365 with effect from December 2019 and December 2020 respectively.

1.2 One of the ways to provide impetus to digital payments is to extend the access to payment systems to more entities. This is also engaging the attention of other central banks globally. Reserve Bank’s Vision Document on Payment and Settlement Systems 2019-2021 includes review of membership of CPS to enable access neutrality between banks and non-banks and to develop a framework for settlement risk management with increased participation of non-banks. The document also refers to the need for a single national settlement account for all authorised card networks.

1.3 Apart from banks, very few select non-banks have been given approval to participate in CPS so far. The non-banks which are permitted membership / access to CPS are standalone primary dealers, clearing corporations of stock exchanges, central counter parties, retail payment system organisations, select financial institutions (NABARD, EXIM Bank) and DICGC.

1.4 Banks have been providing the services to non-banks for their payment and settlement needs. However, if the bank, which provides payment services to non-banks, is impacted, it can cause business disruption to the non-banks also. The disruption, even if temporary, could have the potential to cause and spread instability in the system. Consequently, the customers of the non-banks, who are using their products and services, would also get affected.

2 Direct Access for Non-banks to CPS

2.1 Meaning of Direct Access to CPS

2.1.1 Allotment of a separate Indian Financial System Code (IFSC).

2.1.2 Opening a Current Account with the Reserve Bank in its core banking system (e-Kuber).

2.1.3 Maintaining a settlement account with the Reserve Bank.

2.1.4 Membership of Indian Financial Network (INFINET) and use of Structured Financial Messaging System (SFMS) to communicate with CPS.

2.2 Benefits of Direct Access

2.2.1 Efficiency: For non-banks, the cost of routing payments through banks can be minimised. The risk of failure or delay in execution of fund transfers can be eliminated if the transactions are directly initiated by non-banks.

2.2.2 Competition and innovation: Non-banks increasingly and actively offer financial services which hitherto were the sole domain of banks. They are seen to be agile in coming up with innovative products and solutions as well. Direct access to CPS can further enable them to leverage technology to offer customised choices to consumers. They can use their capabilities to assimilate and analyse data to support their innovations and solutions. As non-banks compete in the same segment that banks operate, direct access can provide level playing field, minimising the need to use intermediaries.

2.2.3 Risk management and stability: As the settlement is carried out in central bank money, it greatly reduces the uncertainty in finality of the payments and settlement risk. Expanding the access and participation facilitates diversity and resiliency of the ecosystem.

2.2.4 Data protection: Direct access to CPS can enable the non-banks to safeguard customer information and fund flows, which may not be possible when using banks to provide payment services.

3 Eligibility

3.1 Entities

3.1.1 Non-banks include entities like Payment System Providers (PSPs) and Non-Banking Financial Companies (NBFCs) that are regulated by Reserve Bank as also entities that are under the remit of other financial sector regulators like PFRDA, IRDAI, SEBI, etc.

3.1.2 To start with, access to non-banks in CPS will be enabled in a phased manner. In the first phase, only the following authorised non-bank PSPs shall be provided access –

  1. Prepaid Payment Instrument (PPI) Issuers;
  2. Card Networks; and
  3. White Label ATM Operators.

3.2 Criteria

3.2.1 Eligibility for non-bank access to CPS shall be as per the criteria prescribed by Reserve Bank.

3.2.2 For access to CPS the non-bank PSPs shall fulfil the following criteria:

  1. Valid Certificate of Authorisation (CoA) from Reserve Bank under the Payment and Settlement Systems Act, 2007 (PSS Act).
  2. Net-worth of ₹25 crore or as prescribed as per CoA, whichever is higher.
  3. Incorporation in India under the Companies Act, 1956 / 2013. Entities not fulfilling this requirement shall empower their Indian subsidiary / associate to enter into valid agreements with RBI.
  4. Implementation of centralised processing systems.
  5. Adequate technical / system readiness including cyber resilience.
  6. Compliance with local payment data storage requirements issued by Reserve Bank from time to time.
  7. Adherence to Master Directions on Access Criteria for Payment Systems, RTGS System Regulations, NEFT Procedural Guidelines and other instructions prescribed by Reserve Bank from time to time.
  8. Satisfactory record of compliance to conditions laid out in CoA and regulatory guidelines.
  9. Recommendations of the concerned regulatory / supervisory department of Reserve Bank.

3.2.3 Entities incorporated outside India shall empower their local offices to carry out all operations in respect of CPS, but the responsibility for all operations and management of any contingency, including settlement obligations, shall remain with the foreign parent institution, which has taken authorisation as PSP.

3.2.4. Reserve Bank shall have the authority to suspend or terminate membership of a PSP, if the PSP is found to be not complying with the access criteria on an ongoing basis.

3.2.5 Non-bank PSPs shall not be eligible for availing Intra-Day Liquidity (IDL) facility from the Reserve Bank. For any shortfall / default in completing the payment / settlement obligations, such entities shall approach their bankers for a ready line of credit facility. They shall ensure that appropriate liquidity support arrangements are in place with their bankers to avoid gridlocks and to ensure business continuity.

3.2.6 Non-bank entities shall not be permitted to sponsor sub-members.

3.2.7 Non-bank entities shall adhere to the terms and conditions specified for maintenance of Current Account in Reserve Bank’s core banking solution (e-Kuber), membership to INFINET, use of SFMS, etc.

3.3 Membership Type and Nature of Transactions

3.3.1 Nature of transactions that can be executed shall depend upon the type of membership approved for RTGS. Based on requirement, some categories of PSPs shall be permitted to participate in NEFT also.

3.3.2 The details of access for non-bank PSPs to CPS shall be as under:

Sl. No.PSPRTGS Membership Type and Nature of TransactionsNEFT
1.PPI IssuersDCustomers, own / other bank / non-bank account transfersYes
2.Card NetworksCMultilateral net settlement batches, own account transfersNo
3.WLA OperatorsDCustomer, own / other bank account transfersNo

3.3.2 Once admitted as members, RTGS and NEFT systems may be used by the non-bank PSPs to execute various types of transactions. A summary of different transaction types and their use-cases is given below:

i. RTGS / NEFT customer payments initiated by:

  1. PPI issuers to merchants / payment aggregators;
  2. WLA operators to agencies handling ATMs; and
  3. Full-KYC PPI customers to load the PPIs from their bank account.

ii. RTGS inter-bank transfers initiated by:

  1. Non-bank PSPs to maintain sufficient balance in their escrow account with member bank/s based on net debit or credit position; and
  2. WLA operators and PPI issuers to other member banks / non-banks.

iii. Multilateral Net Settlement Batches (MNSB) posted in RTGS by:

  1. Card networks for settlements, dispute management, annual fee collections, etc.;
  2. Direct credit to WLA operators in NFS settlements; and
  3. NPCI allowing settlement of transactions of non-bank PSPs without involving their sponsor bank/s.

iv. Own Account Transfer (OAT) between the current and RTGS settlement accounts of the non-bank PSPs to maintain sufficient balances.

3.3.3 Card networks shall not be allowed to use the RBI current account for their settlement guarantee and related activities.

4 Operational Aspects

4.1 Process of Applying for Direct Access to CPS by Non-banks

4.1.1 The detailed process of applying for membership is given in the Master Directions on Access Criteria for Payment Systems issued vide DPSS.CO.OD.No.1846/04.04.009/2016-17 dated January 17, 2017.

4.1.2 All applications for membership to CPS shall be submitted to the Chief General Manager, Department of Payment and Settlement Systems (DPSS), Reserve Bank of India (RBI), Central Office (CO), 14th Floor, Central Office Building, Shahid Bhagat Singh Marg, Fort, Mumbai – 400 001.

4.1.3 The application shall be submitted in the format prescribed in Appendix – 1 “Covering letter for membership to Centralised Payment System”, of Master Directions on Access Criteria for Payment Systems, together with annexures.

4.1.4 Reserve Bank shall endeavour to complete the process of scrutinising the applications, that are complete with all required documents, within 60 days of receipt.

4.1.5 On approval of the application, DPSS, CO shall issue a letter of approval to the non-bank entity with a validity of six months, within which the entity shall ensure participation in CPS. DPSS, CO shall forward the application to RBI, Mumbai Regional Office (MRO), for further processing of RTGS and NEFT membership.

4.1.6 DPSS, MRO shall act as the point of contact for guidance of the non-bank entity.

4.1.7 Non-bank entities shall choose the type of access to the RTGS system, i.e., SFMS member interface, Web service interface or Payment originator module through INFINET, as per their convenience and requirement in consultation with Indian Financial Technology & Allied Services (IFTAS) and Reserve Bank.

4.1.8 Non-bank entities shall approach RBI, MRO for going live in RTGS, NEFT, getting INFINET membership, getting SFMS membership, opening of Current Account (in e-Kuber), opening of Settlement Account in RTGS, for necessary technical support from IFTAS for INFINET connectivity and SFMS integration, etc.

4.1.9 RBI, MRO shall refer the entity to RBI, Primary Data Centre (PDC), Department of Information Technology (DIT), CO for establishing connectivity to RTGS, user acceptance testing, providing sign-off for going live in RTGS, NEFT, etc.

4.2 Other Operational Aspects

4.2.1 RTGS Settlement Account shall be funded from Current Account at start of the day for an approved amount and balance, if any, in RTGS Settlement Account at end of the day, shall be transferred back to the Current Account.

4.2.2 Non-bank entities shall transfer funds from their Current Account to RTGS Settlement Account and vice versa during the operating hours. Non-bank entities shall monitor both their accounts continuously throughout the day. Any disruption in settlements due to insufficient balance in their accounts shall be viewed seriously and attract stringent regulatory / supervisory action, including levy of penalty, suspension / termination of CPS membership, etc.

4.2.3 Non-bank PPI issuers shall transfer funds from their escrow account/s with scheduled commercial bank/s to Current Account with RBI and from Current Account with RBI to the escrow account/s for operational purposes. The balances in Current Account with the Reserve Bank shall not be reckoned for the purpose of maintenance of daily balance in escrow accounts.

4.2.4 For any issue that arises during the course of membership of the non-bank entities, the decision of Reserve Bank shall be final and binding.

4.2.5 Reserve Bank shall review the access type and membership criteria of non-bank entities for further streamlining as and where necessary.

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certificate of deposits

The IFSCA has issued guidelines for issue of certificates of deposits by Banking Units situated inside the IFSC. Salient features are as follows:

Certificate of Deposit (CD) is a negotiable instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a BU for a specified time period.

  1. IBUs may issue CDs denominated in any freely convertible foreign currency.
  2. Minimum amount of a CD should be USD 2500 or equivalent in any freely convertible foreign currency.
  3. BUs may issue CDs to persons resident in India and persons resident outside India. Issuance of CDs to persons resident in India shall be subject to the provisions of the Foreign Exchange Management Act, 1999.
  4. The maturity period of CDs issued by BUs should not be less than 7 days and not more than one year, from the date of issue. There shall be no lock-in period for the CDs other than the minimum maturity period.
  5. IBUs may issue CDs at a discount on face value or on the basis of fixed or floating coupon rate. In case of CDs issued on floating rate basis the methodology of compiling the floating rate should be objective, transparent and market based. The BU is free to determine such discount / coupon rate.
  6. IBUs have to maintain appropriate reserve requirements, i.e., Retail Deposit Reserve Ratio (RDRR) on the issue price of the CDs issued to individuals.
  7. CDs may be issued in physical form or in demat form.

  1. CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form can be transferred as per the procedure laid down by the depository.
    10.IBUs shall clearly inform subscribers that the CDs issued by them are not covered by Deposit Insurance and also that the lender of Last resort (LOLR) facility is not available in IFSC.
    11.IBUs shall not grant loans against CDs.
    12.IBUs are permitted to buyback CDs before maturity. Buyback of CDs can be made only 7 days after the date of issue of the CD
    13.Since CDs are transferable, the physical certificates may be presented for payment by the last holder. BUs shall take necessary precautions to verify the chain of transfers and make payment only by credit to the account of the presenter held with them or with another BU or with the branch of a bank outside IFSCA. In case of payment to an account held in another BU or with the branch of a bank outside IFSCA, the BU shall obtain complete details of the payee and such bank accounts and keep them on record.
    14.IBUs shall provide any information/ data or statement that may be called for by the Authority.

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guidelines on dividends payable by NBFCs

In order to infuse greater transparency and uniformity in practice, it has been decided to prescribe guidelines on distribution of dividend by NBFCs.

Applicability

2. These guidelines shall be applicable to all NBFCs regulated by RBI1 as below:

(a) Applicable NBFCs as defined in Paragraph 2(2) of Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016; and

(b) Applicable NBFCs as defined in Paragraph 2(2) of Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016.

Effective Date

3. These guidelines shall be effective for declaration of dividend from the profits of the financial year ending March 31, 2022 and onwards.

Board Oversight

4. The Board of Directors shall, while considering the proposals for dividend, take into account the following aspects:

(a) Supervisory findings of the Reserve Bank (National Housing Bank (NHB) for HFCs) on divergence in classification and provisioning for Non-Performing Assets (NPAs).

(b) Qualifications in the Auditors’ Report to the financial statements; and

(c) Long term growth plans of the NBFC.

The Board shall ensure that the total dividend proposed for the financial year does not exceed the ceilings specified in these guidelines.

Eligibility criteria

5. NBFCs shall comply with the following minimum prudential requirements to be eligible to declare dividend:

Table 1: Declaration of Dividend: Minimum Prudential Requirements
Sl. No.ParameterRequirement
1.Capital Adequacy(a) NBFCs (other than Standalone Primary Dealers) shall have met the applicable regulatory capital requirement (refer Annex I) for each of the last three2 financial years including the financial year for which the dividend is proposed.

(b) Standalone Primary Dealers (SPDs) should have maintained a minimum CRAR of 20 per cent for the financial year (all the four quarters) for which dividend is proposed.
2.Net NPAThe net NPA ratio shall be less than 6 per cent in each of the last three years, including as at the close of the financial year for which dividend is proposed to be declared.
3.Other criteria(a) NBFCs shall comply with the provisions of Section 45 IC of the Reserve Bank of India Act, 1934. HFCs shall comply with the provisions of Section 29 C of The National Housing Bank Act, 1987.

(b) NBFCs shall be compliant with the prevailing regulations/ guidelines issued by the Reserve Bank. The Reserve Bank or the NHB (for HFCs) shall not have placed any explicit restrictions on declaration of dividend.

Quantum of Dividend Payable

6. NBFCs eligible to declare dividend as per paragraph 5 above, may pay dividend, subject to the following:

(a) The Dividend Payout Ratio is the ratio between the amount of the dividend payable in a year and the net profit as per the audited financial statements for the financial year for which the dividend is proposed.

(b) Proposed dividend shall include both dividend on equity shares and compulsorily convertible preference shares eligible for inclusion in Tier 1 Capital.

(c) In case the net profit for the relevant period includes any exceptional and/or extra-ordinary profits/ income or the financial statements are qualified (including ’emphasis of matter’) by the statutory auditor that indicates an overstatement of net profit, the same shall be reduced from net profits while determining the Dividend Payout Ratio.

(d) The ceilings on dividend payout ratios for NBFCs eligible to declare dividend are as under:

Table 2: Ceilings on Dividend Payout Ratio
Sl. No.Type of NBFCMaximum Dividend Payout Ratio (percentage)
1.NBFCs that do not accept public funds and do not have any customer interfaceNo ceiling specified
2.Core Investment Company60
3.Standalone Primary Dealers60
4.Other NBFCs50

(e) The Reserve Bank shall not entertain any request for ad-hoc dispensation on declaration of dividend.

7. A NBFC (other than SPD) which does not meet the applicable prudential requirement prescribed in Paragraph 53 above for each of the last three financial years, may be eligible to declare dividend, subject to a cap of 10 percent on the dividend payout ratio, provided the NBFC complies with the following conditions :

(a) meets the applicable capital adequacy requirement in the financial year for which it proposes to pay dividend; and

(b) has net NPA of less than 4 per cent as at the close of the financial year.

8. As per extant regulations contained in paragraph 30 of Master Direction – Standalone Primary Dealers (Reserve Bank) Directions, 2016, in case of SPDs which have a CRAR at or above the regulatory minimum of 15 per cent during each of the quarters of the previous year, but lower than 20 per cent in any of those quarters, the dividend payout ratio shall not exceed 33.3 per cent.

Reporting System

9. NBFC-D, NBFC-ND-SI, HFC & CIC declaring dividend shall report details of dividend declared during the financial year as per the format prescribed in Annex 2. The report shall be furnished within a fortnight after declaration of dividend to the Regional Office of the Department of Supervision of the Reserve Bank/ Department of Supervision of NHB, under whose jurisdiction it is registered.

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monetary penalty on mogaveera

RBI has vide its circular dated 21st June, 2021 levied a penalty of Rs.1.2 million on Mogaveera Co-operative Bank Limited for violation of provisions of section 26a and 56 of the banking regulation act, 1949 and also for non compliance of the provisions of directions issued by RBI on maintenance of deposit accounts and KYC provisions.

As usual RBI is very shy in giving more details of the non compliance for the general public to know.

Section 26A of BR act pertains to establishment of depositor education and awareness fund and it is not clear what provisions of section 56 has been violated.

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51769

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FATF non compliant jurisdictions

RBI has issued a circular dated 14th June, 2021 wherein they have barred investments from jurisdictions which are non FATF compliant into Payment System Operators (PSOs). Its not a complete ban but they are not authorised to give significant influence to investors from FATF non compliant jurisdictions. A threshold of 20% of the voting power or potential voting power has been established to distinguish significant influence.

PSOs who already have investments from FATF non compliant jurisdictions may continue with the said investments and also seek fresh investments from the same, in order to maintain continuity of business operations.

The circular can be found here

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12114&Mode=0

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risk based internal audit

RBI has vide its circular dated 11th June, 2021 mandated risk based internal audit for housing finance companies (HFCs)as follows:

  1. all deposit taking HFCs irrespective of their size;
  2. all non deposit taking HFCs having asset size of Rs.50 billion million and above

Previously vide circular dated 3rd February, 2021 risk based internal audit was mandated for NBFC companies as follows:

a) all deposit taking NBFCs irrespective of their size;

b) all non deposit taking NBFCs (including core investment companies) with asset size of Rs.50 billion and above;

c) all urban co-operative banks having asset size of Rs.5 billion and above

The risk based internal audit was originally introduced by RBI in 2002 as an overall move towards risk based supervision of the banks. There was a guidance note issued for the same which can be found in this circular i.e.

The importance of risk based internal audit was reiterated by RBI on 7th January, 2021 wherein they have laid down few parameters to give risk based internal audit sufficient importance in the organisation. These parameters are :

  1. Authority, Stature and Independence – The internal audit function must have sufficient authority, stature, independence and resources within the bank, thereby enabling internal auditors to carry out their assignments with objectivity. Accordingly, the Head of Internal Audit (HIA) shall be a senior executive of the bank who shall have the ability to exercise independent judgement. The HIA as well as the internal audit function shall have the authority to communicate with any staff member and have access to all records or files that are necessary to carry out the entrusted responsibilities.
  2. Competence – Requisite professional competence, knowledge and experience of each internal auditor is essential for the effectiveness of the bank’s internal audit function. The desired areas of knowledge and experience may include banking operations, accounting, information technology, data analytics and forensic investigation, among others. Banks should ensure that internal audit function has the requisite skills to audit all areas of the bank.
  3. Staff Rotation – Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the Board should prescribe a minimum period of service for staff in the Internal Audit function. The Board may also examine the feasibility of prescribing at least one stint of service in the internal audit function for those staff possessing specialized knowledge useful for the audit function, but who are posted in other departments, so as to have adequate skills for the staff in the Internal Audit function.
  4. Tenor for appointment of Head of Internal Audit – Except for the entities where the internal audit function is a specialised function and managed by career internal auditors, the HIA shall be appointed for a reasonably long period, preferably for a minimum of three years.
  5. Reporting Line – The HIA shall directly report to either the Audit Committee of the Board (ACB) / MD & CEO or Whole Time Director (WTD). Should the Board of Directors decide to allow the MD & CEO or a WTD to be the ‘reporting authority’ of the HIA, then the ‘reviewing authority’ shall be with the ACB and the ‘accepting authority’ shall be with the Board in matters of performance appraisal of the HIA. Further, in such cases, the ACB shall meet the HIA at least once in a quarter, without the presence of the senior management, including the MD & CEO/WTD. The HIA shall not have any reporting relationship with the business verticals of the bank and shall not be given any business targets. In foreign banks operating in India as branches, the HIA shall report to the internal audit function in the controlling office / head office.
  6. Remuneration – The independence and objectivity of the internal audit function could be undermined if the remuneration of internal audit staff is linked to the financial performance of the business lines for which they exercise audit responsibilities. Thus, the remuneration policies should be structured in a way that it avoids creating conflict of interest and compromising audit’s independence and objectivity.

It was also emphasised that the internal audit function should not be outsourced. However, where required, experts, including former employees, could be hired on contractual basis subject to the Audit Committee being assured that such expertise does not exist within the audit function of the bank. Any conflict of interest in such matters shall be recognised and effectively addressed. Ownership of audit reports in all cases shall rest with regular functionaries of the internal audit function.

Banks must ensure and demonstrate through proper documentation that their risk-based internal audit framework captures all the significant criteria / principles suited for their organisational structure, the business model and the risks.

All these circulars may be accessed for easy reference on the subject.

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monetary penalty on PNB, BOI

RBI has vide its press release levied monetary penalties of Rs.2 crores and Rs.4 crores each respectively on Punjab National Bank and Bank of India. 

For PNB it is relating to 

non-compliance of certain provisions of directions issued by RBI contained in the Master Directions on “Frauds – Classification and Reporting by commercial banks and select FIs” dated July 01, 2016 and, the circular on “Creation of a Central Repository of Large Common Exposures – Across Banks” dated September 11, 2013.

For Bank of India, it is relating to 

non-compliance with certain provisions of directions issued by RBI contained in the “Master Circular on KYC norms/AML standards/ CFT / Obligation of banks under PMLA, 2002” dated July 1, 2014, circular on “The Depositor Education and Awareness Fund Scheme, 2014 – Section 26A of Banking Regulation Act, 1949 – Operational Guidelines” dated May 27, 2014“Master Circular on Frauds – Classification and Reporting” dated July 02, 2012 and circular on “Sale of Financial Assets of Doubtful Standard / Fraudulent Origin to Securitization Company (SC) / Reconstruction Company (RC) – Reporting Requirements” dated April 5, 2011.

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monetary penalty on HDFC Bank

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=51650

RBI has imposed a monetary penalty of Rs.100 million for contravention of section 6(2) and 8 of the Banking Regulation Act, 1949. As usual the press release gives very scant details as to the non compliance involved.

Section 6(2) specifies that no banking company shall engage in any form of business other than that referred to in section 6(1).

Section 6(1) specifies what kinds of business that a banking company can carry out in India. It is a very inclusive definition leaving no scope for banking companies to do any other business other than those specified in this section.

Section 8 specifies that no banking company shall indulge in any buying or selling or bartering of goods or engage in any trade other than in connection with realisation of security held by it or in connection with bills of exchange received for collection or negotiation.

From newspaper reports, it appears that HDFC Bank has indulged in cross selling of products of third party in its auto loan section.

https://timesofindia.indiatimes.com/business/india-business/hdfc-bank-fined-rs-10-crore-by-rbi-in-car-loan-case/articleshow/83052541.cms

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amalgamation of co-operative banks – RBI guidelines

The Banking Regulation (Amendment) Act, 2020 (39 of 2020) has been notified for the State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs) with effect from, April 1, 2021 vide Notification dated December 23, 2020 issued by Government of India. With the issue of the notification, the amalgamations of the above banks have to be sanctioned by Reserve Bank of India in terms of the provisions of the Section 44-A read with Section 56 of the Banking Regulation Act, 1949.

In recent past, a few State Governments approached RBI for amalgamation of DCCBs with the StCB as a two-tier Short-term Co-operative Credit Structure (STCCS). In order to help the States contemplating delayering their STCCS, following guidelines are being issued to bring the requirements and indicative benchmarks for the amalgamation of DCCBs with the StCB to the notice of all stakeholders. These guidelines will also apply for amalgamation of one or more DCCBs in a State with the StCB or amalgamation of one DCCB with another.

2. The Reserve Bank of India will consider proposals for amalgamation if the following conditions are fulfilled:

  1. When the State Government of the State makes a proposal to amalgamate one or more DCCB/s in the State with the StCB after conducting a detailed study of the legal framework along with additional capital infusion strategy, assurance regarding financial support if required, projected business model with clear profitability and proposed governance model for the amalgamated bank.
  2. When the scheme of amalgamation is approved by the requisite majority of shareholders in accordance with the provisions of Section 44A read with Section 56 of the Banking Regulation Act, 1949.
  3. When such proposal of the State Government has been examined and recommended by NABARD.

3. The proposal for amalgamation of DCCBs with the StCB will be examined by Reserve Bank in consultation with NABARD and the sanction/ approval will be a two-stage process. In the first stage, an ‘in-principle’ approval will be accorded subject to fulfilment of certain conditions, following which the processes for amalgamation may be initiated by all concerned. After completion of the above processes, NABARD and Reserve Bank may be approached for final approval along with compliance report. To enable the Reserve Bank to consider the application for sanction, the State Government shall submit the information and documents specified in the Annex to the concerned Regional Office of Reserve Bank and NABARD.

Regulatory Criteria

4. The basic regulatory criteria for amalgamation shall be as under:

  1. The proposal should be in compliance with the legal requirements, past orders/ rulings of the Courts, if any. The State Government shall verify that there are no Court Orders prohibiting or staying the proposal for amalgamation.
  2. Financial parameters of the amalgamated entity based on notionally consolidated latest audited financial statements should be robust. It should have its CRAR above the prescribed regulatory minimum, Gross NPA below 7% and Net NPA below 5% and availability of adequate liquid assets. Post-amalgamation, it should be a profit making and financially viable entity on sustained basis.
  3. The StCB should have a satisfactory track record of regulatory and supervisory compliance.
  4. The StCB should have strong governance/ management practices.

General considerations governing the In-principle Approval

5. The general considerations governing the in-principle approval by RBI shall be as under:

  1. The scheme of amalgamation shall be presented to the shareholders of the StCB/ DCCBs. A resolution shall be passed by 2/3rd of the majority of the shareholders, both in number and value, present and voting at a General Body Meeting of StCB and each DCCB as required under section 44(A) read with section 56 of the Banking Regulation Act, 1949.
  2. An MOU shall be executed by the constituents i.e. amalgamating DCCBs, StCB and State Government covering issues of governance structure, management, manpower/HR issues and the manner of arriving at the share swap ratio based on the net worth of DCCBs (Networth of the StCB/ DCCB to be computed as per the guidelines issued by NABARD in circular NB.DoS.HO.POL/2069/J-1/2012-13 Circular No.211/DoS 28/2012 dated August 24, 2012 and other circulars issued from time to time) which are proposed to be amalgamated with the StCB. A copy of the MOU shall be submitted to RBI / NABARD.
  3. Due diligence on the amalgamating entities shall be carried out by Chartered Accountants. Shares in the amalgamated entity will be allotted on the basis of the net worth of the amalgamating banks. Share swap ratios for allotment of shares will be required to be worked out on the basis of valuation of assets and liabilities done by a chartered accountant firm registered with IBBI as valuers.
  4. If as a result of share swap ratio based on net worth, shareholders of some DCCBs cannot be allotted any shares, the State Government shall infuse sufficient capital in such DCCBs to ensure that the shareholders of such DCCBs are allotted at least one share each.
  5. In addition to compliance with extant income recognition, asset classification and provisioning norms, full provision shall be made for impairment of assets, if any, on account of frauds, misappropriation etc. while arriving at the value of net assets of the amalgamating banks.
  6. The StCB, post-amalgamation, shall be required to adhere to the CRAR norms prescribed by RBI from time to time. The shortfall in capital, if required, for meeting CRAR requirement shall be met by State Government on an ongoing basis.
  7. The StCB, post-amalgamation, shall meet with the regulatory requirements laid down for grant of various permissions/approvals given to the amalgamating banks so that none of the services currently extended by the banks under amalgamation get jeopardized. The required regulatory approvals for the said services shall be obtained, if required, before the amalgamated entity commences operations. In case the StCB is not eligible to continue with certain lines of business which the amalgamating banks have been permitted, such lines of business shall be phased-out non-disruptively within one year of grant of final approval.
  8. StCB shall ensure to appropriately configure its IT system to enable system integration with all DCCBs before applying for final approval. The migration audit on IT systems of all the DCCBs shall be completed before the amalgamation. System integrity shall be established and certified before the DCCBs can migrate onto the StCB platform.
  9. A new Board of the amalgamated bank shall be constituted within three months of amalgamation. The MD/ CEO who is to be appointed should meet the Fit & Proper criteria prescribed by RBI.
  10. In addition to the Board of Directors, a Board of Management (BoM) shall be set up for the StCB within three months of amalgamation as prescribed in terms of the circular DoR(PCB).BPD.Cir.No.8/12.05.002/2019-20 dated December 31, 2019 addressed to Urban Co-operative banks. For this purpose, the bye-laws of the StCB shall be amended for incorporating the provisions relating to guidelines on BoM issued by RBI.
  11. The banking licence issued to the StCB shall continue after the process of amalgamation. DCCBs which are being amalgamated into the StCB shall surrender their licences to RBI. The process of surrendering licences shall be completed within three months of amalgamation.
  12. Existing branches of the DCCBs shall be converted into branches of the StCB and will come under the purview of Section 23 of the BR Act, 1949 (AACS). Thus, the StCB will be required to apply for branch licence from RBI for all these existing branches of DCCBs within three months from the date of amalgamation. The StCB shall also seek prior approval of RBI for shifting of branches and opening of any new place of business including controlling offices. The granting of permission by RBI for shifting of branches/ opening of any new place of business shall be in accordance with the extant guidelines.
  13. DICGC clearance for the amalgamation shall be obtained by the StCB before applying for final approval.
  14. In case of divergence in interest rates offered on deposits by the StCB and the amalgamating DCCBs, the StCB shall provide sufficient notice period to the customers of DCCBs to enable them to take a decision with regard to continuing their deposits with the amalgamating bank. Depositors deciding to discontinue their deposits within the aforesaid notice period will not be levied any penalty for such premature withdrawal
  15. RBI may prescribe any additional condition/s, as may be considered necessary.
  16. The proposals for amalgamation which meet the indicative benchmarks would be evaluated by NABARD and RBI on merits and would be subject to additional requirements/ conditions as deemed fit.

6. The assets and liabilities of the transferor DCCBs will be transferred to StCB on the date of the amalgamation as advised by Reserve Bank while according final approval for the amalgamation.

Post- amalgamation requirements

7. Post-amalgamation, the StCB will be required to take the following action:

  1. A compliance report with reference to the conditions of the final approval for amalgamation shall be submitted within the prescribed timeframe.
  2. Licences of the transferor banks shall be surrendered. Applications for issue of branch licences shall be made by StCB within the given time frame as per the conditions of amalgamation.
  3. Steps initiated by the authority / institution responsible for settlement of claims of the transferor banks and their members in respect of allotment of shares shall be indicated. Details of the list of pending claims and the time frame to settle such claims should also be indicated.

Disclosures

8. The amalgamated entity shall make disclosures in its first annual accounts post- amalgamation as mentioned below. These disclosures shall continue in the subsequent annual accounts till they are resolved/ closed with concurrence of the Statutory Auditors:

  1. Pension liabilities pre and post-amalgamation. The methodology of valuation/ re-valuation of the pension liabilities shall be disclosed with details of the increase/ reduction in liabilities as a result of change in pension scheme, if any. This disclosure shall capture details of changes, if any, in pension schemes that are made applicable to the employees of amalgamating banks/ amalgamated bank.
  2. Status of vigilance cases and complaints pending in the amalgamating banks as on the date of amalgamation and details of cases that are closed during the year.
  3. Status of pending fraud cases, outstanding inter-bank adjustments (amalgamating/amalgamated) and inter-branch accounts and other intermediary accounts post–merger and their impact on the financial statements of the amalgamated bank.
  4. Outstanding claims of the amalgamating banks and their members in respect of allotment of shares and time frame for settlement of such claims.
  5. Such additional disclosures that may be required by the regulator/ supervisor

Yours faithfully

(Neeraj Nigam)
Chief General Manager in Charge


Annex

Documents to be furnished to the RBI and NABARD along with the Proposal

I. Documents to comply with the Regulatory requirements:

a) Feasibility Study.

b) Formal approval of the State Government.

c) Draft Scheme of Amalgamation along with duly certified resolution passed by the shareholders.

II. Managerial and Governance:

a) Copies of the notices of every meeting of the shareholders called for such approval together with newspaper cuttings evidencing that notices of the meetings were published in newspapers at least once a week for three consecutive weeks in two newspapers circulating in the locality or localities in which the registered offices of the banks are situated and that one of the newspapers was in a language commonly understood in the locality or localities.

b) Certificates signed by each of the officers presiding at the meeting of shareholders certifying the following

  1. A copy of the resolution passed at the meeting;
  2. The number of shareholders present at the meeting
  3. The number of shareholders who voted in favour of the resolution and the aggregate value of the shares held by them
  4. The number of shareholders who voted against the resolution and the aggregate value of the shares held by them
  5. The number of shareholders whose votes were declared as invalid and the aggregate value of the shares held by them
  6. The names of shareholders who have given notice in writing to the Presiding Officer that they dissented from the scheme of amalgamation together with the number of shares held by each of them.

c) Proposed governance reforms enabling professional governance/ management in the amalgamated bank.

III. Financials:

a) Audited Financial position of all the banks proposed to be amalgamated for preceding two financial years.

b) Financial structure of the amalgamated entity post-merger.

c) Areas of operational synergies and cost management.

d) Due-diligence Report (DDR) from Chartered Accountants, which may generally include:

  1. Scope/Mandate of DDR
  2. Sources of information used and limitations, if any, due to incomplete/not available data/information
  3. Nature of business being undertaken including Foreign Exchange Business such as Authorized Dealer (Category 1 or 2), Bharat Bill Payment system (BBPS), Electronic Banking Channels etc.
  4. Share capital and share holding pattern
  5. Management structure and organisational chart of holding Membership
  6. Accounting policies/practices and software in use
  7. Agreements, contracts and insurance in place
  8. Legal cases – by and against the bank
  9. Statutory liability assessment and compliance (IT, PF, TDS, etc); penalty imposed if any
  10. Liability particulars (deposits, to staff, others) and contingent liabilities details
  11. Asset particulars along with its actual IRAC status as per RBI guidelines/ fixed assets-valuation method, other assets
  12. Contra items
  13. Off balance sheet items and contingent liabilities, if any
  14. Review of net assets and net liability including realisable value
  15. Independent study of assets and pointers on erosion in assets, under provisioning (e.g. on gratuity, leave encashment, income tax, depreciation, stamp duty, etc.), understatement of liability (e.g. non-recognition of interest liability on matured term deposits, etc.) and factoring these into net worth calculation
  16. Non-banking assets, if any
  17. Net worth statement
  18. Details of property owned and leased with market value.
  19. Loans etc. to Directors
  20. Any signs of possible frauds or financial malfeasance.

e) Report of the valuers appointed for determination of the swap ratio.

IV. Disclosures:

  1. Pension liabilities pre-amalgamation. The methodology of valuation/ re-valuation of the pension liabilities shall be disclosed with details of the increase/ reduction in liabilities as a result of change in pension scheme, if any. This disclosure shall capture details of changes, if any, in pension schemes that will be made applicable to the employees of amalgamating banks/ amalgamated bank.
  2. Status of vigilance cases and complaints pending in the amalgamating banks as on the date of application/proposal.
  3. Status of pending fraud cases, outstanding inter-bank adjustments and inter-branch accounts and other intermediary accounts pre–merger.

V. Other Documents:

Additional information relevant for the consideration of the scheme of amalgamation.

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payment system compliances – covid relaxations

RBI has vide its circular dated 21st May, 2021 given relaxations from compliances to payment system operators as follows:

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monetary penalty on banks

The Reserve Bank of India (RBI) has, by an order dated May 20, 2021 imposed a monetary penalty of ₹1.00 crore (Rupees One crore only) on Tamilnad Mercantile Bank Ltd. (the bank) for non-compliance with certain provisions of directions issued by RBI on “Cyber Security Framework in Banks” dated June 2, 2016.

The Reserve Bank of India (RBI) has imposed, by an order dated May 19, 2021, a monetary penalty of ₹1 Crore (Rupees one Crore only) on City Union Bank Limited (the bank) for contravention of/non-compliance with certain provisions of the directions contained in the Reserve Bank of India (Lending to Micro, Small & Medium Enterprises (MSME) Sector) Directions, 2017 and the circulars on Educational Loan Scheme and Credit Flow to Agriculture – Agricultural Loans – Waiver of Margin/Security Requirements.

The Reserve Bank of India (RBI) has, by an order dated May 19, 2021, imposed a monetary penalty of ₹10 Lakh (Rupees Ten Lakh only) on Daimler Financial Services India Private Limited, Pune (the company), Maharashtra for non-compliance with certain provisions of the directions issued by RBI contained in ‘Reserve Bank Commercial Paper Directions 2017’ and ‘Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016’

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